<PAGE>
As filed with the Securities and Exchange Commission on August 14, 2000
Registration No. 333-40146
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SYCAMORE NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 3661 04-3410558
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation or Classification Code
Organization) Number)
---------------
10 Elizabeth Drive
Chelmsford, Massachusetts 01824
(978) 250-2900
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Daniel E. Smith
President and Chief Executive Officer
Sycamore Networks, Inc.
10 Elizabeth Drive
Chelmsford, Massachusetts 01824
(978) 250-2900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Margaret A. Brown, Esq. Frances M. Jewels, Esq. Frank J. Marco, Esq.
Skadden, Arps, Slate, Vice President and Chief Day, Berry & Howard LLP
Meagher & Flom LLP Financial Officer CityPlace I, 25th Floor
One Beacon Street Sycamore Networks, Inc. 185 Asylum Street
Boston, Massachusetts 10 Elizabeth Drive Hartford, CT 06103
02108 Chelmsford, Massachusetts Telephone: (860) 275-0100
Telephone: (617) 573-4800 01824
Telephone: (978) 250-2900
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the merger agreement are satisfied or waived.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Share Price Registration Fee
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$.001 per share....... 28,378,690(1) N/A $9,091,195.68(2) $2,400.07
</TABLE>
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(1) Based on the quotient of $2,400,000,000, the agreed valuation of Sirocco,
divided by $84.5705, the average price of Sycamore common stock pursuant to
the merger agreement.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
calculated pursuant to Rule 457(f) under the Securities Act. As there is no
market for the securities of Sirocco to be received by Sycamore in the
merger, and as Sirocco has an accumulated capital deficit, the proposed
maximum aggregate offering price is calculated, pursuant to Rule 457(f)(2)
under the Securities Act, as the sum of: (i) $10,168.67, one-third of the
stated value of the 30,506,279 shares of Sirocco common stock outstanding
as of March 31, 2000; (ii) $196,209, one-third of the stated value of the
60,000 shares of Sirocco Series A preferred stock outstanding as of March
31, 2000; (iii) $422,404.67, one-third of the stated value of the 85,000
shares of Sirocco Series B preferred stock outstanding as of March 31,
2000; (iv) $1,930,174.67, one third of the stated value of the 2,654,548
shares of Sirocco Series C preferred stock outstanding as of March 31,
2000; and (v) $6,532,238.67, one-third of the stated value of the 5,370,047
shares of Sirocco Series D preferred stock outstanding as of March 31,
2000.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
LOGO OF SIROCCO SYSTEMS
August 14, 2000
Dear Sirocco Stockholder,
You are cordially invited to attend our special meeting of stockholders to
be held at Day, Berry & Howard LLP, CityPlace I, 25th Floor, 185 Asylum Street,
Hartford, Connecticut 06103 on September 7, 2000 at 9:00 a.m., local time.
At the special meeting, you will be asked to vote on the merger of Sirocco
Systems, Inc. and a wholly owned subsidiary of Sycamore Networks, Inc. After
the merger, Sirocco will be a wholly owned subsidiary of Sycamore. If the
merger is completed you will receive:
. .1181 of a share of Sycamore common stock for each share of Sirocco
Series A preferred stock you own;
. .1772 of a share of Sycamore common stock for each share of Sirocco
Series B preferred stock you own;
. .0259 of a share of Sycamore common stock for each share of Sirocco
Series C preferred stock you own; and
. .6798 of a share of Sycamore common stock for each share of Sirocco
common stock you own. This common stock exchange ratio will be adjusted
under certain circumstances if outstanding options, or offers relating to
the grant of options, to purchase shares of Sirocco common stock expire
or are terminated without exercise prior to completion of the merger. In
addition, the Sirocco common stock exchange ratio assumes that all of the
issued and outstanding shares of Sirocco Series D preferred stock will be
converted into Sirocco common stock prior to the completion of the
merger. Each share of Sirocco Series D preferred stock is convertible, at
the option of the holder, into 1.5 shares of Sirocco common stock. If
shares of Sirocco Series D preferred stock are not converted prior to
completion of the merger:
. upon completion of the merger, each outstanding share of Sirocco
Series D preferred stock will be converted into the right to
receive .0436 of a share of Sycamore common stock; and
. the exchange ratio for the Sirocco common stock of .6798 will be
adjusted up to a maximum of .8360.
You will receive cash for any fractional shares of Sycamore common stock
which you would otherwise receive in the merger. Sycamore common stock is
listed on the Nasdaq National Market under the trading symbol "SCMR," and on
August 11, 2000, Sycamore common stock closed at $134 per share.
Ten percent of the Sycamore common stock you would otherwise be entitled to
receive in the merger will be deposited in an escrow account and may be used to
compensate Sycamore in the event that it is entitled to indemnification under
the merger agreement. To the extent that some or all of the escrowed shares are
not required to indemnify Sycamore, such escrowed shares will be distributed to
you following the earlier of the first anniversary of the completion date of
the merger or the date of the first independent audit report on Sycamore's
financial statements which include the financial results of Sirocco.
<PAGE>
We cannot complete the merger unless it is approved by the holders of a
majority of Sirocco common stock and a majority of each series of Sirocco
preferred stock entitled to vote at the special meeting. Only stockholders who
hold their shares of Sirocco stock at the close of business on July 28, 2000
will be entitled to vote at the special meeting. Stockholders who are parties
to the voting agreement and who hold in the aggregate a sufficient number of
shares to ensure adoption of the merger have committed to vote their shares at
this special meeting in favor of adoption of the merger agreement.
After careful consideration, Sirocco's board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests. Sirocco's board of directors unanimously recommends
that you vote FOR the adoption of the merger agreement.
This proxy statement/prospectus provides you with detailed information
concerning Sirocco, Sycamore and the proposed merger. Please give all of the
information contained in this proxy statement/prospectus your careful
attention. In particular, you should carefully consider the discussion in the
section entitled "Risk Factors" beginning on page 16 of this proxy
statement/prospectus.
Please use this opportunity to take part in the affairs of Sirocco by voting
on the merger. IF YOU DO NOT VOTE BY PROXY OR IN PERSON AT THE SPECIAL MEETING,
IT WILL COUNT AS A VOTE AGAINST ADOPTION OF THE MERGER AGREEMENT. Whether or
not you plan to attend the meeting, please complete, sign, date and return the
accompanying proxy in the enclosed self-addressed stamped envelope. Returning
your proxy does NOT deprive you of your right to attend the meeting and to vote
your shares in person, should you choose to do so. YOUR VOTE IS VERY IMPORTANT.
We appreciate your interest in Sirocco and your consideration of this
matter.
/s/ Jonathan Reeves
Jonathan Reeves
President and Chief Executive
Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the merger described in the proxy
statement/prospectus or the Sycamore common stock to be issued in connection
with the merger, or passed upon the adequacy or accuracy of this proxy
statement/prospectus. Any representation to the contrary is a criminal
offense.
This proxy statement/prospectus is dated August 14, 2000 and was first
mailed to stockholders on or about August 15, 2000.
2
<PAGE>
SIROCCO SYSTEMS, INC.
----------------
Notice of Special Meeting of Sirocco Stockholders
----------------
to be held on September 7, 2000
at 9:00 a.m.
To Sirocco Stockholders:
Notice is hereby given that a special meeting of stockholders of Sirocco
Systems, Inc. will be held on Thursday, September 7, 2000 at 9:00 a.m. local
time at Day, Berry & Howard LLP, CityPlace I, 185 Asylum Street, 25th Floor,
Hartford, Connecticut 06103 for the following purposes:
1. To consider and vote upon a proposal to adopt the merger agreement among
Sycamore Networks, Inc., a wholly owned subsidiary of Sycamore and
Sirocco Systems, Inc. In the merger:
. each share of your Sirocco Series A preferred stock will be
exchanged for .1181 of a share of Sycamore common stock;
. each share of your Sirocco Series B preferred stock will be
exchanged for .1772 of a share of Sycamore common stock;
. each share of your Sirocco Series C preferred stock will be
exchanged for .0259 of a share of Sycamore common stock; and
. each share of your Sirocco common stock will be exchanged for .6798
of a share of Sycamore common stock. The common stock exchange ratio
will be adjusted under certain circumstances if outstanding options,
or offers relating to the grant of options, to purchase shares of
Sirocco common stock expire or are terminated without exercise prior
to completion of the merger. In addition, the Sirocco common stock
exchange ratio assumes that all of the issued and outstanding shares
of Sirocco Series D preferred stock will be converted into Sirocco
common stock prior to the completion of the merger. If shares of
Sirocco Series D preferred stock are not converted prior to the
merger, each outstanding share of Sirocco Series D preferred stock
will be exchanged for .0436 of a share of Sycamore common stock and
the exchange ratio for the Sirocco common stock will be adjusted
upward. If none of the shares of Series D preferred stock are
converted, upon completion of the merger, each outstanding share of
Sirocco common stock outstanding will be converted into the right to
receive .8360 of a share of Sycamore common stock.
2. To transact any other business that may properly come before the special
meeting or any adjournment.
These items of business are described in the attached proxy
statement/prospectus. Only holders of record of Sirocco stock at the close of
business on July 28, 2000, the record date, are entitled to vote on the matters
listed in this Notice of Special Meeting of Sirocco Stockholders. You may vote
in person at the Sirocco special meeting even if you have returned a proxy.
By Order of the Board of Directors,
W. Thomas Shea
Secretary
Wallingford, Connecticut /s/ W. Thomas Shea
August 14, 2000
Whether or Not You Plan to Attend the Meeting,
Please Complete, Sign, Date and Return the Accompanying Proxy
In the Enclosed Self-Addressed Stamped Envelope.
<PAGE>
[LOGO OF SIROCCO SYSTEMS] [LOGO OF SYCAMORE NETWORKS]
PROXY STATEMENT PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS.................................. 1
The Companies............................................................ 1
Questions and Answers about the Merger................................... 2
Summary of the Transaction............................................... 4
Selected Historical Consolidated Financial Data of Sycamore.............. 9
Selected Historical Financial Data of Sirocco............................ 11
Selected Unaudited Pro Forma Combined Financial Data..................... 12
Unaudited Comparative Per Share Data..................................... 13
Market Price Data........................................................ 15
RISK FACTORS............................................................... 16
Risks Relating to the Merger............................................. 16
Risks Relating to Sirocco................................................ 18
Risks Relating to the Investment in Sycamore............................. 19
Risks Relating to the Securities Markets................................. 28
THE SPECIAL MEETING OF SIROCCO STOCKHOLDERS................................ 30
Date, Time and Place of the Special Meeting.............................. 30
Purpose of the Special Meeting........................................... 30
Stockholder Record Date for the Special Meeting.......................... 30
Vote of Sirocco Stockholders Required for Approval of the Merger......... 30
Voting of Proxies........................................................ 31
Revocability of Proxies.................................................. 31
Solicitation of Proxies.................................................. 32
THE MERGER................................................................. 33
Background of the Merger................................................. 33
Sycamore's Reasons for the Merger........................................ 34
Sirocco's Reasons for the Merger......................................... 35
Recommendation of Sirocco's Board of Directors........................... 36
Stock Restriction Agreements............................................. 36
Sirocco's 1998 Stock Plan................................................ 36
Indemnification and Insurance............................................ 37
Employee Non-Competition and Non-Disclosure Agreements................... 37
Completion and Effectiveness of the Merger............................... 37
Structure of the Merger and Conversion of Sirocco Common Stock and
Preferred Stock......................................................... 37
Exchange of Sirocco Stock Certificates for Sycamore Stock Certificates... 38
United States Federal Income Tax Consequences of the Merger.............. 39
Accounting Treatment of the Merger....................................... 40
Regulatory Filings and Approvals Required to Complete the Merger......... 41
Restrictions on Sales of Shares by Affiliates of Sirocco and Sycamore.... 41
Listing on the Nasdaq National Market of the Common Stock to be Issued by
Sycamore................................................................ 41
Dissenters' and Appraisal Rights......................................... 42
THE MERGER AGREEMENT....................................................... 45
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
THE VOTING AGREEMENT...................................................... 49
THE ESCROW AGREEMENT...................................................... 50
OPERATIONS AFTER THE MERGER............................................... 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SYCAMORE................................................... 51
Overview................................................................ 51
Results of Operations................................................... 52
Liquidity and Capital Resources......................................... 56
Year 2000 Computer Systems Compliance................................... 57
Market Risk............................................................. 57
Recent Accounting Pronouncements........................................ 58
SYCAMORE'S BUSINESS....................................................... 59
Overview................................................................ 59
Industry Background..................................................... 59
The Sycamore Solution................................................... 61
Strategy................................................................ 62
Products and Technology................................................. 63
Sycamore's Intelligent Optical Networking Products...................... 64
Customers............................................................... 65
Sales and Marketing..................................................... 65
Research and Development................................................ 66
Competition............................................................. 66
Proprietary Rights and Licensing........................................ 67
Manufacturing........................................................... 68
Employees............................................................... 68
Properties.............................................................. 68
Legal Proceedings....................................................... 68
MANAGEMENT OF SYCAMORE.................................................... 69
Executive Officers and Directors........................................ 69
Election of Directors................................................... 71
Compensation of Directors............................................... 71
Compensation Committee Interlocks and Insider Participation............. 72
Board Committees........................................................ 72
Executive Compensation.................................................. 72
Summary Compensation Table.............................................. 72
Change in Control Agreements............................................ 73
Limitations on Directors' Liability and Indemnification................. 74
Benefit Plans........................................................... 74
CERTAIN TRANSACTIONS OF SYCAMORE.......................................... 78
Preferred Stock Issuances............................................... 78
Common Stock Issuances.................................................. 78
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF SYCAMORE...... 79
DESCRIPTION OF SYCAMORE CAPITAL STOCK..................................... 81
Common Stock............................................................ 81
Preferred Stock......................................................... 81
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover
Effects................................................................ 81
Transfer Agent and Registrar............................................ 82
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SIROCCO.................................................... 83
Overview................................................................ 83
Results of Operations................................................... 83
Liquidity and Capital Resources......................................... 84
Qualitative Disclosures about Market Risk............................... 85
Recent Accounting Pronouncements........................................ 85
SIROCCO'S BUSINESS........................................................ 86
Overview................................................................ 86
Industry Background..................................................... 86
Sirocco's Strategy...................................................... 88
Sirocco's Product Line.................................................. 88
Marketing............................................................... 89
Manufacturing........................................................... 89
Intellectual Property................................................... 89
Employees............................................................... 89
Properties.............................................................. 89
Legal Proceedings....................................................... 89
Competition............................................................. 89
MANAGEMENT OF SIROCCO..................................................... 90
Executive Compensation.................................................. 91
Summary Compensation Table.............................................. 91
CERTAIN TRANSACTIONS OF SIROCCO........................................... 92
Series A Preferred Stock Financing...................................... 92
Series B Preferred Stock Financing...................................... 92
Series C Preferred Stock Financing...................................... 92
Series D Preferred Stock Financing...................................... 92
Stock Restriction Agreements............................................ 93
Proprietary Information and Invention Agreements........................ 93
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF SIROCCO....... 94
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA..................... 96
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF APRIL 29,
2000..................................................................... 97
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED APRIL 29, 2000......................................... 98
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED MAY 1, 1999............................................ 99
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED JULY 31, 1999................................................. 100
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE
PERIOD ENDED JULY 31, 1998............................................... 101
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................ 102
COMPARISON OF RIGHTS OF HOLDERS OF SIROCCO COMMON STOCK AND SYCAMORE
COMMON STOCK............................................................. 104
LEGAL OPINIONS............................................................ 110
EXPERTS................................................................... 110
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
CAUTIONARY FACTORS CONCERNING FORWARD-LOOKING STATEMENTS................... 110
WHERE YOU CAN FIND MORE INFORMATION........................................ 111
SYCAMORE NETWORKS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......... F-1
SIROCCO SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS........................ F-22
APPENDIX A--MERGER AGREEMENT
APPENDIX B--AMENDED VOTING AGREEMENT
APPENDIX C--ESCROW AGREEMENT
APPENDIX D--DELAWARE APPRAISAL RIGHTS STATUTE
</TABLE>
iv
<PAGE>
[SIROCCO SYSTEMS LOGO] [SYCAMORE NETWORKS LOGO]
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
The Companies
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents we refer to for a more complete understanding of the merger. In
particular, you should read the documents attached to this proxy
statement/prospectus, which include the merger agreement, the voting agreement
and the escrow agreement. References in this proxy statement/prospectus to
"Sycamore" refer to Sycamore Networks, Inc., "Sirocco" refer to Sirocco
Systems, Inc., and "we," "us" and "our," unless the context otherwise requires,
refer to Sycamore and Sirocco, collectively.
Sirocco Systems, Inc.
95 Barnes Road
Wallingford, CT 06492
(203) 294-8000
http://www.siroccosystems.com
Sirocco develops and markets intelligent optical aggregation, switching and
network management products that collect and package voice and data traffic for
transmission over intelligent optical backbone networks. Sirocco's product line
is designed to make use of the bandwidth potential and speed of the fiber optic
backbone network to efficiently transport complex data applications. In addi-
tion, the Sirocco product line is designed to function in tandem with existing
electronic switching technologies so as to permit service providers to build
and upgrade their systems at their own pace.
Sirocco's product line is aimed primarily at meeting the needs of metropoli-
tan access service providers. These service providers link end users to the in-
telligent optical backbone of the public network. Service providers in this
market include new and established providers of voice and data transport serv-
ices, long distance carriers, Internet service providers, cable operators and
foreign telephone companies.
Sirocco was founded in July 1998. Sirocco expects the first testing of its
products at potential customer sites to begin in the third calendar quarter of
2000. Products are expected to be available for shipment to customers beginning
in the following quarter.
Sycamore Networks, Inc.
10 Elizabeth Drive
Chelmsford, MA 01824-4111
(978) 250-2900
http://www.sycamorenet.com
Sycamore develops and markets intelligent optical networking products that
transport and switch voice and data on wavelengths of light across fiber optic
cable that comprise the core of the public network. The existing public network
backbone is based on SONET/SDH transmission technology, which requires optical
signals traveling across the network to be converted into electrical signals at
each network transit point and then reconverted into optical signals for trans-
port to the next transit point. The multiple conversions required in a
SONET/SDH network increase network complexity and cost. Sycamore's products are
designed to enable their customers to quickly and cost effectively create us-
able network capacity in the form of bandwidth over existing fiber to create
new high speed data services. Sycamore's target customers are providers of
voice and data transport services, including telephone companies, Internet
service providers, cable operators and similar service providers.
Sycamore believes that data traffic on the public network backbone is grow-
ing at rates that surpass available network capacity and that service providers
will require new solutions to relieve this network congestion and create new
data services. Sycamore's products are designed to address the current and fu-
ture needs of service providers by offering an end-to-end intelligent optical
networking solution.
1
<PAGE>
Questions and Answers about the Merger
Q.As a holder of Sirocco capital stock, what will I receive in the merger?
A.If the merger is completed, you will receive:
. .1181 of a share of Sycamore common stock for each share of Sirocco
Series A preferred stock you own;
. .1772 of a share of Sycamore common stock for each share of Sirocco
Series B preferred stock you own;
. .0259 of a share of Sycamore common stock for each share of Sirocco
Series C preferred stock you own; and
. .6798 of a share of Sycamore common stock for each share of Sirocco
common stock you own.
The common stock exchange ratio will be adjusted under certain circumstances if
outstanding options to purchase shares of Sirocco common stock, or offers re-
lating to the grant of options, expire or are terminated without exercise prior
to completion of the merger. In addition, the Sirocco common stock exchange ra-
tio assumes that all of the issued and outstanding shares of Sirocco Series D
preferred stock will be converted into Sirocco common stock prior to the com-
pletion of the merger. If shares of Sirocco Series D preferred stock are not
converted prior to the merger, each outstanding share of Sirocco Series D pre-
ferred stock will be exchanged for .0436 of a share of Sycamore common stock
and the exchange ratio for the Sirocco common stock will be adjusted upward. If
none of the shares of Series D preferred stock are converted, upon completion
of the merger, each outstanding share of Sirocco common stock outstanding will
be converted into the right to receive .8360 of a share of Sycamore common
stock.
Sycamore will not issue fractional shares. Instead, you will receive an amount
of cash determined by multiplying the fraction of a share to be converted by
$84.5705.
Except for any adjustment to the Sirocco common stock exchange ratio to reflect
options that expire or shares of Sirocco Series D preferred stock that are not
converted before completion of the merger, the number of shares of Sycamore
common stock to be issued for each share of Sirocco common stock and preferred
stock described above is fixed and will not be adjusted based upon changes in
the value of these shares. As a result, the value of the shares you receive in
the merger will not be known at the time you vote on the merger and may go up
or down as the market price of Sycamore common stock goes up or down. Sirocco
is not permitted to "walk away" from the merger or resolicit the vote of its
stockholders based on changes in the value of Sycamore common stock.
Ten percent of the Sycamore common stock you would otherwise be entitled to re-
ceive in the merger will be deposited in an escrow account and may be used to
compensate Sycamore in the event that it is entitled to indemnification under
the merger agreement. If any escrowed shares remain upon the termination of
this indemnification obligation, they will be distributed to you. For more in-
formation on the escrow account, see "The Escrow Agreement" on page 50 of this
proxy statement/prospectus.
Based on the number of Sirocco and Sycamore shares outstanding as of July 28,
2000, the former securityholders of Sirocco will own approximately 12% of Syca-
more upon consummation of the merger, including the escrowed shares, restricted
shares and shares underlying options to purchase shares of Sirocco common stock
that are assumed by Sycamore in the merger.
Q.What are the U.S. federal income tax consequences of the merger?
A.Sirocco and Sycamore have structured the merger so that, in general, Sirocco
stockholders will not recognize gain or loss for U.S. federal income tax pur-
poses in the merger on the exchange of their Sirocco stock, except that Sirocco
stockholders will generally be taxed on any cash they receive in lieu of a
fractional share. Sirocco and Sycamore will not be obligated to complete the
merger unless we both receive legal opinions to this effect. After receipt of
stockholder approval, neither of us may waive the requirement that legal opin-
ions be provided unless further stockholder approval is obtained with appropri-
ate disclosure.
2
<PAGE>
Because tax matters are complicated, we encourage you to contact your tax advi-
sors to determine the particular tax consequences of the merger to you. To re-
view the tax consequences to Sirocco stockholders in greater detail, see pages
39 through 40 of this proxy statement/prospectus.
Q.What do I do if I want to change my vote after I have mailed my proxy card?
A.Send in a later-dated, signed proxy card to Sirocco's corporate secretary be-
fore the special meeting or attend the special meeting in person and vote. You
may also revoke your proxy by sending a written notice of revocation to Siroc-
co's corporate secretary before the special meeting.
Q.What do I need to do now?
A.Fill out, sign and mail your proxy card in the enclosed return envelope as
soon as possible, so that your shares may be represented at the special meet-
ing. In order to assure that your vote is obtained, please give your proxy as
instructed on your proxy card even if you currently plan to attend the meeting
in person. If you do not attend the special meeting and you do not return your
proxy card, it will count as a vote against adoption of the merger agreement.
Sirocco's board of directors unanimously recommends that its stockholders vote
in favor of the merger.
Q.Should I send in my stock certificates now?
A. No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q.When do you expect the merger to be completed?
A.We are working towards completing the merger as quickly as possible. Assuming
that both Sirocco and Sycamore satisfy or waive all of the conditions to clos-
ing contained in the merger agreement, we anticipate that the closing of the
merger will occur in the third calendar quarter of 2000.
Q.Whom should I call with additional questions?
A.If you have questions about the merger, you should call Sirocco's Investor
Relations Department at (203) 294-8002.
3
<PAGE>
Summary of the Transaction
Structure of the Transaction (see page 37)
Sirocco will merge with a subsidiary of Sycamore and become a wholly owned
subsidiary of Sycamore. Following the merger, as a stockholder of Sycamore, you
will have an equity stake in Sirocco's parent company.
Stockholder Approval (see page 30)
The holders of a majority of the outstanding shares of Sirocco common stock
and each series of Sirocco preferred stock must adopt the merger agreement.
Sycamore stockholders are not required to adopt the merger agreement and will
not vote on the merger.
You are entitled to cast one vote per share of Sirocco common stock and pre-
ferred stock you owned as of July 28, 2000, the record date.
Recommendation of Sirocco's Board of Directors (see page 36)
After careful consideration, Sirocco's board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests. Sirocco's board of directors unanimously recommends
that you vote for the adoption of the merger agreement.
Completion and Effectiveness of the Merger (see page 37)
We will complete the merger when all of the conditions to completion of the
merger are satisfied or waived. The merger will become effective when we file a
certificate of merger with the State of Delaware. We are working toward com-
pleting the merger as quickly as possible. We expect to complete the merger
during the third calendar quarter of 2000.
Conditions to Completion of the Merger (see page 47)
Our obligations to complete the merger are subject to the prior satisfaction
or waiver of several conditions. If either Sycamore or Sirocco waives any con-
dition, Sirocco will consider the facts and circumstances at that time and make
a determination as to whether a resolicitation of proxies from Sirocco stock-
holders is required. The conditions that must be satisfied or waived before the
completion of the merger include the following:
. the merger agreement must be adopted by holders of a majority of the Si-
rocco common stock and holders of a majority of each series of Sirocco
preferred stock, which is assured assuming no breach of the voting
agreement by the Sirocco stockholders that are parties thereto;
. the applicable waiting periods under antitrust laws must expire or be
terminated;
. no injunction or order preventing the completion of the merger or pro-
hibiting or limiting Sycamore's ownership of Sirocco may be in effect
and no litigation seeking to prevent the merger or significant damages
in connection with the merger may be pending or threatened;
. the sum of Sirocco common stock to which dissenters' or appraisal rights
have been properly asserted under Delaware law do not exceed 5% of the
Sirocco common stock issued and outstanding as of July 28, 2000;
. no litigation which is reasonably likely to have a material adverse
change in Sycamore's business may be pending or threatened;
. Sirocco's and Sycamore's representations and warranties in the merger
agreement must be true and correct such that there are no material ad-
verse changes in their respective businesses;
. Sirocco must obtain any required approvals and consents from third par-
ties relating to the merger;
. Sirocco and Sycamore must have materially complied with their agreements
in the merger agreement;
. Sirocco and Sycamore must each receive an opinion of special tax counsel
to the
4
<PAGE>
effect that the merger will qualify as a tax-free reorganization;
. Sycamore and Sirocco must be advised by its independent accountants that
they concur with Sycamore's conclusion that the merger can properly be
accounted for as a "pooling of interests" business combination;
. employment agreements entered into by specified key employees of Sirocco
with Sycamore must remain in effect;
. the shares of Sycamore common stock to be issued to Sirocco stockholders
in the merger must have been approved for listing on the Nasdaq National
Market;
. Sycamore must receive an opinion of Sirocco's counsel relating to speci-
fied corporate matters;
. each affiliate of Sirocco must agree to comply with Rule 145 under the
Securities Act and with other restrictions on transfer required to en-
sure that the transaction may be accounted for as a "pooling of
interests";
. Sirocco must terminate specified agreements to which it is a party; and
. all outstanding warrants and other rights to purchase Sirocco stock in
connection with Sirocco's loan agreement with Silicon Valley Bank and
Lighthouse Capital Partners III, L.P. must be exercised or have expired.
You should carefully read the merger agreement, which is attached as Appen-
dix A to this proxy statement/prospectus.
Termination of the Merger Agreement (see page 48)
The merger agreement may be terminated under certain circumstances at any
time before the completion of the merger, by:
. Sirocco's and Sycamore's mutual consent;
. Sirocco or Sycamore under any of the following circumstances:
- if the merger is not completed by November 30, 2000; or
- if a final court order prohibiting the merger is issued and is not
appealable.
. Sycamore if:
- Sirocco or any of its officers or directors facilitate or participate
in discussions or negotiations in breach of their non-solicitation
obligations under the merger agreement or otherwise breach these ob-
ligations;
- Sirocco agrees to, approves or recommends to its stockholders certain
acquisition proposals from a third party;
- Sirocco knowingly takes any action or fails to take any action that
would be reasonably likely to jeopardize the accounting treatment of
the merger as a "pooling of interests" business combination.
. Sycamore if a Sirocco stockholder who is a party to the voting agreement
breaches the voting agreement, unless the Sirocco stockholders have oth-
erwise adopted the merger agreement and approved or consented to the
other actions required by the merger agreement;
. Sycamore if more than 5% of the Sirocco common stock outstanding on July
28, 2000 properly assert dissenters or appraisal rights under Delaware
law; and
. Sirocco or Sycamore if the conditions to completion of the merger would
not be satisfied because of a breach or failure to perform an agreement
in the merger agreement by the other party or a representation or war-
ranty of the other party in the merger agreement becomes untrue, either
of which is not cured within 10 business days of notice.
5
<PAGE>
Payment of Termination Fee (see page 49)
Sirocco has agreed to pay Sycamore a termination fee of $96 million if the
merger agreement is terminated in any of the following circumstances:
. if the merger agreement is terminated by Sycamore because Sirocco's
board of directors takes any of the actions described in the third bul-
let point under "Termination of the Merger Agreement" above;
. if the merger agreement is terminated by Sycamore because
- holders of more than 5% of the Sirocco common stock outstanding on
July 28, 2000 properly assert dissenters' or appraisal rights under
Delaware law and within one year from the termination date, Sirocco
enters into an agreement or completes a transaction in which it sells
more than 50% of its outstanding stock or the fair market value of
its assets to a third party; or
- Sirocco breached a representation or warranty or failed to perform an
agreement in the merger agreement and Sirocco completes a transaction
in which it sells more than 50% of its outstanding stock or the fair
market value of its assets to a third party, if Sirocco completed
such transaction within one year from the termination date.
No Other Negotiations Involving Sirocco (see page 46)
Until the merger is completed or the merger agreement is terminated, Sirocco
has agreed not to directly or indirectly take any of the following actions:
. solicit, initiate, facilitate or encourage any inquiries or proposals
that constitute or could reasonably be expected to lead to a proposal to
acquire Sirocco, or significant assets of Sirocco, by any party other
than Sycamore; or
. with respect to any person or entity that is pursuing such a transac-
tion:
- engage in negotiations or discussions;
- provide any non-public information relating to Sirocco; or
- agree to approve or recommend to its stockholders such a transaction.
Some Sirocco Stockholders Have Entered Into a Voting Agreement (see page 49)
In connection with the execution of the merger agreement, stockholders rep-
resenting over a majority of the voting power of Sirocco's common stock and
each series of Sirocco's preferred stock entered into a voting agreement with
Sycamore. Under the voting agreement, each of these Sirocco stockholders agreed
to vote all of their shares of Sirocco stock in favor of adoption of the merger
agreement. In addition, under the voting agreement, these stockholders may
transfer shares of the Sirocco stock they own or their options to purchase Si-
rocco stock only if the transferees agree to be bound by the provisions of the
voting agreement or the stockholders obtain Sycamore's consent to the transfer.
These Sirocco stockholders were not paid additional consideration in connection
with the voting agreement.
The Sirocco stockholders who entered into the voting agreement own a major-
ity of the Sirocco common stock and each series of Sirocco preferred stock out-
standing. Accordingly, assuming no breach of the voting agreement by any party
thereto, adoption of the merger agreement is assured.
You should carefully read the voting agreement, which is attached as Appen-
dix B to this proxy statement/prospectus.
A Portion of the Shares to be Paid in the Merger Will be Held in Escrow (see
page 50)
Under the escrow agreement, Sycamore will deposit 10% of the shares of Syca-
more common stock the Sirocco stockholders would otherwise receive in connec-
tion with the merger into an escrow account. The escrow shares may be used to
compensate Sycamore in the event it is entitled to indemnification under the
merger agreement. To the extent that some or
6
<PAGE>
all of the escrowed shares are not required to indemnify Sycamore, such shares
will be distributed pro rata among Sirocco stockholders entitled to receive
Sycamore shares in the merger on the earlier of the first anniversary of the
date the merger is completed or the date of the first independent audit report
on Sycamore's financial statements after completion of the merger that include
the financial results of Sirocco.
As a result of the escrow, depending on the amounts to which Sycamore is en-
titled for indemnification under the merger agreement, you may never receive up
to 10% of the shares of Sycamore common stock you would otherwise be entitled
to receive.
At the time of the closing of the merger, G. Felda Hardymon, as representa-
tive of Sirocco stockholders entitled to receive Sycamore shares in the merger,
will enter into an escrow agreement with Sycamore and an independent escrow
agent.
You should carefully read the escrow agreement, which is attached as Appen-
dix C to this proxy statement/prospectus.
Interests of Certain Persons in the Merger (see page 92)
In addition to their interests as stockholders, some of the directors, offi-
cers and employees of Sirocco may have interests in the merger that are differ-
ent than, or in addition to, your interests. These interests exist because of
rights they have pursuant to the terms of benefit and compensation plans main-
tained by Sirocco and arrangements with Sirocco regarding employment following
the merger.
In addition, Sycamore will indemnify the officers and directors of Sirocco
for events occurring before the merger.
The Sirocco board of directors was aware of and discussed these potentially
conflicting interests when it approved the merger.
U.S. Federal Income Tax Consequences of the Merger (see page 39)
We have structured the merger so that in general, Sycamore, Sirocco and
their respective stockholders will not recognize gain or loss for United States
federal income tax purposes in the merger, except for taxes payable because of
cash received by Sirocco stockholders instead of fractional shares. It is a
condition to the merger that we receive legal opinions to this effect.
Because tax matters are complicated, we encourage you to contact your tax
advisors to determine the particular tax consequences of the merger to you.
Accounting Treatment of the Merger (see page 40)
We intend to account for the merger as a "pooling of interests" business
combination. It is a condition to Sycamore's obligations to complete the merger
that Sycamore be advised in writing by PricewaterhouseCoopers LLP that they
concur with Sycamore's conclusion that the merger can properly be accounted for
as a "pooling of interests" business combination, although this condition may
be waived. Under the "pooling of interests" method of accounting, our histori-
cal recorded assets and liabilities will be carried forward to the combined
company at their recorded amounts. In addition, the operating results of the
combined company will include our operating results for the entire fiscal year
in which the merger is completed, and our historical reported operating results
for prior periods will be combined and restated as the operating results of the
combined company.
Antitrust Approval Required to Complete the Merger (see page 41)
The merger is subject to antitrust laws. We have made the required filings
with the Department of Justice and the Federal Trade Commission, and early ter-
mination was granted on June 30, 2000. The Department of Justice or the Federal
Trade Commission, as well as a state agency, a government agency or private
person, may challenge the merger at any time before its completion.
Restrictions on the Ability to Sell Sycamore Stock (see page 41)
All shares of Sycamore common stock received by you in connection with the
merger will be freely transferable unless you are considered
7
<PAGE>
an "affiliate" of either Sirocco or Sycamore under the Securities Act of 1933.
Shares of Sycamore common stock held by our affiliates may only be sold pursu-
ant to a registration statement or exemption under the Securities Act. In
addition, our affiliates are further restricted from selling their shares pur-
suant to the requirements of "pooling of interests" accounting treatment.
You Have Dissenters' or Appraisal Rights (see page 42)
If you do not vote for the adoption of the merger agreement and you satisfy
other conditions described on pages 42 to 44 and in Appendix D to this proxy
statement/prospectus, you are entitled to be paid the "fair value" of your
shares of Sirocco common stock as determined by the Delaware Court of Chancery.
Since appraisal rights are only available to you if you properly assert your
dissenters' or appraisal rights, you should carefully read "The Merger-Dissent-
ers' and Appraisal Rights" beginning on page 42 and the copy of the Delaware
appraisal rights statute attached as Appendix D to this proxy
statement/prospectus.
Where You Can Find More Information (see page 111)
If you have any questions about the merger, please call Sirocco's Investor
Relations Department at (203) 294-8002.
Forward-Looking Statements in this Proxy Statement/Prospectus (see page 110)
This proxy statement/prospectus contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to Sirocco's and Sycamore's financial conditions, results of
operations and businesses and the expected impact of the merger on Sycamore's
financial performance. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully con-
sider the discussion of risks and uncertainties in the section entitled "Risk
Factors" beginning on page 16 of this proxy statement/prospectus.
8
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SYCAMORE
The following table presents selected historical consolidated financial data
of Sycamore. The consolidated statement of operations data for the period from
inception (February 17, 1998) through July 31, 1998 and the fiscal year ended
July 31, 1999 and the consolidated balance sheet data at July 31, 1998 and 1999
are derived from the financial statements of Sycamore audited by
PricewaterhouseCoopers LLP, independent accountants, which are included
elsewhere in this proxy statement/prospectus. The consolidated statement of
operations data for the nine-month periods ended May 1, 1999 and April 29,
2000, and the consolidated balance sheet data at April 29, 2000 are unaudited.
In the opinion of management, all necessary adjustments for a fair statement
(consisting of only normal recurring adjustments), have been included in the
unaudited quarterly results when read in conjunction with the audited financial
statements and the notes thereto appearing elsewhere in this prospectus. The
historical results are not necessarily indicative of results to be expected for
any future period. Sycamore effected a three-for-one stock split which was paid
as a 200% stock dividend on February 11, 2000 to stockholders of record as of
February 4, 2000. This stock split has been reflected in the consolidated
financial statements for all periods presented. The following information is
for illustrative purposes only and you should read it together with Sycamore's
historical consolidated financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this proxy statement/prospectus.
<TABLE>
<CAPTION>
Period from
Inception
(February Nine Months Ended
17, 1998) Year ------------------
through July Ended July May 1, April
31, 1998 31, 1999 1999 29, 2000
------------ ---------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues........................... $ -- $ 11,330 $ -- $107,742
Cost of revenues (exclusive of non-
cash stock compensation expense of
$0, $101, $45 and $918,
respectively)..................... -- 8,486 1,173 57,103
------ -------- -------- --------
Gross profit (loss)................ -- 2,844 (1,173) 50,639
Loss from operations............... (793) (20,049) (10,897) (12,042)
Provision for income taxes......... -- -- -- 3,484
Net income (loss).................. $ (693) $(19,490) $(10,409) $ 2,069
Basic net income (loss) per
share(1).......................... $(0.18) $ (2.09) $ (1.13) $ 0.02
Diluted net income (loss) per
share(2).......................... $(0.18) $ (2.09) $ (1.13) $ 0.01
Shares used in calculating:
Basic net income (loss) per
share........................... 3,753 9,324 9,248 135,944
Diluted net income (loss) per
share........................... 3,753 9,324 9,248 195,915
Pro forma basic net income (loss)
per share(3)...................... $ (0.17) $ (0.10) $ 0.01
Pro forma diluted net income (loss)
per share(3)...................... $ (0.17) $ (0.10) $ 0.01
Shares used in calculating:
Pro forma basic net income (loss)
per share....................... 114,435 104,189 179,070
Pro forma diluted net income
(loss) per share................ 114,435 104,189 239,042
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1999 April 29, 2000
------------- ------------- --------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
marketable securities............. $4,279 $ 28,989 $1,514,078
Working capital.................... 4,341 40,450 1,193,469
Total assets....................... 5,081 57,912 1,610,657
Long term debt, less current
portion........................... -- 2,957 --
Redeemable convertible preferred
stock............................. 5,621 55,771 --
Total stockholders' equity
(deficit)......................... (678) (13,623) 1,545,363
</TABLE>
--------
(1) Basic net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of common shares
outstanding during the period.
(2) Diluted net income (loss) per share is computed by dividing the net income
(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 and unvested restricted common shares.
(3) Pro forma net income (loss) per share is computed using the weighted
average number of common shares outstanding, including the pro forma
effects of the conversion of all redeemable convertible preferred stock
into common stock as if such conversion occurred at the date of original
issuance.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF SIROCCO
The following table presents selected historical financial data of Sirocco.
The statement of operations data for the period from inception (July 7, 1998)
through December 31, 1998 and the fiscal year ended December 31, 1999 and the
balance sheet data as of December 31, 1998 and 1999 are derived from, the
financial statements of Sirocco audited by PricewaterhouseCoopers LLP,
independent accountants, which are included elsewhere in this proxy
statement/prospectus. The statement of operations data for the three-month
periods ended March 31, 1999 and March 31, 2000 and the balance sheet data as
of March 31, 2000 are unaudited.
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Sirocco" and Sirocco's financial statements and
related notes included elsewhere in this proxy statement/prospectus. Sirocco's
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of Sirocco's management,
include all adjustments, consisting only of normally recurring adjustments,
necessary for a fair statement of the information set forth therein. Historical
results are not necessarily indicative of results that may be expected for any
future period. In 1999, Sirocco executed various stock splits of its common
stock and in March 2000, Sirocco effected a three-for-two stock split of its
common stock. These stock splits have been reflected in the financial
statements for all periods presented.
<TABLE>
<CAPTION>
Period from
Inception Three Months
(July 7, 1998) Ended March 31,
through Year Ended ----------------
December 31, 1998 December 31, 1999 1999 2000
----------------- ----------------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue.................. $ -- $ -- $ -- $ --
Costs and expenses....... 265 5,854 587 5,671
------ ------- ------- -------
Loss from operations..... (265) (5,854) (587) (5,671)
Interest income, net..... 8 291 8 185
------ ------- ------- -------
Net loss................. (257) (5,563) (579) (5,486)
Preferred stock
accretion............... -- (11) (1) (5)
------ ------- ------- -------
Net loss attributable to
common stockholders..... $ (257) $(5,574) $ (580) $(5,491)
------ ------- ------- -------
Basic and diluted net
loss per share
attributable to common
stockholders............ $(0.07) $ (0.24) $ (0.04) $ (0.19)
Shares used in computing
basic and diluted net
loss per share
attributable to common
stockholders............ 3,768 22,891 13,571 29,638
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 March 31, 2000
----------------- ----------------- --------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.. $ 320 $18,900 $15,700
Working capital............ 208 18,841 15,353
Total assets............... 442 21,126 19,320
Long-term liabilities...... -- 435 351
Mandatorily redeemable
preferred stock........... 585 25,599 27,243
Total stockholders'
deficit................... (255) (5,285) (9,521)
</TABLE>
11
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table presents selected unaudited pro forma combined financial
data of Sycamore and Sirocco which are derived from the unaudited pro forma
condensed combined financial statements which are presented elsewhere in this
proxy statement/prospectus. The data has been prepared giving effect to the
merger under the "pooling of interests" method of accounting. This information
should be read in conjunction with the unaudited pro forma statements and
related notes. The selected unaudited pro forma combined financial data is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have been achieved had
the merger been consummated as of the dates indicated or that may be achieved
in the future.
Since the fiscal years of Sycamore and Sirocco differ, the periods combined
for purposes of the pro forma combined financial data are as follows giving
effect to the merger as if it had occurred at the beginning of each period
presented:
<TABLE>
<CAPTION>
Sycamore Sirocco
-------- -------
<S> <C>
Period from inception
(February 17, 1998) to
July 31, 1998 Period from inception (July 7, 1998) to December 31, 1998
Fiscal year ended July
31, 1999 Fiscal year ended December 31, 1999
Nine months ended April
29, 2000 and May 1,
1999 Nine months ended April 29, 2000 and May 1, 1999
</TABLE>
The nine months ended April 29, 2000 and May 1, 1999 include five months of
Sirocco's financial results which are also recorded in the fiscal year ended
December 31, 1999 and the period from inception (July 7, 1998) to December 31,
1998, respectively. Sirocco's net loss for the five-month periods ended
December 31, 1998 and 1999 was $257,000 and $3,659,000, respectively.
<TABLE>
<CAPTION>
Period from
Inception Year
(February 17, Ended Nine Months Ended
1998) through July 31, --------------------------
July 31, 1998 1999 May 1, 1999 April 29, 2000
------------- -------- ----------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues................... $ -- $ 11,330 $ -- $107,742
Cost of revenues........... -- 8,486 1,173 57,103
------- -------- -------- --------
Gross profit (loss)........ -- 2,844 (1,173) 50,639
Loss from operations....... (1,058) (25,903) (12,032) (24,738)
Net loss................... (950) (25,053) (11,517) (7,947)
Net loss attributable to
common stockholders ...... (950) (25,053) (11,517) (7,947)
Basic and diluted net loss
per share................. (0.15) (1.01) (0.75) (0.05)
Shares used in calculating:
Basic and diluted net
loss per share.......... 6,314 24,885 15,440 155,452
</TABLE>
<TABLE>
<CAPTION>
As of
April 29, 2000
--------------
(in thousands)
<S> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities................. $1,528,032
Working capital.................................................. 1,204,542
Total assets..................................................... 1,630,151
Long term debt, less current portion............................. 328
Preferred stock.................................................. --
Total stockholders' equity....................................... 1,559,623
</TABLE>
12
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
The following table presents (a) the basic and diluted net income (loss) per
common share and book value per common share data for each of Sycamore and
Sirocco on a historical basis, (b) the basic and diluted net income (loss) per
common share and book value per common share data for the combined company on a
pro forma combined basis and (c) the basic and diluted net income (loss) per
common share and book value per common share data for Sirocco on an equivalent
pro forma combined basis. Under Sirocco equivalent pro forma combined below, we
show the effect of the merger from the perspective of an owner of shares of
Sirocco common stock. We computed the information set out under that caption by
multiplying the corresponding pro forma financial data by the common stock
exchange ratio of .6798. The common stock exchange ratio will be adjusted if
any of the options that are currently outstanding, or offers relating to the
grant of options, to purchase shares of Sirocco common stock expire or are
terminated prior to completion of the merger. This Sirocco common stock
exchange ratio assumes that all issued and outstanding shares of Sirocco Series
D convertible preferred stock are converted into shares of Sirocco common stock
either prior to or concurrent with completion of the merger.
You should read the information below together with the historical financial
statements and related notes contained in the financial statements, quarterly
reports and other information that Sycamore has filed with the SEC. To obtain
copies of these documents, see "Where You Can Find More Information" on page
111. The unaudited pro forma combined data below is for illustrative purposes
only. The companies might have performed differently had they always been
combined. You should not rely on the information as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results of operation or financial condition that the
combined company will experience after the merger.
<TABLE>
<CAPTION>
Period from Nine Months
Inception Year Ended
(February 17, Ended -----------------
1998) through July 31, May 1, April 29,
July 31, 1998 1999 1999 2000
------------- -------- ------ ---------
<S> <C> <C> <C> <C>
Sycamore Historical:
Basic net income (loss) per share..... $(0.18) $(2.09) $(1.13) $0.02
Diluted net income (loss) per share... (0.18) (2.09) (1.13) 0.01
Book value per share (1).............. (0.20) 6.31
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception Three Months
(July 7, Ended
1998) Year --------------
through Ended March March
December 31, December 31, 31,
1998 31, 1999 1999 2000
------------ -------- ------ ------
<S> <C> <C> <C> <C>
Sirocco Historical:
Basic and diluted net loss per share
attributable to common stockholders.... $(0.07) $(0.24) $(0.04) $(0.19)
Book value per share (2)................ (0.18) (0.31)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Period from Year
Inception Ended Nine Months Ended
(February 17, July -----------------
1998) through 31, May 1, April 29,
July 31, 1998 1999 1999 2000
------------- ------ ------- ---------
<S> <C> <C> <C> <C>
Sycamore Pro Forma Combined:
Basic and diluted net loss per share.. $(0.15) $(1.01) $(0.75) $(0.05)
Book value per share (3).............. 0.11 5.75
Sirocco Equivalent Pro Forma Combined:
(4)
Basic and diluted net loss per share.. (0.10) (0.68) (0.51) (0.03)
Book value per share.................. 0.07 3.91
</TABLE>
(1) Book value per share is computed by dividing total stockholders' equity
(deficit) by the number of shares outstanding at July 31, 1999 and April
29, 2000.
(2) Book value per share is computed by dividing total stockholders' equity
(deficit) by the number of shares outstanding at December 31, 1999 and
March 31, 2000.
(3) Sycamore pro forma combined book value per share is computed by dividing
pro forma stockholders' equity (deficit) by the pro forma number of shares
of Sycamore common stock which would have been outstanding had the merger
been consummated as of each balance sheet date.
(4) Sirocco equivalent pro forma combined amounts are calculated by
multiplying the Sycamore pro forma combined per share amounts and book
value by the exchange ratio assuming the exchange ratio is .6798 of a
share of Sycamore common stock for each of Sirocco common stock.
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MARKET PRICE DATA
Sycamore Market Price Data
Sycamore common stock has traded on the Nasdaq National Market under the
symbol "SCMR" since October 22, 1999. The following table sets forth, for the
periods indicated, the high and low closing sale prices reported on the Nasdaq
National Market for Sycamore common stock, as adjusted for all stock splits.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
First Quarter (since October 22, 1999).......................... $ 71.67 $12.67
Second Quarter (through January 29, 2000)....................... 105.38 73.13
Third Quarter (through April 29, 2000).......................... 189.94 51.00
</TABLE>
On June 5, 2000, the business day before the public announcement that
Sycamore and Sirocco had entered into the merger agreement, the closing price
per share of Sycamore common stock on the Nasdaq National Market was $102.94.
On August 11, 2000, the latest practicable trading day before the printing of
this proxy statement/prospectus, the closing price per share of Sycamore common
stock on the Nasdaq National Market was $134.
Because the market price of Sycamore common stock is subject to fluctuation,
the market value of the shares of Sycamore common stock that holders of Sirocco
common stock will receive in the merger may increase or decrease prior to and
following the vote on merger. We urge stockholders to obtain current market
quotations for Sycamore common stock. We cannot assure you of the future prices
or trading markets for Sycamore common stock.
Sirocco Market Price Data
Neither Sirocco's common stock nor its preferred stock is traded in any
securities market.
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RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in Sycamore
common stock. An investment in Sycamore common stock involves a high degree of
risk. In addition to the other information mailed with or contained in this
proxy statement/prospectus, you should carefully consider the following risk
factors in determining whether to approve the merger.
Risks Relating to the Merger
Benefits of Combining Sirocco and Sycamore May Not be Realized.
Sirocco and Sycamore entered into the merger agreement with the expectation
that the merger will result in certain benefits including, among other things,
benefits relating to expanded and complementary product offerings, enhanced
revenues, increased market opportunity, acceleration of Sycamore's entry into
the optical access market, new technology and the addition of personnel who are
specialists in the optical access market. Achieving the benefits of the merger
will depend in part on the integration of our technology, operations and
personnel in a timely and efficient manner so as to minimize the risk that the
merger will result in the loss of market opportunity or key employees or the
diversion of the attention of management. Among the challenges involved in this
integration is demonstrating to our customers that the merger will not result
in adverse changes in client service standards or business focus and persuading
our personnel that our business cultures are compatible. In addition, Sirocco's
principal offices are located in Wallingford, Connecticut, and Sycamore's
principal offices are located in Chelmsford, Massachusetts. We currently have
no plans to relocate either of these principal offices. We must successfully
integrate Sirocco's operations and personnel with Sycamore's operations and
personnel for the merger to be successful. We cannot assure you that Sycamore
and Sirocco can be successfully integrated or that we will realize any of the
anticipated benefits. Our failure to do so could have a material adverse effect
on the combined company's business, financial condition and operating results
and the market price for our common stock may decline.
The Exchange Ratio for Sycamore Common Stock to be Received in the Merger is
Fixed and Will Not be Adjusted in the Event of Any Change in the Price of
Sycamore Common Stock.
Upon completion of the merger, you will receive:
. .1181 of a share of Sycamore common stock for each share of Sirocco
Series A preferred stock you own;
. .1772 of a share of Sycamore common stock for each share of Sirocco
Series B preferred stock you own;
. .0259 of a share of Sycamore common stock for each share of Sirocco
Series C preferred stock you own; and
. .6798 of a share of Sycamore common stock for each share of Sirocco
common stock you own, subject to adjustment under certain circumstances
if outstanding options, or offers relating to the grant of options, to
purchase shares of Sirocco common stock expire or are terminated without
exercise prior to completion of the merger or if any of the issued and
outstanding shares of Sirocco Series D preferred stock are not converted
into Sirocco common stock prior to completion of the merger.
The exchange ratios described above will be adjusted to give effect to any
stock split, stock dividend, subdivision, reclassification, reorganization,
exchange of shares or similar transaction with respect to Sycamore common stock
or Sirocco common stock or preferred stock. However, the exchange ratios will
not be adjusted for any increase or decrease in the market price of Sycamore
common stock, and Sirocco is not permitted to "walk away" from the merger or
resolicit your vote solely because of changes in the market price of Sycamore
common stock. Accordingly, the specific dollar value of Sycamore common stock
to be received by you if the merger is completed will depend on the market
value of Sycamore common stock at the time the merger is completed. The share
price of Sycamore common stock is by its nature subject to the general price
fluctuations and volatility in the market for publicly traded high technology
equity securities and has experienced significant
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<PAGE>
volatility. No prediction can be made as to the market price of Sycamore common
stock before or after the completion of the merger.
You May Never Receive 10% of the Sycamore Common Stock to be Paid in the
Merger.
An aggregate of 10% of the shares of Sycamore common stock that the Sirocco
stockholders would otherwise be entitled to receive in the merger will be
placed in an escrow account to secure the indemnification obligation of the
Sirocco stockholders to Sycamore under the merger agreement. Sycamore may make
claims against the shares held in the escrow account for liabilities, damages
and expenses, including reasonable attorney's fees, arising out of:
. any inaccuracy or breach of any representation or warranty made by
Sirocco in the merger agreement or in any certificate delivered by
Sirocco pursuant to the terms of the merger agreement; and
. any breach or default of any of the covenants or agreements made by
Sirocco in the merger agreement or in any certificate delivered by
Sirocco pursuant to the terms of the merger agreement.
To the extent that some or all of the shares in the escrow account are not
required to indemnify Sycamore, such escrow shares will be distributed pro rata
to you on the earlier of the first anniversary of the date the merger is
completed or on the date of the first independent audit report on Sycamore's
financial statements after the completion of the merger which include the
financial results of Sirocco. We cannot assure you that Sycamore will not make
claims for indemnification against the shares held in the escrow account or
that you will receive any of those shares if they are required to indemnify
Sycamore. For more information on the escrow account and the shares held in the
escrow account, see "The Escrow Agreement" on page 50.
Sycamore's Failure to Qualify for "Pooling of Interests" Accounting
Treatment Would Create the Need to Account for the Purchase of Goodwill, Which
Will Negatively Impact the Future Earnings of Sycamore.
The merger is intended to be treated for accounting purposes as a "pooling
of interests." Based solely on information furnished by management of Sycamore
to its independent accountants, Sycamore will receive a letter from its
independent accountants indicating whether or not the independent accountants
concur with the conclusion of Sycamore's management that the merger will
qualify for "pooling of interests" accounting treatment. In addition, based
solely on information furnished by management of Sirocco to its independent
accountants, Sirocco will receive a letter from its independent accountants
indicating whether or not the independent accountants concur with the
conclusion of Sirocco's management that no conditions exist that would preclude
Sirocco's ability to be a party in the merger to be accounted for as a "pooling
of interests." The foregoing opinions are not binding on the Securities and
Exchange Commission and do not take into account transactions that may occur
subsequent to the merger date that would disallow "pooling of interests"
accounting treatment. If the merger is not treated as a pooling of interests
and the merger is nevertheless consummated, Sycamore will have to account for
its purchase of Sirocco's goodwill and other intangible assets. Purchase
accounting will negatively affect Sycamore's earnings, as goodwill and other
intangible assets would be amortized over a period of years and cause decreased
earnings for each quarter during those years.
If Sycamore and Sirocco Do Not Integrate Their Technologies and Operations
Quickly and Effectively, Some or All of the Potential Benefits of the Merger
May Not Occur.
In order to achieve the benefits of the merger, Sycamore must successfully
combine its business with Sirocco's business. The companies must make Sirocco's
technology, products and services operate together with Sycamore's
technologies, products and services. If Sycamore and Sirocco do not integrate
their operations and technologies quickly and smoothly, serious harm to the
combined company's business, financial condition and prospects may result.
Integrating the two businesses will entail significant diversion of the
management's time and attention. Sycamore may be required to spend additional
time or money on integration that would otherwise be spent on developing its
business and services or other matters. In addition, the integration may
require the partial or wholesale conversion or redesign of some or all of the
technologies, products and services of either Sycamore or Sirocco.
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<PAGE>
Failure of the Combined Company to Retain Key Employees of Sirocco Could
Harm the Business of the Combined Company.
The success of the combined company after the merger and the ability of the
combined company to achieve the potential benefits of the merger depend in part
on the continued services of key employees of Sirocco. Despite Sycamore's
efforts to retain these key employees, the combined company might lose some of
Sirocco's employees. Many Sirocco employees will acquire significant amounts of
Sycamore common stock or vested stock options in the merger and may be able to
sell these shares at substantial gains. In addition, these individuals could
become financially independent through these sales, before the products of
Sirocco have fully matured into commercially deliverable products.
Additionally, competitors and other companies may seek to hire these
individuals prior to the merger and during integration of the companies. Under
these circumstances, we may face a difficult task of retaining and motivating
the key personnel to stay committed to the combined company. Sycamore may not
be successful in retaining these key employees and any such failure could
result in the failure to realize anticipated benefits of the merger.
Sales of substantial amounts of Sycamore common stock in the public market
after the proposed merger could materially adversely affect the market price of
Sycamore's common stock.
Based on the shares of Sirocco capital stock, and options and warrants to
purchase Sirocco stock, that are outstanding on June 5, 2000, an aggregate of
28,378,690 shares of Sycamore's common stock will be issued in the merger or be
issuable upon the exercise of options assumed by Sycamore in the merger. A
number of these shares will be freely tradable immediately following the
merger. Sales of a substantial number of shares of Sycamore common stock could
cause Sycamore's stock price to fall. In addition, these sales could impair
Sycamore's ability to raise capital through the sale of additional stock.
Substantial Expenses Will be Incurred and Payments Made Even if the Merger
is Not Consummated.
If the merger agreement is terminated, under some circumstances, Sirocco may
be required to pay Sycamore a termination fee of $96 million. See "The Merger
Agreement-Payment of Termination Fee" on page 49. In addition, whether or not
the merger is consummated, Sirocco and Sycamore will incur substantial
expenses, including legal, financial advisor and administrative expenses, in
pursuing the merger.
Risks Relating to Sirocco
Officers of Sirocco and Certain Members of Sirocco's Board Of Directors Have
Interests in the Merger in Addition to Their Interest as Stockholders of
Sirocco.
As described in greater detail under "Certain Transactions of Sirocco," 50%
of the unvested shares of restricted stock held by officers of Sirocco,
including Jonathan Reeves, who is also a director, will vest upon consummation
of the merger. The balance of the unvested shares held by these persons will
also vest over an accelerated period of either one or two years. Mr. Reeves,
who is currently the President and Chief Executive Officer of Sirocco, will
become Vice President and General Manager, Optical Networking of Sycamore.
Officers and directors of Sirocco will be entitled to indemnification from
Sycamore under certain circumstances.
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<PAGE>
Risks Relating to the Investment in Sycamore
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
Sycamore Does Not Successfully Sell Products to These Customers.
Sycamore currently has a limited number of customers, one of whom, Williams
Communications, accounts for substantially all of Sycamore's revenues to date.
Williams is not contractually committed to purchase any minimum quantities of
products from Sycamore. Sycamore expects that in the foreseeable future
substantially all of Sycamore's revenues will continue to depend on sales of
its 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 them will depend, in part, on its success in
selling communications services based on these products to its own customers.
Any failure of current or prospective customers to purchase products from
Sycamore for any reason, including any determination not to install Sycamore's
products in their networks or downturn in their business, would seriously harm
Sycamore's financial condition or results of its operations.
Sycamore Has Been in Business for a Short Period of Time and Your Basis for
Evaluating Sycamore is Limited.
Sycamore was founded in February 1998. Sycamore began shipping its SN 6000
Intelligent Optical Transport product in May 1999, its 8000 Intelligent Optical
Network Node in August 1999 and its SilvxManager Network Management System in
November 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. You 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, it achieves, depends, among other
things, on the level of demand for intelligent optical networking products,
which is a new and rapidly evolving market.
Sycamore's Failure to Increase its Revenues Would Prevent it from Achieving
and Maintaining Profitability.
Sycamore has a history of losses and has not achieved profitability on an
annual basis. While it had a loss from operations in the quarter ended April
29, 2000, Sycamore achieved profitability for the first time in this quarter on
a net income basis. Sycamore may not sustain profitability on a quarterly basis
or achieve profitability on an annual basis. Sycamore cannot assure you that
its revenues will grow or that it will generate sufficient revenues to 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. Although its revenue has grown in recent
quarters, Sycamore cannot be certain that its revenue growth will continue or
increase in the future or that it will realize sufficient revenues to be
profitable on an annual or quarterly basis.
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Sycamore is Entirely Dependent on its Line of Intelligent Optical Networking
Products and its Future Revenue Depends on its 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, SN 8000 Intelligent Optical Network
Node, SN 16000 Intelligent Optical Switch and its SilvxManager Network
Management System 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. Sycamore cannot assure you that it will be
successful in completing the development or introduction of these products.
Failure of its current or planned products to operate as expected could delay
or prevent its adoption. If Sycamore's target customers do not adopt, purchase
and successfully deploy its current and planned products, its revenues will not
grow significantly.
Because Sycamore's Products Are Complex and Are Deployed in Complex
Environments, it May Have Errors or Defects That it Finds Only After Full
Deployment, Which Could Seriously Harm its 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, it
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 its customers; and
. increased insurance costs.
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 its 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 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, it cannot predict these sales and
deployment cycles. The long sales cycles, as well as its expectation that
customers will tend to sporadically place large orders with short lead times,
may cause its revenues and results of operations to vary significantly and
unexpectedly from quarter to quarter.
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Sycamore May Not Be Successful if its Customer Base Does Not Grow.
Sycamore's future success will depend on its attracting additional
customers. The growth of its customer base could be adversely affected by:
. customer unwillingness to implement its new optical networking
architecture;
. any delays or difficulties that it may incur in completing the
development and introduction of its planned products or product
enhancements;
. new product introductions by its competitors;
. any failure of its products to perform as expected; or
. any difficulty it 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 it Expects.
The market for intelligent optical networking products is new. Sycamore
cannot assure you that a viable market for its products will develop or be
sustainable. If this market does not develop, or develops more slowly than it
expects, Sycamore's business, results of operations and financial condition
would be seriously harmed.
If Sycamore Does Not Respond Rapidly to Technological Changes, its 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 its
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 its existing or future products obsolete.
In developing its 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
has chosen to support, market acceptance of its products may be significantly
reduced or delayed and its 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 its products.
Customer Requirements Are Likely to Evolve, and Sycamore Will Not Retain
Customers or Attract New Customers if it 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 its products, it must effectively and timely anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Sycamore's failure to develop products or offer services that
satisfy customer requirements would seriously harm its 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
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delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
it 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 it to lose current and
prospective customers.
Sycamore's Market is Highly Competitive, and its Failure to Compete
Successfully Would Limit its Ability to Increase its 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. In
addition, a number of private companies have announced plans for new products
to address the same network problems which Sycamore's 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 its products or even render
their products obsolete. Due to the rapidly evolving markets in which it
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 its customers, and an ability to
provide vendor-sponsored financing, are important competitive factors in their
market. Sycamore has limited ability to provide vendor-sponsored financing and
this may influence the purchasing decisions of prospective customers, who may
decide to purchase products from one of its competitors who are able to provide
more extensive financing programs.
If Sycamore is unable to compete successfully against its current and future
competitors, it could experience price reductions, order cancellations and
reduced gross margins, any one of which could materially and adversely affect
its business, results of operations and financial condition.
Sycamore is Likely to Face Difficulties in Obtaining and Retaining Customers
if it 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 their prospective
customers' organizations. This effort requires specialized sales personnel and
consulting engineers. Sycamore is in the process of building its direct sales
force and plan to hire additional qualified sales personnel and consulting
engineers. Competition for these individuals is intense, and Sycamore might not
be able to hire and train the kind and number of sales personnel and consulting
engineers required for it to be successful. In addition, Sycamore believes that
its future success is dependent upon its ability to establish successful
relationships with a variety of distribution partners. If Sycamore is unable to
expand its direct sales operations, or expand its indirect sales channel, it
may not be able to increase market awareness or sales of its products, which
may prevent it from achieving and maintaining profitability.
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Sycamore currently has a small customer service and support organization and
will need to increase its staff to support new customers. The support of its
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 its market. Once Sycamore hires
them, they may require extensive training in their intelligent optical
networking products. If Sycamore is unable to expand its customer service and
support organization and train its personnel rapidly, it may not be able to
increase sales of its products.
Sycamore Depends upon Contract Manufacturers and Any Disruption in These
Relationships May Cause it to Fail to Meet the Demands of its Customers and
Damage its Customer Relationships.
Sycamore does not have internal manufacturing capabilities. It relies on a
small number of contract manufacturers to manufacture its products in
accordance with its specifications, and to fill orders on a timely basis.
Sycamore has a contract with Celestica Corporation, which provides
comprehensive manufacturing services, including assembly, test, control and
shipment to its customers, and procures material on Sycamore's behalf. Sycamore
also has a contract with Jabil Circuit, Inc. for comprehensive manufacturing
services for certain products that are under development. Sycamore may not be
able to effectively manage its relationship with its manufacturers, and these
manufacturers may not meet its future requirements for timely delivery. Each of
Sycamore's contract manufacturers also builds products for other companies, and
it cannot assure you that it will always have sufficient quantities of
inventory available to fill orders placed by its customers, or that it will
allocate its internal resources to fill these orders on a timely basis. Except
for its contracts with Celestica and Jabil, Sycamore does not have any on-going
supply contracts with its manufacturers. At present, Sycamore purchases
products from these other manufacturers on a purchase order basis. 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
its products. If Sycamore is required or chooses to change contract
manufacturers, it may lose revenue and damage its customer relationships.
Sycamore Relies on Single Sources for Supply of Certain Components and its
Business May be Seriously Harmed if its Supply of Any of These Components 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. It 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, it 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 its
operating margins. In addition, Sycamore's reliance on its suppliers exposes it
to potential supplier production difficulties or quality variations. Any such
disruption in supply would seriously impact present and 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.
The Unpredictability of Sycamore's Quarterly Results May Adversely Affect
the Trading Price of its 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 its
control and any of which may cause its stock price to fluctuate. The primary
factors that may affect it include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of its products;
. the length and variability of the sales cycle for its products;
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. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by its competitors and
itself;
. changes in its pricing policies or the pricing policies of its
competitors;
. its ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. its ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components it purchases;
. its ability to attain and maintain production volumes and quality levels
for its 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 its
business. Its operating expenses are largely based on anticipated
organizational growth and revenue trends and a high percentage of its 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 its 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 its operating results are not a good indication of its future
performance. You should not rely on Sycamore's results or growth for one
quarter as any indication of its future performance. It is likely that in some
future quarters, its operating results may be below the expectations of public
market analysts and investors. In this event, the price of Sycamore's common
stock could decrease.
If Sycamore's Products Do Not Interoperate with its Customers' Networks,
Installations Will Be Delayed or Cancelled and Could Result in Substantial
Product Returns, Which Could Seriously Harm its Business.
Many of Sycamore's customers will require that its products be specifically
designed to interface with its existing networks, each of which may have
different specifications and utilize multiple protocol standards. Its
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 its customers' requirements. The requirement
that it 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
its products. If Sycamore finds errors in the existing software used in its
customers' networks, it would have to modify its products to fix or overcome
these errors so that its 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 its
products could be cancelled or its products could be returned. This would also
seriously harm Sycamore's reputation, all of which could seriously harm its
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 its 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
it begins commercial shipments. In addition, service providers typically use
its 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 it to incur significant warranty, support and repair
costs, divert the attention of its engineering personnel from its 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 its business, results of operations and financial condition. Defects,
integration issues or other performance problems in its products could result
in financial or other damages to its customers or could damage market
acceptance for its products. Sycamore's customers could also seek damages for
losses from them. 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 its 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 its customers. Sycamore's failure to establish and maintain these
customer relationships may adversely affect its ability to develop new products
and product enhancements. In addition, it 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 its
products and purchase those of its competitors, which could seriously harm its
business.
Sycamore's Failure to Continually Improve its Internal Controls and Systems,
and Hire Needed Personnel, Could Impair its Future Growth.
Sycamore has expanded its operations rapidly since its inception. It
continues to increase the scope of its operations and has grown its headcount
substantially. For example, at July 31, 1999, Sycamore had a total of 148
employees and at April 29, 2000, it had a total of 407 employees. In addition,
Sycamore plans to continue to hire a significant number of employees this
fiscal year. Its growth has placed, and its anticipated growth will continue to
place, a significant strain on its 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 its financial,
managerial and manufacturing controls and reporting systems, and will need to
continue to expand, train and manage its work force worldwide. It 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 its current or future needs could impair its growth.
Sycamore Depends on its Key Personnel to Manage its Business Effectively in
a Rapidly Changing Market and if it is Unable to Retain its Key Employees, its
Ability to Compete Could Be Harmed.
Sycamore's future success depends upon the continued services of its
executive officers and other key engineering, sales, marketing and support
personnel, who have critical industry experience and relationships that it
relies on to implement their business plan. None of Sycamore's officers or key
employees is bound by an employment agreement for any specific term. It does
not have "key person" life insurance policies covering any of its employees.
The loss of the services of any of Sycamore's key employees could delay the
development and introduction of, and negatively impact its ability to sell, its
products.
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If Sycamore Becomes Subject to Unfair Hiring Claims, it Could Incur
Substantial Costs in Defending Itself.
Companies in Sycamore's industry, whose employees accept positions with
competitors, frequently claim that their competitors have engaged in unfair
hiring practices. Sycamore cannot assure you that it will not receive claims of
this kind or other claims relating to its 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 themselves or
its employees against such claims, regardless of their merits. In addition,
defending itself or its employees from such claims could divert the attention
of its management away from its operations.
Sycamore's Ability to Compete Could Be Jeopardized if it 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 its intellectual property
rights. Sycamore also enters into confidentiality or license agreements with
its employees, consultants and corporate partners, and control access to and
distribution of their software, documentation and other proprietary
information. Despite its effort to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use their products or
technology. Monitoring unauthorized use of its products is difficult and
Sycamore cannot be certain that the steps it has taken will prevent
unauthorized use of its technology, particularly in foreign countries where the
laws may not protect their proprietary rights as fully as in the United States.
If competitors are able to use Sycamore's technology, its ability to compete
effectively could be harmed.
If Necessary Licenses of Third-party Technology Are Not Available to
Sycamore or Are Very Expensive, its 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. Sycamore cannot assure
you that third party licenses will be available to it 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 it to
obtain substitute technology of lower quality or performance standards or at
greater cost, either of which could seriously harm the competitiveness of its
products.
Sycamore Could Become Subject to Litigation Regarding Intellectual Property
Rights, Which Could Seriously Harm its Business and Require it 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, it may be a party to
litigation in the future to protect its intellectual property or as a result of
an allegation that it infringes others' intellectual property. Any parties
asserting that its products infringe upon its proprietary rights would force it
to defend itself and possibly its customers or manufacturers against the
alleged infringement. These claims and any resulting lawsuit, if successful,
could subject it to significant liability for damages and invalidation of its
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 its 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, its business may
be seriously harmed.
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Sycamore May Face Risks Associated with its International Expansion That
Could Impair its Ability to Grow its Revenues Abroad.
Sycamore intends to continue to expand its sales into international markets.
This expansion will require significant management attention and financial
resources to develop successfully direct and indirect international sales and
support channels and to support customers in international markets. It may not
be able to develop international market demand for its products.
Sycamore has limited experience in marketing, distributing and supporting
its products internationally and to do so, it expects that it will need to
develop versions of its 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.
Any Acquisitions Sycamore Makes Could Disrupt its Business and Seriously
Harm its Financial Condition.
As part of Sycamore's ongoing business development strategy, it considers
acquisitions and strategic investments in complementary companies, products or
technologies. On June 6, 2000, Sycamore announced the signing of the merger
agreement described in this proxy statement/prospectus. It may also evaluate
other potential transactions and transaction prospects. In the event of any
purchases, Sycamore could:
. issue stock that would dilute its 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 its core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which it has no or limited
prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
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Sycamore cannot assure you that it 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 its business and seriously
harm its financial condition.
Risks Relating to The Securities Markets
The Price of Sycamore Common Stock May be Volatile.
An active public market for the Sycamore common stock you will receive in
the merger may not be sustained. The market for technology stocks has been
extremely volatile. The following factors could cause the market price of the
Sycamore 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;
. failure by Sycamore to meet its product milestones;
. acquisitions, distribution partnerships, joint ventures or capital
commitments;
. changes in financial estimates by securities analysts;
. sales of Sycamore 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. These broad market and industry
factors may materially adversely affect the market price of Sycamore's common
stock, regardless of its 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.
There May be Sales of a Substantial Amount of Sycamore Common Stock That
Could Cause its Stock Price to Fall.
As of April 29, 2000, options to purchase a total of 24,479,310 shares of
Sycamore common stock were outstanding, which options are subject to vesting
schedules. Sales of a substantial number of shares of Sycamore common stock
could cause Sycamore's stock price to fall. In addition, the sale of shares by
its stockholders could impair its ability to raise capital through the sale of
additional stock.
Insiders Have Substantial Control over Sycamore and Could Limit Your Ability
to Influence the Outcome of Key Transactions, Including Changes of Control.
As of April 29, 2000, Sycamore's executive officers, directors and entities
affiliated with it, in the aggregate, beneficially owned approximately 61.5% of
its outstanding common stock. These stockholders, if acting together, would be
able to significantly influence all matters requiring approval by its
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
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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,
by-laws, and Delaware law could make it more difficult for a third party to
acquire it, even if doing so would be beneficial to its stockholders.
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THE SPECIAL MEETING OF SIROCCO STOCKHOLDERS
This proxy statement/prospectus is being furnished to you in connection with
the solicitation of proxies by Sirocco's board of directors in connection with
the proposed merger for use at the special meeting. This proxy
statement/prospectus is first being furnished to stockholders of Sirocco on or
about August 15, 2000.
Date, Time and Place of the Special Meeting
The special meeting of the stockholders of Sirocco is scheduled to be held
as follows:
September 7, 2000
9:00 a.m., local time
Day, Berry & Howard LLP
CityPlace I
185 Asylum Street
25th Floor
Hartford, Connecticut 06103
Purpose of the Special Meeting
The special meeting is being held so that the stockholders of Sirocco may
consider and vote upon a proposal to adopt the merger agreement among Sycamore,
a wholly owned subsidiary of Sycamore and Sirocco and transact any other
business that properly comes before the special meeting or any adjournment
thereof. Adoption of the merger agreement will also constitute approval of the
merger and the other transactions contemplated by the merger agreement.
If the stockholders of Sirocco adopt the merger agreement, a wholly owned
subsidiary of Sycamore will merge into Sirocco, and Sirocco will survive the
merger as a wholly owned subsidiary of Sycamore.
After careful consideration, Sirocco's board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests. Sirocco's board of directors unanimously recommends
that you vote FOR the adoption of the merger agreement.
Stockholder Record Date for the Special Meeting
Sirocco's board of directors has fixed the close of business on July 28,
2000, as the record date for determination of Sirocco stockholders entitled to
notice of and entitled to vote at the special meeting. On the record date,
there were 30,718,991 shares of Sirocco common stock, 60,000 shares of Series A
preferred stock, 85,000 shares of Series B preferred stock, 2,654,548 shares of
Series C preferred stock and 5,370,047 shares of Series D preferred stock
issued and outstanding and held by approximately 155 holders of record.
Vote of Sirocco Stockholders Required for Approval of the Merger
A majority of the outstanding shares of Sirocco common stock and each series
of preferred stock entitled to vote at the special meeting must be represented,
either in person or by proxy, to constitute a quorum at the special meeting.
The affirmative vote of the holders of at least a majority of Sirocco's common
stock and each series of preferred stock outstanding and entitled to vote at
the special meeting is required to adopt the merger agreement. You are entitled
to one vote for each share of Sirocco common stock and each share of preferred
stock held by you on the record date for each proposal to be presented to you
at the special meeting.
The Sirocco stockholders who are parties to the voting agreement with
Sycamore have agreed to vote their shares of Sirocco common stock and preferred
stock in favor of the adoption of the merger agreement. As of
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July 28, 2000, these stockholders held outstanding shares of Sirocco common
stock and preferred stock representing the following:
. 62.11% of the Sirocco common stock;
. 100% of the Sirocco Series A preferred stock;
. 98.04% of the Sirocco Series B preferred stock;
. 94.18% of the Sirocco Series C preferred stock; and
. 90.84% of the Sirocco Series D preferred stock.
Accordingly, as a result of the voting agreement, assuming no breach of the
voting agreement by any party thereto, adoption of the merger agreement is
assured.
As of July 28, 2000, directors and executive officers of Sirocco and its
affiliates beneficially owned and were entitled to vote approximately 8,633,890
shares of Sirocco common stock, which represented approximately 28% of all
outstanding shares of Sirocco common stock entitled to vote at the special
meeting in addition to approximately 17,340,034 shares of common stock, or
approximately 53% of the outstanding shares of common stock, held by investment
funds with which certain directors are affiliated. Each Sirocco director and
executive officer has indicated his present intention to vote, or cause to be
voted, the Sirocco common stock owned by him for adoption of the merger
agreement.
Voting of Proxies
All shares of Sirocco common stock and preferred stock represented by
properly executed proxies received before or at the special meeting will,
unless the proxies are revoked, be voted in accordance with the instructions
indicated on them. Properly executed proxies that do not contain voting
instructions will be voted FOR adoption of the merger agreement. You are urged
to mark the box on the proxy to indicate how to vote your shares.
If you return a properly executed proxy and you have abstained from voting
on the proposal, your Sirocco common stock represented by the proxy will be
considered present at the special meeting for purposes of determining a quorum
and for purposes of calculating the vote, but will not be considered to have
been voted in favor of adoption of the merger agreement.
Because adoption of the merger agreement requires the affirmative vote of at
least a majority of Sirocco's common stock outstanding as of the record date,
any failure to return your proxy will have the same effect as a vote AGAINST
adoption of the merger agreement.
Sirocco does not expect that any matter other than adoption of the merger
agreement will be brought before the special meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to those matters, unless authority
to do so is withheld in the proxy.
Revocability of Proxies
You may revoke your proxy at any time before it is voted by:
. notifying in writing the Secretary of Sirocco, 95 Barnes Road,
Wallingford, Connecticut 06492;
. granting a subsequent proxy; or
. appearing in person and voting at the special meeting. Attendance at the
special meeting will not in and of itself constitute revocation of a
proxy.
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Solicitation of Proxies
Sirocco and Sycamore will share equally all expenses incurred in connection
with the printing and mailing of this proxy statement/prospectus to Sirocco's
stockholders and the filing fees related to the registration statement of which
this proxy statement/prospectus forms a part. Sirocco will bear the cost of
mailing and soliciting proxies from its stockholders. It is expected that
approximately $1,000 will be spent in connection with the solicitation of
Sirocco's stockholders.
You should not send stock certificates with your proxy. A transmittal form
with instructions for the surrender of stock certificates of Sirocco common
stock and preferred stock will be mailed to you as soon as practicable after
completion of the merger.
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THE MERGER
This section of the proxy statement/prospectus describes material aspects of
the proposed merger, including the merger agreement, the voting agreement and
the escrow agreement. While we believe that the description covers the material
terms of the merger and the related transactions, this summary may not contain
all of the information that is important to you. You should carefully read this
entire document and the other documents to which we refer for a more complete
understanding of the merger.
Background of the Merger
Senior management members of Sycamore and Sirocco have been familiar with
each other for several years, having each previously been associated with
Cascade Communications Corp., a networking company. On April 18, 2000, senior
executives of Sycamore and Sirocco met to discuss Sirocco's current and
proposed business operations.
On May 19, 2000, Kevin Oye, Sycamore's Vice President of Business
Development, spoke with Jonathan Reeves, Sirocco's Chief Executive Officer, to
explore the possibility of developing a relationship between Sycamore and
Sirocco. Messrs. Oye and Reeves agreed to organize a subsequent meeting to
further review Sirocco's current and proposed business operations.
On May 24, 2000, Mr. Reeves and W. Thomas Shea, Sirocco's Chief Operating
Officer, together with several other Sirocco officers and employees met with
Mr. Oye and other Sycamore representatives at Sirocco's principal offices in
Wallingford, Connecticut to discuss Sirocco's products and product development.
On May 25, 2000, Mr. Reeves, together with several Sirocco officers and
employees, discussed Sirocco's products and product development in further
detail with representatives of Sycamore by teleconference.
On May 26, 2000, Mr. Oye spoke with Messrs. Reeves and Shea by telephone and
proposed possible terms for a business combination of the two companies. Mr.
Oye requested that as a condition of further discussions, Sirocco agree to
negotiate exclusively with Sycamore for a period of time as to any possible
business combination. On May 27, 2000, Messrs. Reeves and Shea agreed to
negotiate exclusively with Sycamore through the close of business on June 5,
2000 with respect to a business combination which would value Sirocco within an
agreed range. On May 28, 2000, Mr. Oye agreed that a preliminary valuation of
Sirocco at $2.4 billion was within a range that would justify continuing
discussions, conducting mutual due diligence and negotiating definitive
documentation, all subject to the approval of their respective boards of
directors.
From May 29, 2000 through June 4, 2000, representatives of Sycamore and
Sirocco, including their legal advisors, conducted mutual due diligence
concerning their respective businesses and operations.
From June 1, 2000 through June 5, 2000, representatives of Sycamore and
Sirocco, together with their legal advisors, discussed and negotiated the terms
and conditions of the merger agreement, the voting agreement and the escrow
agreement and various other business, legal and financial issues, including
among other things, employee matters and the tax and accounting treatment of
the proposed transaction.
On June 4, 2000, the board of directors of Sycamore held a telephonic
meeting also attended by representatives of Morgan Stanley & Co. and Skadden,
Arps, Slate, Meagher & Flom LLP, special counsel to Sycamore. Sycamore
management reported on the status of the negotiations with Sirocco and
representatives of Morgan Stanley provided their financial analysis of the
proposed combination. Representatives of Skadden Arps described the principal
terms of the merger agreement, voting agreement and escrow agreement, and the
board members discussed generally the merits of the proposed combination.
On June 4, 2000, the Sirocco board of directors held a telephonic meeting
attended by representatives of Day, Berry & Howard LLP, counsel to Sirocco, and
Ropes & Gray, special counsel to Sirocco. Sirocco
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management reported on the status of the negotiations with Sycamore and
representatives of Day, Berry & Howard and Ropes & Gray described the current
status of the negotiations of the principal terms of the merger agreement,
voting agreement and escrow agreement. The Sirocco board members discussed the
factors in favor of the merger, as well as potentially negative factors.
The Sirocco board of directors had a further telephone meeting on June 5,
2000 at which they were updated by members of Sirocco management and by
representatives of Day, Berry & Howard and Ropes & Gray as to the current
status of the negotiations and the remaining issues separating the companies.
The Sirocco board of directors had a second telephone meeting on June 5,
2000, again attended by members of Sirocco management and representatives of
Day, Berry & Howard and Ropes & Gray. The Sirocco board members were updated on
the status of the negotiations and the proposed terms of the merger agreement
and other documents. Following considerable discussion, the Sirocco board of
directors unanimously approved the merger agreement, the voting agreement, the
escrow agreement and related documents, and determined that the merger is fair
to the stockholders of Sirocco and in their best interests. The Sirocco board
of directors directed that the merger agreement be submitted to Sirocco's
stockholders for approval, together with a recommendation from the board that
the stockholders vote in favor of the merger.
On June 5, 2000, the Sycamore board of directors again met telephonically
with Sycamore senior management and representatives of Morgan Stanley and
Skadden Arps. The board was updated on the status of the negotiations and the
proposed terms of the merger agreement and other documents. Representatives of
Morgan Stanley summarized their financial analysis previously discussed with
the board. Following discussion, the Sycamore board of directors concluded that
the merger was fair to and in the best interests of Sycamore and unanimously
approved the merger agreement, the voting agreement, the escrow agreement and
related documents.
Sycamore and Sirocco entered into the merger agreement as of June 5, 2000.
Also as of June 5, 2000, certain Sirocco stockholders entered into the voting
agreement with Sycamore and Sirocco.
On June 6, 2000, Sirocco and Sycamore issued a press release announcing the
transaction.
Sycamore's Reasons for the Merger
Sycamore believes the combined company following the merger will have a more
complete, scalable product family of intelligent optical networking products
and therefore will be positioned to deliver the end-to-end intelligent optical
networking solutions that its customers seek. Sycamore believes that the
combined company after the merger will be able to more rapidly bring this
family of intelligent optical network products to market than if Sycamore had
relied solely on internal product development. Sycamore believes that this will
strengthen its ability to compete in the changing optical networking market,
where the ability to compete can require companies to develop or acquire new
competencies within a short period of time.
Sycamore also believes that the Sirocco team will add substantial talent and
skill to the existing Sycamore team, primarily in the research, development and
sale of optical access and switching products and technologies geared to meet
the needs of service providers in the access and metropolitan sectors of the
fiber optic network. Understanding the needs of the optical access segment of
the network and developing the ability to build compact and capable optical
access products requires specialized talents. Sycamore believes that the
Sirocco team will bring expertise in this area to Sycamore as many of the
founders and key employees of Sirocco have extensive experience researching and
developing optical access products and technologies. Sycamore believes that the
merger will not only accelerate its entry into the optical access market, but
also will create an optical access group that will continue to enhance
Sycamore's future capabilities in this area.
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For the strategic reasons set forth above, after consultation with its
management and advisers and consideration of the terms of the merger agreement
and the transactions contemplated by the merger agreement, the Sycamore board
of directors determined that the merger agreement and the merger were in the
best interests of Sycamore and its stockholders.
Sirocco's Reasons for the Merger
In reaching its decision to approve the merger agreement and the merger and
to recommend approval of the merger agreement by Sirocco stockholders, the
Sirocco board of directors carefully considered the terms of the merger
agreement and the proposed merger and the other transactions contemplated by
the merger agreement.
Among the factors that the Sirocco board of directors considered in favor of
the merger were:
. the current and anticipated market price of Sycamore stock and the
relative value of the merger consideration being offered to Sirocco
stockholders;
. the likelihood that the merger would receive tax-free treatment for
stockholders for federal income tax purposes pursuant to Section 368(a)
of the Internal Revenue Code;
. the belief that the opportunity to own stock of a larger, publicly
traded company would provide greater security to stockholders and a
better return on their investment, and would eliminate some of the risks
of owning an illiquid investment in a privately held company;
. the opportunity afforded to stockholders to participate in the growth of
the combined business;
. the difficulty of maximizing the potential of Sirocco's products within
a small, privately owned business;
. the access to greater financial, administrative and marketing resources
that would be afforded to Sirocco products through the integration of
Sirocco's business with the business of Sycamore;
. the strategic fit and complementary nature of Sirocco's business with
the business of Sycamore, and the belief that each of the businesses
would be stronger as a result of the merger;
. the likelihood that Sirocco would continue to need significant financing
to support its plans for growth; and
. Sycamore's plans for continuing development of Sirocco's business.
Among the factors that the Sirocco board of directors considered as
potentially negative were:
. the risk that the potential benefits sought in the merger might not be
realized fully, or within the time frame contemplated, if at all;
. the possibility that the merger would not be consummated;
. the risk that, despite the efforts of Sirocco and Sycamore, key
technical, marketing and management personnel might choose not to remain
employed by Sycamore after the merger; and
. the other risks associated with Sycamore's business and the merger
described under "Risk Factors."
The Sirocco board of directors believes that the potential benefits of the
merger outweigh the risks.
The foregoing discussion of the information and factors considered by the
Sirocco board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the Sirocco board of directors. In
view of the variety of factors considered in connection with its evaluation of
the merger, the Sirocco board of directors did not find it practicable to and
did not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, individual members of
the Sirocco board of directors may have given different weight to different
factors.
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Recommendation of Sirocco's Board of Directors
After careful consideration, the Sirocco board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests. The Sirocco board of directors unanimously recommends
that you vote FOR the adoption of the merger agreement.
In considering the recommendation of Sirocco's board of directors with
respect to the merger agreement, you should be aware that some directors,
officers and employees of Sirocco have interests in the merger that are
different from, or are in addition to, your interests. Please read the section
entitled "Certain Transactions of Sirocco" on page 92 of this proxy
statement/prospectus.
Stock Restriction Agreements
Pursuant to Stock Restriction Agreements between Sirocco and each of
Jonathon Reeves, W. Thomas Shea and Edward Stern, the executives have purchased
restricted stock of Sirocco. Upon the consummation of the merger, Sirocco's
purchase option covering the restricted stock held by the executives lapses
with respect to 50% of the shares it covered immediately prior to the
transaction. Thereafter, the purchase option will continue to lapse at the rate
of 8.33% per month, such that it expires entirely one year after the
transaction. In the event that an executive is terminated without cause or
resigns for just cause after the transaction is completed, all of such
executive's unvested shares will immediately become vested.
Sirocco's 1998 Stock Plan
At the time the merger is completed, restricted stock and stock options
issued and outstanding under Sirocco's 1998 stock plan, whether vested or
unvested, will be assumed by Sycamore, and assuming that no options that are
currently outstanding to purchase Sirocco common stock expire or are terminated
and that all the issued and outstanding shares of Sirocco Series D preferred
stock convert into Sirocco common stock, each option will be converted into an
option to acquire .6798 of a share of Sycamore common stock. If shares of
Sirocco Series D preferred stock are not converted into Sirocco common stock
prior to completion of the merger, the Sirocco common stock exchange ratio will
be adjusted upward. If none of the issued and outstanding shares of Sirocco
Series D preferred stock are converted, each option will be converted into an
option to acquire .8360 of a share of Sycamore common stock. We expect that all
of the issued and outstanding shares of Sirocco Series D preferred stock will
be converted into Sirocco common stock prior to completion of the merger, and
accordingly, we expect that each option will be converted into an option to
acquire .6798 of a share of Sycamore common stock. Sycamore will assume these
options on the same terms and conditions, including vesting provisions and
repurchase provisions relating to any shares of Sirocco restricted stock, that
were applicable to the options prior to completion of the merger. Fifty percent
of the shares covered by outstanding unvested restricted stock and stock
options will automatically vest upon the consummation of the merger. The
balance of the unvested shares held by these persons will vest over an
accelerated period of either one or two years.
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Indemnification and Insurance
The merger agreement provides that all rights to indemnification existing in
favor of the present and former officers, directors, employees and agents of
Sirocco, to the extent provided in the Sirocco charter and the Sirocco by-laws,
will be assumed by Sycamore and the surviving corporation in the merger. The
merger agreement also provides that for four years after the effective time of
the merger, Sycamore will maintain policies of directors' and officers'
fiduciary liability insurance for acts or omissions occurring prior to the
effective time of the merger, on terms no less advantageous than those in
effect on the date of the merger agreement. However, if the annual premiums for
this insurance exceed two times the annual premiums paid by Sirocco prior to
June 5, 2000, the surviving corporation will only be required to provide as
much coverage as possible for an annual premium equal to two times the last
annual premium paid by Sirocco.
Employee Non-Competition and Non-Disclosure Agreements
Certain key employees of Sirocco have also entered into non-competition and
non-disclosure agreements with Sycamore and Sirocco in connection with the
merger. The agreements provide that the employees bound by such agreements will
not compete with Sycamore for a period of the later of two years from the date
of the agreement or one year following any termination of employment by
Sycamore. For a period of one year following termination of employment, the
employees who are party to such agreements may not solicit any of Sycamore's
current or potential customers, solicit the employment or services of certain
of Sycamore's employees or consultants, or otherwise interfere with Sycamore's
business. The employees who are party to the non-competition and non-disclosure
agreements have also agreed not to disclose any proprietary information
regarding Sycamore or Sirocco. The non-competition and non-disclosure
agreements will become effective upon consummation of the merger and shall be
null and void if the merger agreement is terminated.
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including adoption of the merger agreement by
the stockholders of Sirocco. Upon adoption of the merger agreement, the
stockholders of Sirocco will be deemed to have acknowledged their approval of
their indemnification obligations set forth in the merger agreement and the
escrow agreement and the appointment of G. Felda Hardymon to act as
representative of the stockholders of Sirocco pursuant to the terms and
conditions of the merger agreement and the escrow agreement. The merger will
become effective upon the filing of a certificate of merger with the State of
Delaware.
We are working towards completing the merger as quickly as possible. We
expect to complete the merger during the third calendar quarter of 2000.
Structure of the Merger and Conversion of Sirocco Common Stock and Preferred
Stock
In accordance with the merger agreement and Delaware law, a newly-formed and
wholly owned subsidiary of Sycamore will be merged with and into Sirocco. As a
result of the merger, the separate corporate existence of the newly-formed
subsidiary of Sycamore will cease, and Sirocco will survive the merger as a
wholly owned subsidiary of Sycamore.
Upon completion of the merger, each outstanding share of Sirocco common
stock, other than shares held as treasury stock, and each outstanding share of
Sirocco preferred stock will be converted into, and you will have, the right to
receive:
. .1181 of a share of Sycamore common stock for each share of Sirocco
Series A preferred stock you own;
. .1772 of a share of Sycamore common stock for each share of Sirocco
Series B preferred stock you own;
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. .0259 of a share of Sycamore common stock for each share of Sirocco
Series C preferred stock you own; and
. .6798 of a share of Sycamore common stock for each share of Sirocco
common stock you own. This common stock exchange ratio will be adjusted
under certain circumstances if outstanding options, or offers relating
to the grant of options, to purchase shares of Sirocco common stock
expire or are terminated without exercise prior to completion of the
merger. In addition, the exchange ratios listed above assume that all of
the issued and outstanding shares of Sirocco Series D preferred stock
will be converted into Sirocco common stock prior to the completion of
the merger. Each share of Sirocco Series D preferred stock is
convertible, at the option of the holder, into 1.5 shares of Sirocco
common stock. If shares of Sirocco Series D preferred stock are not
converted prior to completion of the merger:
. upon completion of the merger, each outstanding share of Sirocco
Series D preferred stock will be converted into the right to receive
.0436 of a share of Sycamore common stock; and
. the exchange ratio for the Sirocco common stock of .6798 will be
adjusted upward.
If none of the shares of Series D preferred stock are converted, upon
completion of the merger, each outstanding share of Sirocco common stock
outstanding will be converted into the right to receive .8360 of a share of
Sycamore common stock, assuming none of the currently outstanding options
expire or are terminated. We expect that all of the issued and outstanding
shares of Sirocco Series D preferred stock will be converted into Sirocco
common stock prior to completion of the merger, and accordingly, we expect that
you will receive .6798 of a share of Sycamore common stock for each share of
Sirocco common stock you own.
The number of shares of Sycamore common stock issuable in the merger will be
proportionately adjusted for any additional future stock split, stock dividend
recapitalization, subdivision, reclassification, exchange, combination or
similar transaction with respect to Sirocco common stock or preferred stock or
Sycamore common stock effected between the date of the merger agreement and the
completion of the merger. Each share of Sycamore common stock issued to you in
the merger will be fully paid and nonassessable.
No certificate representing fractional shares of Sycamore common stock will
be issued in connection with the merger. Instead you will receive cash, without
interest, in lieu of a fraction of a share of Sycamore common stock.
Specifically, you will receive an amount of cash equal to $84.5705 multiplied
by the fraction of a share.
Exchange of Sirocco Stock Certificates for Sycamore Stock Certificates
When the merger is completed, the exchange agent will mail to you a letter
of transmittal and instructions for use in surrendering your Sirocco stock
certificates in exchange for Sycamore stock certificates. When you deliver your
Sirocco stock certificates to the exchange agent along with a properly executed
letter of transmittal and any other required documents, your Sirocco stock
certificates will be canceled and you will receive Sycamore stock certificates
representing the number of whole shares of Sycamore common stock to which you
are entitled under the merger agreement. You will receive payment in cash,
without interest, in lieu of any fractional shares of Sycamore common stock
which would have been otherwise issuable to you as a result of the merger, as
described above.
The exchange of your Sirocco shares in the merger for shares of Sycamore
common stock will be in full satisfaction of your rights as a Sirocco or
Sycamore stockholder, subject to any rights you may have to the escrowed shares
upon termination of the escrow agreement.
You should not submit your Sirocco stock certificates for exchange unless
and until you receive the transmittal instructions and a form of letter of
transmittal from the exchange agent.
You are not entitled to receive any dividends or other distributions on
Sycamore common stock until the merger is completed and you have surrendered
your Sirocco stock certificates in exchange for Sycamore stock certificates.
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If there is any dividend or other distribution on Sycamore common stock with
a record date after the merger and a payment date prior to the date you
surrender your Sirocco stock certificates in exchange for Sycamore stock
certificates, you will receive it with respect to the whole shares of Sycamore
common stock issued to you promptly after they are issued. If there is a
dividend or other distribution on Sycamore common stock with a record date
after the merger and a payment date after the date you surrender your Sirocco
stock certificates in exchange for Sycamore stock certificates, you will
receive it with respect to the whole shares of Sycamore common stock issued to
you promptly after the payment date.
Sycamore will only issue a Sycamore stock certificate or a check in lieu of
a fractional share in a name other than the name in which a surrendered Sirocco
stock certificate is registered if you present the exchange agent with all the
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.
United States Federal Income Tax Consequences of the Merger
The following general discussion summarizes the anticipated material United
States federal income tax consequences of the merger to holders of Sirocco
common stock and preferred stock who exchange their Sirocco stock for Sycamore
common stock in the merger. This discussion addresses only such stockholders
who hold their Sirocco stock as a capital asset and does not address all of the
United States federal income tax consequences that may be relevant to
particular stockholders in light of their individual circumstances or to
stockholders who are subject to special rules, such as:
. financial institutions,
. mutual funds,
. tax-exempt organizations,
. insurance companies,
. dealers in securities or foreign currencies,
. traders in securities who elect to apply a mark-to-market method of
accounting,
. foreign holders,
. persons who hold such shares as a hedge against currency risk or as part
of a straddle, constructive sale or conversion transaction,
. holders who acquired their shares upon the exercise of employee stock
options or similar derivative securities or otherwise as compensation,
or
. holders of any employee stock options or restricted stock.
The following discussion is not binding on the Internal Revenue Service. It
is based upon the Internal Revenue Code, laws, regulations, rulings and
decisions in effect as of the date of this proxy statement/prospectus, all of
which are subject to change, possibly with retroactive effect. Tax consequences
under state, local and foreign laws, and federal laws other than federal income
tax laws, are not addressed.
Sirocco stockholders are strongly urged to consult their tax advisors as to
the specific tax consequences to them of the merger, including the
applicability and effect of federal, state, local and foreign income and other
tax laws in their particular circumstances.
It is a condition to the consummation of the merger that (i) Sirocco
receives an opinion from Day, Berry & Howard LLP, special tax counsel to
Sirocco, dated as of the effective date of the merger, to the effect that the
merger will qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code and (ii) Sycamore receives an opinion from Skadden,
Arps, Slate, Meagher & Flom LLP, special tax counsel to Sycamore, dated as of
the effective date of the merger, to the effect that the merger will qualify as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. The conditions relating to the tax opinions may not be waived by Sirocco
or Sycamore after receipt of the Sirocco stockholder approval unless further
stockholder approval is obtained with appropriate disclosure. The opinions will
be based on customary assumptions and customary representations made by
Sirocco, Sycamore and Sycamore's wholly
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owned subsidiary with which Sirocco will merge. An opinion of counsel
represents counsel's best legal judgment and is not binding on the Internal
Revenue Service or any court. No ruling has been, or will be, sought from the
Internal Revenue Service as to the United States federal income tax
consequences of the merger.
Assuming the merger qualifies as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, holders of Sirocco stock who
exchange their Sirocco stock solely for Sycamore common stock in the merger
will not recognize gain or loss for United States federal income tax purposes,
except with respect to cash, if any, they receive in lieu of a fractional share
of Sycamore common stock. Each holder's tax basis in the Sycamore common stock
received in the merger will be the same as his or her aggregate tax basis in
the Sirocco stock surrendered in the merger, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is received.
The holding period of the Sycamore common stock received in the merger by a
Sirocco stockholder will include the holding period of the Sirocco stock that
he or she surrendered in the merger.
A Sirocco stockholder who receives cash in lieu of a fractional share of
Sycamore common stock will recognize gain or loss equal to the difference
between the amount of cash received and his or her tax basis in the Sycamore
common stock that is allocable to the fractional share. That gain or loss
generally will constitute capital gain or loss. In the case of an individual
stockholder, any such capital gain generally will be subject to a maximum
United States federal income tax rate of 20% if the individual has held his or
her Sirocco stock for more than 12 months on the date of the merger. The
deductibility of capital losses is subject to limitations for both individuals
and corporations.
Under the escrow agreement, 10% of the aggregate number of shares of
Sycamore common stock that the Sirocco stockholders would otherwise receive in
the merger will be placed in escrow. For United States federal income tax
purposes, Sirocco stockholders will be treated as having received the escrow
shares upon the consummation of the merger. Accordingly, until the escrow
shares are released, the interim basis of the Sycamore common stock received by
Sirocco stockholders will be determined as though the maximum number of shares
of Sycamore common stock were received by Sirocco stockholders. Former Sirocco
stockholders may be required to include in their income distributions with
respect to the escrow shares and income generated from the investment of such
distributions. However, Sycamore has never paid or declared any cash dividends
on Sycamore common stock and does not anticipate paying cash dividends in the
foreseeable future. If escrow shares are required to by paid to Sycamore,
former Sirocco stockholders would not recognize gain or loss on such payment
and such former stockholders would allocate their tax basis in any surrendered
escrow shares among their remaining shares of Sycamore common stock received
(or treated as received) in the merger. No gain or loss will be recognized and
no amount will be included in the income of the former Sirocco stockholders by
reason of the release of escrow materials to such former stockholders.
Upon the consummation of the merger, certain currently unvested employee
stock options shall become vested and exercisable and restrictions will lapse
with respect to shares of restricted stock of Sirocco. This acceleration of
vesting and/or lapse of restrictions may be deemed to be an "excess parachute
payment" (within the meaning of Section 280G of the Internal Revenue Code) to
the holders of the options or restricted stock. Individuals who receive "excess
parachute payments" may be subject to an excise tax on such payments pursuant
to Section 4999 of the Internal Revenue Code. Holders of unvested Sirocco stock
options and restricted stock of Sirocco are strongly urged to consult their tax
advisors as to the specific tax consequences to them of the merger, including
the applicability of Sections 280G and 4999 of the Internal Revenue Code in
their particular circumstances.
Accounting Treatment of the Merger
Sirocco and Sycamore intend to account for the merger as a "pooling of
interests" business combination. It is a condition to completion of the merger
that Sycamore be advised by PricewaterhouseCoopers LLP that they concur with
Sycamore's conclusion that the transactions contemplated by the merger
agreement can properly be accounted for as a "pooling of interests" business
combination, although this condition may be
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waived exclusively by Sycamore. Under the "pooling of interests" method of
accounting, as of the effective time of the merger, the historical recorded
assets and liabilities of Sirocco will be carried forward to those of Sycamore
at their recorded amounts. In addition, the operating results of the combined
company will include Sirocco and Sycamore's operating results for the entire
fiscal year in which the merger is completed, and Sirocco and Sycamore's
historical reported operating results for prior periods will be combined and
restated as the operating results of the combined company.
Regulatory Filings and Approvals Required to Complete the Merger
The merger is reportable under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended. On June 20, 2000, Sycamore and Sirocco each filed with
the Antitrust Division of the Department of Justice and the Premerger
Notification Office of the Federal Trade Commission (the "Agencies") certain
financial and competitive information in Premerger Notification and Report
Forms (the "HSR Form"). Filing of the HSR Form by both parties started a 30-day
waiting period, and early termination was granted on June 30, 2000.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds either before or after
expiration or termination of the waiting period. Accordingly, at any time
before or after the completion of the merger, either the Antitrust Division of
the Department of Justice or the Federal Trade Commission could take action
under the antitrust laws as it deems necessary or desirable in the public
interest, or other persons could take action under the antitrust laws,
including seeking to enjoin the merger. Additionally, at any time before or
after the completion of the merger, notwithstanding that the applicable waiting
period expired or terminated, any state could take action under the antitrust
laws as it deems necessary or desirable in the public interest. There can be no
assurance that a challenge to the merger will not be made or that, if a
challenge is made, the parties will prevail.
Restrictions on Sales of Shares by Affiliates of Sirocco and Sycamore
The shares of Sycamore common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of Sycamore common
stock issued to any person who is deemed to be an "affiliate" of either
Sycamore or Sirocco at the time of the special meeting. Persons who may be
deemed to be affiliates include individuals or entities that control, are
controlled by, or are under common control of either Sycamore or Sirocco and
may include some of either Sycamore's or Sirocco's officers and directors, as
well as their principal stockholders. Affiliates may not sell their shares of
Sycamore common stock acquired in connection with the merger except pursuant
to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
. any other applicable exemption under the Securities Act.
In addition, each of Sycamore and Sirocco has agreed to cause its affiliates
to enter into an agreement pursuant to which each affiliate will agree not to
engage in any transfer of its shares of Sycamore common stock until publication
of combined financial results covering at least 30 days of post-merger combined
operations of Sycamore and Sirocco.
Sycamore's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
Sycamore common stock to be received by our affiliates in the merger.
Listing on the Nasdaq National Market of the Common Stock to be Issued by
Sycamore
Sycamore will use reasonable efforts to cause the shares of Sycamore common
stock to be issued in the merger to be approved for listing on the Nasdaq
National Market, subject to official notice of issuance, before the completion
of the merger.
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Dissenters' and Appraisal Rights
Under the Delaware General Corporation Law, holders of Sirocco common stock
have appraisal rights (sometimes referred to as "dissenters' rights") in
connection with the merger. However, it is a condition to Sycamore's obligation
to complete the merger that no more than 5% of the issued and outstanding
shares of Sirocco common stock as of July 28, 2000 exercise their appraisal
rights. If holders of more than 5% of the outstanding shares of Sirocco common
stock exercise their appraisal rights, Sycamore may exercise its right to
terminate the merger agreement. Furthermore, if Sycamore exercises this right,
and within one year after the termination of the merger agreement Sirocco
directly or indirectly enters into an agreement for, or completes the sale of
at least 50% of its equity securities or the fair market value of its assets,
then Sirocco must pay Sycamore a termination fee of $96 million. Any
stockholder who is eligible to exercise appraisal rights and properly does so
will be paid in cash the "fair value" of their shares. Fair value takes into
account all relevant factors but excludes any appreciation or depreciation in
anticipation of the applicable merger.
Stockholders who elect to exercise appraisal rights must comply with the
procedures described in Section 262 of the Delaware General Corporation Law. We
have attached a copy of Section 262 of the Delaware General Corporation Law as
Appendix D to this proxy statement/prospectus.
This proxy statement/prospectus is being sent to you as a holder of record
of Sirocco common stock as of the record date for the Sirocco special meeting
and constitutes notice of the appraisal rights available to you under Section
262. The statutory right of appraisal granted by Section 262 is complex and
requires strict compliance with the procedures in Section 262. Failure to
follow any of these procedures may result in a termination or waiver of your
appraisal rights under Section 262. The following is a summary of the principal
provisions of Section 262. This summary is qualified in its entirety by
reference to Section 262 which is incorporated in this proxy
statement/prospectus by reference, together with any amendments to the laws
that may be adopted after the date of this proxy statement/prospectus.
If you elect to exercise your appraisal rights under Section 262, you must:
. Deliver a written demand for appraisal of your shares of Sirocco common
stock prior to the vote on the merger. The written demand must identify
you as a stockholder of record and state your intention to demand
appraisal of your shares. Merely voting against adoption of the merger
agreement, abstaining from voting or failing to vote with respect to
adoption of the merger agreement will not constitute a demand for
appraisal within the meaning of Section 262. Demand for appraisal must
be executed by or for you as a holder of record, fully and correctly, as
your name appears on your stock certificates representing shares of
Sirocco common stock. If you own Sirocco common stock in a fiduciary
capacity, such as a trustee, guardian or custodian, you must disclose
the fact that you are signing the demand in that capacity. If you own
Sirocco common stock jointly with one or more persons, all of the joint
owners must sign the demand for appraisal. Your demand should be
delivered to: Jonathan Reeves, President and Chief Executive Officer,
Sirocco Systems, Inc., 95 Barnes Road, Wallingford, Connecticut 06492.
. Refrain from voting for adoption of the merger agreement. If you vote,
by proxy or in person, in favor of adoption of the merger agreement, you
will terminate your right to appraisal. In addition, you will terminate
your right to appraisal if you return a signed proxy and (1) fail to
vote against adoption of the merger agreement or (2) fail to note that
you are abstaining from voting. In items (1) and (2), your appraisal
rights will be terminated even if you previously filed a written demand
for appraisal.
. Continuously hold your shares of Sirocco common stock from the date you
make the demand for appraisal through the completion of the merger. If
you are the record holder of Sirocco common stock on the date you make
the written demand for appraisal, but transfer your shares prior to the
merger, you will lose any right to appraisal with respect to those
shares.
Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply with the statutory
requirements with respect to the exercise of appraisal rights before the date
of the Sirocco special meeting.
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Shares of Sirocco common stock outstanding immediately prior to the
effective time of the merger, with respect to which appraisal shall have been
properly demanded in accordance with Section 262, will not be converted into
the right to receive shares of Sycamore common stock in the merger unless and
until the holder of such shares withdraws the demand for appraisal or becomes
ineligible for appraisal.
Within 10 days after the merger, the surviving corporation in the merger is
required to send notice of the effectiveness of the merger to each stockholder
who prior to the completion of the merger has complied with the requirements of
Section 262.
Within 120 days after the effective date of the merger, the surviving
corporation in the merger or any stockholder who has complied with the
requirements of Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of Sirocco
common stock held by all stockholders seeking appraisal. A dissenting
stockholder must serve a copy of the petition on Sirocco, as the surviving
corporation in the merger. If no petition is filed by either Sycamore or any
dissenting stockholder within the 120-day period, the rights of all dissenting
stockholders to appraisal will cease. Stockholders seeking to exercise
appraisal rights should not assume that the surviving corporation will file a
petition with respect to the appraisal of the fair value of their shares or
that the surviving corporation will initiate any negotiations with respect to
the fair value of those shares. The surviving corporation is under no
obligation to and has no present intention to take any action in this regard.
Accordingly, stockholders who wish to seek appraisal of their shares should
initiate all necessary action with respect to the perfection of their appraisal
rights within the time periods and in the manner prescribed in Section 262.
Failure to file the petition on a timely basis will cause the stockholder's
right to an appraisal to cease.
Within 120 days after the time of the merger, any stockholder who has
complied with subsections (a) and (d) of Section 262 is entitled, upon written
request, to receive from the surviving corporation in the merger a statement
setting forth the total number of shares of Sirocco common stock not voted in
favor of the merger with respect to which demands for appraisal have been
received and the number of holders of those shares. The statement must be
mailed within 10 days after Sirocco has received the written request or within
10 days after the time for delivery of demands for appraisal under subsection
(d) of Section 262 has expired, whichever is later.
If a petition for an appraisal is filed in a timely manner, at the hearing
on that petition the Delaware Court of Chancery will determine which
stockholders are entitled to appraisal rights and will appraise the shares of
Sirocco common stock owned by those stockholders. The court will determine the
fair value of those shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the fair value. The Delaware Court of
Chancery may require the stockholders who have demanded appraisal rights for
their shares of Sirocco common stock and who hold certificates representing
such shares to submit such certificates to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings. The Court of
Chancery may dismiss the proceedings as to any stockholder who fails to comply
with any such directions.
Stockholders who consider seeking appraisal should consider that the fair
value of their shares under Section 262 could be more than, the same as, or
less than, the value of the consideration provided for in the merger agreement
without the exercise of appraisal rights. The Court of Chancery may determine
the cost of the appraisal proceeding and assess it against the parties as the
Court deems equitable. Upon application of a dissenting stockholder, the Court
may order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including reasonable
attorney's fees and the fees and expenses of experts, be charged pro rata
against the value of all shares of Sirocco common stock entitled to appraisal.
In the absence of a court determination or assessment, each party bears its own
expenses.
Any stockholder who has demanded appraisal in compliance with Section 262
will not, after the effective date of the merger, be entitled to vote such
stock for any purpose or receive payment of dividends or other distributions,
if any, on the Sirocco common stock, except for dividends or distributions, if
any, payable to stockholders of record at a date prior to the effective date of
the merger.
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A stockholder may withdraw a demand for appraisal and accept the Sycamore
common stock at any time within 60 days after the effective date of merger, or
thereafter may withdraw a demand for appraisal with the written approval of the
surviving corporation in the merger. If an appraisal proceeding is properly
instituted, it may not be dismissed as to any stockholder without the approval
of the Delaware Court of Chancery, and this approval may be conditioned on the
Court of Chancery's deeming the terms to be just. If, after the merger, a
holder of Sirocco common stock who had demanded appraisal for its shares fails
to perfect or loses its right to appraisal, those shares will be treated under
the merger agreement as if they were converted into Sycamore common stock at
the time of the merger.
In view of the complexity of these provisions of Section 262 of the Delaware
General Corporation Law, any Sirocco stockholder who is considering exercising
appraisal rights should consult a legal advisor.
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THE MERGER AGREEMENT
The following description summarizes the material provisions of the merger
agreement. You should read carefully the merger agreement, which is attached as
Appendix A to this proxy statement/prospectus.
Please note that the italicized terms Acquisition Proposal and Acquisition
Transaction used in this section are defined on pages 46 and 49.
Our Representations and Warranties. We each made a number of representations
and warranties in the merger agreement relating to, among other things:
. corporate organization and similar corporate matters of Sirocco and
Sycamore
. subsidiaries of Sirocco
. capitalization of Sirocco and Sycamore
. authorization, execution, delivery, performance and enforceability of
the merger agreement by Sirocco and Sycamore and of the escrow agreement
by Sycamore
. absence of a breach of the certificate of incorporation, by-laws, laws
or material agreements by Sirocco or of the certificate of
incorporation, by-laws or laws by Sycamore as a result of the merger
. governmental consents, approvals, orders and authorizations required in
connection with the merger
. absence of undisclosed liabilities of Sirocco
. intellectual property and year 2000 matters of Sirocco
. absence of certain changes or events in Sirocco's business since
December 31, 1999
. Sycamore's filings and reports with the Securities and Exchange
Commission
. the absence of undisclosed litigation involving Sirocco or Sycamore
. filing of tax returns and payment of taxes by Sirocco
. compliance with applicable laws by Sirocco
. Sirocco's employee benefit plans
. the treatment of the merger as a "pooling of interests" for accounting
purposes and as a tax-free reorganization under the Internal Revenue
Code
. the accuracy of information supplied by Sirocco and Sycamore in
connection with this proxy statement/prospectus and the registration
statement of which it is a part
. payment of fees to finders and financial advisors in connection with the
merger agreement
The representations and warranties in the merger agreement are complicated
and not easily summarized. We urge you to carefully read the articles of the
merger agreement entitled "Representations and Warranties of the Company" and
"Representations and Warranties of the Buyer."
Sirocco's Conduct of Business Before Completion of the Merger. Sirocco has
agreed that until the merger is terminated or completed, or unless Sycamore
consents in writing, it will, except as otherwise agreed, conduct its business
with the goal of:
. carrying on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted
. paying or performing its obligations when due
. preserving intact its business organization
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. keeping available the services of its present officers and employees
. preserving its relationships with customers, suppliers, distributors,
licensors, licensees and others having business dealings with it
Sirocco also agreed that until the merger is terminated or completed, or
unless Sycamore consents in writing, Sirocco will, except as otherwise agreed,
conduct its business in compliance with specific restrictions relating, among
other restrictions, to the following:
. employees and employee benefits
. the transfer or license of intellectual property rights
. issuance of dividends or other distributions
. the issuance, reclassification or redemption of securities
. the acquisition of assets or other entities
. the disposition of Sirocco's assets
. the incurrence of indebtedness
. capital expenditures
. accounting policies and procedures
. revaluation of assets
. modification of Sirocco's certificate of incorporation or by-laws
. entrance into or modification of contracts
. tax elections and liabilities
. litigation and arbitration
The agreements related to the conduct of Sirocco's business in the merger
agreement are complicated and not easily summarized. We urge you to carefully
read the article of the merger agreement entitled "Conduct of Business."
No Other Negotiations Involving Sirocco. Until the merger is completed or the
merger agreement is terminated, Sirocco has agreed that it will not, directly
or indirectly, through any officer, director, employee, stockholder,
representative or agent of Sirocco, take any of the following actions:
. solicit, initiate, facilitate or encourage any inquiries or proposals
that constitute, or could reasonably be expected to lead to an
Acquisition Proposal
. engage in negotiations or discussions concerning, or provide any
information concerning Sirocco to any person relating to, any
Acquisition Proposal
. agree to, approve or recommend any Acquisition Proposal
Sirocco has agreed to provide Sycamore with detailed information about any
Acquisition Proposal it receives.
An Acquisition Proposal is a proposal or offer for a merger, consolidation,
business combination, sale of substantial assets (other than sales of inventory
in the ordinary course of business consistent with past practice), sale of
shares of capital stock or similar transactions involving Sirocco, other than
the transactions contemplated by the merger agreement.
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Treatment of Sirocco Stock Options. Upon completion of the merger, each stock
option issued by Sirocco under Sirocco's 1998 Option Plan will be assumed by
Sycamore.
Upon completion of the merger, each outstanding option to purchase Sirocco
common stock will be converted into an option to acquire the number of shares
of Sycamore common stock determined by multiplying the number of shares of
Sirocco common stock subject to such option immediately prior to the completion
of the merger by the common stock exchange ratio. The exercise price for each
converted option will be equal to the exercise price per share of each Sirocco
stock option divided by the exchange ratio, rounded up to the nearest whole
cent.
The other terms of each option and the Sirocco option plan referred to above
under which the options were issued will continue to apply in accordance with
their terms, including any provisions providing for vesting and acceleration.
Conditions to Completion of the Merger. The respective obligations of Sirocco
and Sycamore to complete the merger and the other transactions contemplated by
the merger agreement are subject to the satisfaction or waiver of various
conditions which include, in addition to other customary closing conditions,
the following:
. the merger agreement must be approved and adopted by holders of a
majority of Sirocco common stock and holders of a majority of each
series of Sirocco preferred stock
. the applicable waiting periods under antitrust laws must expire or be
terminated
. no injunction or order preventing the completion of the merger or
prohibiting or limiting Sycamore's ownership of Sirocco may be in effect
and no litigation seeking to prevent the merger or significant damages
in connection with the merger may be pending or threatened
. Sycamore, the stockholder representative and the escrow agent must have
executed and delivered the escrow agreement
. Sycamore's registration statement on Form S-4 must be effective
. the shares of Sycamore common stock to be issued to Sirocco stockholders
in the merger must have been approved for listing on the Nasdaq National
Market
. the receipt of opinions of special tax counsel to the effect that the
merger will qualify as a reorganization under Section 368(a) of the
Internal Revenue Code
Sycamore's obligation to effect the merger is also subject to the
satisfaction or waiver of the following conditions:
. there shall be no pending or threatened litigation that seeks to prevent
the consummation of the merger or that would have a material adverse
effect on Sycamore
. Sycamore must receive an opinion of Sirocco's counsel relating to
specified corporate matters
. certain of the officers and directors of Sirocco shall have resigned
. Sirocco must obtain any required approvals and consents from third
parties relating to the merger
. employment agreements entered into by specified key employees of Sirocco
must remain in effect
. Sycamore must receive letters from PricewaterhouseCoopers LLP stating
that the business combination to be effected by the merger will qualify
as a "pooling of interests" transaction under generally accepted
accounting principles
. Sirocco must receive letters from PricewaterhouseCoopers LLP stating
that they agree with management's conclusion that Sirocco has not taken
or agreed to take any action that would prevent
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Sycamore from accounting for the business combination to be effected by
the merger as a "pooling of interests" transaction under generally
accepted accounting principles
. Sirocco's affiliates must deliver executed affiliate agreements to
Sycamore, which are in full force and effect
In addition, each party's obligation to effect the merger is further
subject to the satisfaction or waiver of the following additional conditions:
. the representations and warranties of the other party set forth in the
merger agreement must be true and correct without giving effect to any
limitation or qualification as to materiality or material adverse effect
set forth therein both when made and at and as of the date the merger is
to be completed as if made at and as of such time, except where the
failure of such representations and warranties to be so true and correct
without giving effect to any limitations or qualifications as to
materiality or material adverse effect set forth therein would not be
reasonably likely to have, individually or in the aggregate, a material
adverse effect on such other party
. the other party to the merger agreement must have performed or complied
in all material respects with all of its agreements and covenants
required by the merger agreement
The merger agreement provides that a material adverse effect means, when
used in connection with Sirocco or Sycamore, a material adverse effect on the
business, operations, assets, condition (financial or otherwise), results of
operations or prospects of Sirocco or Sycamore or the ability of Sirocco or
Sycamore to perform their respective obligations under or to consummate the
transactions contemplated by the merger agreement.
Termination of the Merger Agreement. The merger agreement may be terminated at
any time prior to completion of the merger:
. by mutual consent of Sirocco and Sycamore
. by Sycamore or Sirocco if the merger is not completed before November
30, 2000, except that the right to terminate the merger agreement is not
available to any party whose failure to fulfill any obligation under the
merger agreement has been a cause of the failure to complete the merger
on or before November 30, 2000
. by Sycamore or Sirocco if there is any order of a court or governmental
authority permanently prohibiting the completion of the merger which is
final and nonappealable, unless the party relying on that order has not
complied with certain of its obligations under the merger agreement
. by Sycamore if any stockholder of Sirocco party to the voting agreement
breaches the voting agreement or any director, officer, employee or
stockholder of Sirocco breaches certain non-solicitation and accounting
treatment obligations of the merger agreement
. by Sycamore if the sum of Sirocco shares to which dissenter's rights
have been properly asserted under Delaware law exceed 5% of the Sirocco
common stock issued and outstanding as of July 28, 2000
. by Sycamore upon a breach or failure to perform any of Sirocco's
representations, warranties, covenants or agreements set forth in the
merger agreement, which breach or failure to perform would cause certain
closing conditions to not be satisfied and which breach is not cured
within 10 business days of notice of that breach
. by Sirocco upon a breach or failure to perform any of Sycamore's
representations, warranties, covenants or agreements set forth in the
merger agreement, which breach or failure to perform would cause certain
closing conditions to not be satisfied and which breach is not cured
within 10 business days of notice of that breach
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Payment of Termination Fee. Sirocco will pay to Sycamore a termination fee of
$96 million under the following circumstances:
. if Sycamore terminates the merger agreement because:
. any stockholder of Sirocco party to the voting agreement breached the
voting agreement
. any director, officer, employee or stockholder of Sirocco breached
certain non-solicitation obligations of the merger agreement
. Sirocco breached its obligations to cause the merger to be accounted
for as a pooling of interests for accounting purposes
Sirocco will also pay a termination fee of $96 million to Sycamore under
the following circumstances:
. if Sycamore terminates the merger agreement because the sum of Sirocco
shares to which dissenter's rights have been properly asserted under
Delaware law exceeds 5% of the Sirocco common stock issued and
outstanding as of July 28, 2000 and Sirocco has entered into or
consummated an Acquisition Transaction within one year after the
termination of the merger agreement (in such case, the termination fee
being payable immediately upon the entering into or consummation of the
Acquistition Transaction).
. if Sycamore terminates the merger agreement because of Sirocco's breach
or failure to perform any of its representations, warranties, covenants
or agreements set forth in the merger agreement, which breach or failure
to perform caused certain closing conditions to not be satisfied and
which breach was not cured within 10 business days of notice of that
breach and Sirocco has entered into or consummated an Acquisition
Transaction within one year after the termination of the merger
agreement (in such case, the termination fee being payable immediately
upon the consummation of the Acquisition Transaction).
An Acquisition Transaction is either a transaction or a merger or other
business combination, or a series thereof, involving Sirocco pursuant to which
any third party acquires 50% or more of the outstanding equity securities of
Sirocco or the entity surviving such merger or business combination, any other
transaction or series of transactions pursuant to which any third party
acquires control of assets of Sirocco having a fair market value equal to 50%
or more of the fair market value of all the assets of Sirocco immediately
prior to such transaction or any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
Extension, Waiver and Amendment of the Merger Agreement. We may amend the
merger agreement before completion of the merger.
Either of us may extend the other's time for the performance of any of the
obligations or other acts under the merger agreement, waive any inaccuracies
in the other's representations and warranties and waive compliance by the
other with any of the agreements or conditions contained in the merger
agreement.
THE VOTING AGREEMENT
The following description summarizes the material provisions of the voting
agreement, as amended. You should read carefully the voting agreement, as
amended, which is attached as Appendix B to this proxy statement/prospectus.
In connection with the execution of the merger agreement, stockholders
representing over a majority of the voting power of Sirocco's common stock and
each series of Sirocco's preferred stock entered into a voting agreement with
Sycamore. Under the voting agreement, each of these Sirocco stockholders
agreed to vote all of their shares of Sirocco stock in favor of adoption of
the merger agreement. In addition, under the voting agreement, these
stockholders may transfer shares of the Sirocco stock they own or their
options to purchase
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Sirocco stock only if the transferees agree to be bound by the provisions of
the voting agreement or if the stockholders obtain Sycamore's consent to the
transfer. These Sirocco stockholders were not paid additional consideration in
connection with the voting agreement.
The voting agreement contains certain other agreements made by the Sirocco
stockholders that are parties to the voting agreement. The Sirocco preferred
stockholders that have entered the voting agreement agreed that the
consideration they will receive upon consummation of the merger will be in full
satisfaction of their rights as a Sirocco or Sycamore stockholder. The
stockholders that hold Sirocco preferred stock agreed not to make an election
not to treat the merger as a liquidation, dissolution or winding up of Sirocco
under Sirocco's certificate of incorporation. In addition, the holders of
Sirocco Series A preferred stock, Series B preferred stock and Series C
preferred stock agreed not to redeem the Sirocco Series A preferred stock,
Series B preferred stock and Series C preferred stock in connection with the
proposed merger. For a further explanation of these elections, please read the
section entitled "Comparison of Rights of Holders of Sirocco Common Stock and
Sycamore Common Stock" on page 104 of this proxy statement/prospectus.
The Sirocco stockholders who entered into the voting agreement own a
majority of the Sirocco common stock and each series of Sirocco preferred stock
outstanding. Accordingly, assuming no breach of the voting agreement by any
party thereto, adoption of the merger agreement is assured.
THE ESCROW AGREEMENT
The following description summarizes the material provisions of the escrow
agreement. You should read carefully the escrow agreement, which is attached as
Appendix C to this proxy statement/prospectus.
Under the escrow agreement, Sycamore will deposit 10% of the shares of
Sycamore common stock the Sirocco stockholders would otherwise receive in
connection with the merger into an escrow account. The escrow shares may be
used to compensate Sycamore in the event it is entitled to indemnification
under the merger agreement. To the extent that some or all of the escrowed
shares are not required to indemnify Sycamore, such shares will be distributed
pro rata among Sirocco Stockholders entitled to receive Sycamore shares in the
merger on the earlier of the first anniversary of the date the merger is
completed or the date of the first independent audit report on Sycamore's
financial statements after completion of the merger that include the financial
results of Sirocco.
Until the proceeds of the escrow account are distributed, all cash dividends
and other cash distributions on the shares of Sycamore common stock held in the
escrow account will be invested by the escrow agent at the direction of a
representative of the Sirocco stockholders, and all noncash dividends and other
noncash distributions will become part of the escrow fund.
As a result of the escrow, depending on the amounts to which Sycamore is
entitled to indemnification under the merger agreement, you may never receive
up to 10% of the shares of Sycamore common stock you would otherwise be
entitled to receive.
At the time of the closing of the merger, G. Felda Hardymon, as
representative of Sirocco stockholders entitled to receive Sycamore shares in
the merger, will enter into an escrow agreement with Sycamore and an
independent escrow agent.
OPERATIONS AFTER THE MERGER
Following the merger, Sycamore may integrate some or all of Sirocco's
operations or continue Sirocco's operations as a wholly owned subsidiary of
Sycamore. The stockholders of Sirocco will become stockholders of Sycamore, and
their rights as stockholders will be governed by Sycamore's Amended and
Restated Certificate of Incorporation and the Sycamore Amended and Restated By-
Laws, each as currently in effect, and the laws of the State of Delaware. See
"Comparison of Rights of Holders of Sirocco Common Stock and Sycamore Common
Stock."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SYCAMORE
Overview
Sycamore develops and markets products that transport voice and data traffic
over wavelengths of light. Its products enable service providers to quickly and
cost effectively provide bandwidth and create new high-speed data services.
From Sycamore's inception on February 17, 1998 through May 1, 1999, its
operating activities consisted primarily of research and development, product
design, development and testing. During this period, it also staffed and
trained its administrative, marketing and sales personnel and began sales and
marketing activities. Sycamore began shipping its SN 6000 Intelligent Optical
Transport product in May 1999, its SN 8000 Intelligent Optical Network Node in
August 1999 and its SilvxManager Network Management System in November 1999. To
date all of its product revenues have been derived from these products. During
the quarter ended April 29, 2000, Sycamore had a loss from operations but
achieved profitability for the first time on a net income basis. During periods
prior to its most recent fiscal quarter, it incurred significant losses. As of
April 29, 2000, it had an accumulated deficit of $18.1 million. Sycamore has
not achieved profitability on an annual basis.
While Sycamore is developing and plans to introduce new products and
enhancements, it cannot assure you that it will be successful in these efforts.
Sycamore has a lengthy sales cycle for its products and, accordingly, it
expects to incur sales and other expenses before Sycamore realizes the related
revenue. Sycamore expects to continue to incur significant sales and marketing,
research and development and general and administrative expenses and, as a
result, it will need to generate significant revenues to achieve and maintain
profitability. Sycamore's policy is to recognize revenue from product sales
upon shipment provided that a purchase order has been received or a contract
has been executed, there are no uncertainties regarding customer acceptance,
the fee is fixed and determinable and collectibility is deemed probable. If
uncertainties regarding customer acceptance exist, revenue is recognized when
the uncertainties are resolved. Revenue from technical support and maintenance
contracts is deferred and recognized ratably over the period of the related
agreements. Sycamore records a warranty liability for parts and labor on its
products. Warranty periods are generally three years from installation date.
Estimated warranty costs are recorded at the time of revenue recognition.
Sycamore's manufacturing expenses consists of amounts paid to third party
manufacturers, manufacturing start-up expenses, manufacturing personnel and
related costs and its customer support group. Sycamore's outsources its
manufacturing and assembly requirements. Accordingly, a significant portion of
its manufacturing expenses consists of payments to a third-party contract
manufacturer. Manufacturing and engineering documentation controls are
performed at its facility in Chelmsford, Massachusetts. Sycamore believes that
its gross margins will be affected primarily by the following factors:
. demand for its products;
. new product introductions both by Sycamore and by its competitors;
. changes in Sycamore's pricing policies and those of its competitors;
. the mix of product configurations sold; and
. the volume of manufacturing and its effect on manufacturing and
component costs.
Research and development expenses consist primarily of salaries and related
personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of its products. To date, Sycamore has
expensed its research and development costs as they were incurred. Several
components of its research and development effort require significant
expenditures, the timing of which can cause significant quarterly variability
in Sycamore's expenses. Sycamore incurs significant expenses in connection with
the
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purchase of testing equipment for its products. Sycamore believes that research
and development is critical to its strategic product development objectives and
intends to enhance its technology to meet the changing requirements of its
customers. As a result, Sycamore expects its research and development expenses
to increase in absolute dollars in the future.
Sales and marketing expenses consist primarily of salaries and the related
personnel costs of sales and marketing personnel, commissions, promotional,
travel and other marketing expenses and recruiting expenses. Sycamore expects
that sales and marketing expenses will increase in absolute dollars in the
future as it increases its direct sales efforts, expand its operations
internationally, hire additional sales and marketing personnel, initiate
additional marketing programs and establish sales offices in new locations.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities, human resources and
information technology personnel, recruiting expenses and professional fees.
Sycamore expects that general and administrative expenses will increase in
absolute dollars as it adds personnel and incurs additional costs related to
the growth of its business and its operation as a public company.
In connection with the granting of certain stock options and the issuance of
certain restricted shares during the period from inception (February 17, 1998)
through July 31, 1998, the fiscal year ended July 31, 1999 and the nine months
ended April 29, 2000, which were deemed to be below fair market value, Sycamore
recorded deferred stock compensation expense of approximately $184,000, $25.2
million and $31.7 million, respectively.
Deferred stock compensation expense consists of charges resulting from the
granting of stock options and restricted shares with exercise or sales prices
deemed to be below the fair value of its common stock on the date of grant.
These amounts are being amortized ratably over the vesting periods of the
applicable options or restricted stock, which are typically five years, with
20% vesting on the first anniversary of the date of grant and 5% vesting
quarterly thereafter.
Results of Operations
Nine Months Ended April 29, 2000 and May 1, 1999
Revenues
Revenues for the nine months ended April 29, 2000 were $107.7 million, (none
for the corresponding period in the prior year). Sycamore began shipping the SN
6000 in May 1999, the SN 8000 in August 1999, and SilvxManager in November
1999. For the nine months ended April 29, 2000, one customer accounted for
substantially all of its revenues.
Cost of Revenues
Cost of revenues were $57.1 million for the nine months ended April 29,
2000, compared to $1.2 million for the same period in fiscal 1999. The increase
in cost of revenues is primarily related to increased revenues since Sycamore
began shipping products in May 1999, as well as headcount increases in its
manufacturing overhead and customer service organizations, warranty and other
period costs. Sycamore expects cost of revenues to continue to increase as net
revenues increase.
Research and Development Expenses
Research and development expenses increased $26.3 million to $32.9 million
for the nine months ended April 29, 2000 compared to $6.6 million for the same
period in fiscal 1999. The increase in expenses were primarily due to increased
costs associated with a significant increase in personnel and personnel-related
expenses, increases in non-recurring engineering costs and increases in
prototype expenses for the design and
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development of new products as well as enhancements to existing products.
Research and development is essential to its future success, and Sycamore
expects the dollar amounts of research and development expenses will increase
in future periods to support the continued development of its intelligent
optical transport and optical switching products as well as new or
complementary technologies.
Sales and Marketing Expenses
Sales and marketing expenses increased $14.9 million to $16.5 million for
the nine months ended April 29, 2000 compared to $1.6 million for the same
period in fiscal 1999. The increase in expenses reflect the hiring of
additional sales and marketing personnel, sales based commissions, additional
office space and marketing program costs, including web development, trade
shows and new 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 $3.1 million to $3.8 million
for the nine months ended April 29, 2000 compared to $752,000 for the same
period in fiscal 1999. The increase in expenses reflect 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 increases in the
number of its employees.
Amortization of Stock Compensation
Amortization of stock compensation expense was $9.5 million for the nine
months ended April 29, 2000, compared to $802,000 for the same period in fiscal
1999. Amounts for the nine months ended April 29, 2000 include $1.4 million of
compensation expense associated with the grant of options to purchase common
stock to non-employees and consultants. Amortization of stock compensation
expense primarily resulted from the granting of stock options and restricted
shares with an exercise or sale prices which were deemed to be below fair
market value. 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 increased $17.1 million to $17.6 million for the nine
months ended April 29, 2000 compared to $488,000 for the same period in fiscal
1999. The increase in interest income primarily reflects the invested proceeds
of Sycamore's two public offerings within fiscal year 2000.
Provision for Income Taxes
During the nine months ended April 29, 2000, Sycamore reduced its valuation
allowance related to its deferred tax assets by $2 million as the realization
of such assets became probable. Sycamore currently estimates that its annual
effective income tax rate will be approximately 27.0% for the remainder of its
fiscal year ending July 31, 2000, primarily due to the reduction in the
valuation allowance and the use of its net operating loss carryforwards.
Period from inception (February 17, 1998) through July 31, 1998 (fiscal 1998)
and the year ended July 31, 1999
Revenues
Sycamore began shipping the SN 6000 in May 1999 and recognized $11.3 million
of revenue for the year ended July 31, 1999. All revenue was derived from the
shipments of the SN 6000 product. For the year ended July 31, 1999, one
customer accounted for all of its revenue.
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Cost of Revenues
Cost of revenues was $8.5 million, or 75% of revenue, for the year ended
July 31, 1999. Sycamore began shipping the SN 6000 in May 1999. Cost of
revenues as a percentage of revenue in fiscal 1999 were higher than they are
anticipated to be in the future due to the high cost of initial start-up of
production, including the increase in personnel and the low volume of sales.
Research and Development Expenses
Research and development expenses were $497,000 for fiscal 1998 and $14.0
million for fiscal 1999 and represented 63% and 61% of total operating expenses
for fiscal 1998 and 1999, respectively. 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 the SN
6000, SN 8000 and SN 16000 products. Research and development is essential to
Sycamore's future success and it expects that research and development expenses
will increase in absolute dollars in future periods.
Sales and Marketing Expenses
Sales and marketing expenses were $92,000 for fiscal 1998 and $4.1 million
for fiscal 1999 and represented 12% and 18% of total operating expenses in
fiscal 1998 and 1999, respectively. 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 expect sales
and marketing expenses will increase in absolute dollars in future periods.
General and Administrative Expenses
General and administrative expenses were $199,000 for fiscal 1998 and $1.4
million for fiscal 1999 and represented 25% and 6% of total operating expenses
in fiscal 1998 and 1999, respectively. The increase in expenses reflects the
hiring of additional general and administrative personnel and expenses
necessary to support and scale Sycamore's operations.
Amortization of Stock Compensation
Amortization of stock compensation expense was $5,000 and $1.4 million for
fiscal 1998 and fiscal 1999, respectively. Amortization of stock compensation
expense in fiscal 1998 resulted from the granting of stock options and
restricted shares with the exercise or sales prices below the deemed fair value
of Sycamore's common stock on the date of grant. Additionally, in fiscal 1999,
it incurred $2.1 million of compensation expense associated with the grant of
options to non-employees and members of its advisory boards.
Interest Income, Net
Interest income, net was $100,000 and $559,000 for fiscal 1998 and fiscal
1999, respectively. Interest income consists of interest earned on Sycamore's
cash balances and marketable securities and interest expense associated with
its equipment note payable. The increase in interest income reflects higher
invested balances in 1999, offset by interest payments on its equipment note
payable in 1999.
Quarterly Results of Operations
The following table presents Sycamore's operating results for the quarters
ended July 31, 1999, October 30, 1999, January 29, 2000 and April 29, 2000,
which are the only quarters for which it has recognized revenue, together with
the percentage of revenues of certain items in its statement of operations for
these quarters. The information for each of these quarters is unaudited and has
been prepared on the same basis as the audited financial statements appearing
elsewhere in this prospectus. In the opinion of management, all necessary
adjustments consisting only of normal recurring adjustments necessary for a
fair statement of the unaudited quarterly results when read in conjunction with
Sycamore's audited financial statements and the
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related notes appearing elsewhere in this prospectus have been included. These
operating results are not necessarily indicative of the results of any future
period.
<TABLE>
<CAPTION>
July 31, October 30, January 29, April 29,
1999 1999 2000 2000
------------ ------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $11,330 100% $19,510 100% $29,049 100% $59,183 100%
Cost of revenues
(exclusive of non-cash
stock compensation
expense of $56, $262,
$328 and $328,
respectively........... 7,313 65 10,340 53 15,396 53 31,367 53
------- --- ------- --- ------- --- ------- ---
Gross profit........ 4,017 35 9,170 47 13,653 47 27,816 47
------- --- ------- --- ------- --- ------- ---
Operating expenses:
Research and
development.......... 7,383 65 7,844 40 10,175 35 14,892 25
Sales and marketing... 2,466 22 3,445 18 4,950 17 8,062 14
General and
administrative....... 653 6 751 4 1,159 4 1,909 3
Amortization of stock
compensation......... 2,667 23 3,289 17 3,066 11 3,139 5
------- --- ------- --- ------- --- ------- ---
Total operating
expenses........... 13,169 116 15,329 79 19,350 67 28,002 47
------- --- ------- --- ------- --- ------- ---
Loss from operations.... (9,152) (81) (6,159) (32) (5,697) (20) (186) 0
Interest income, net.... 71 1 442 3 4,063 14 13,090 22
------- --- ------- --- ------- --- ------- ---
Income (loss) before
income taxes........... (9,081) (80) (5,717) (29) (1,634) (6) 12,904 22
Provision for income
taxes.................. -- -- -- -- -- -- 3,484 6
------- --- ------- --- ------- --- ------- ---
Net income (loss)....... $(9,081) (80)% $(5,717) (29)% $(1,634) (6)% $ 9,420 16%
======= === ======= === ======= === ======= ===
</TABLE>
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 its
control and any of which may cause its 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 its products;
. the length and variability of the sales cycle for its products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by its competitors and
ourselves;
. changes in its pricing policies or the pricing policies of its
competitors;
. its ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. its ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components it purchases;
. its ability to attain and maintain production volumes and quality levels
for its 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.
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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 increasing the size of its
business. Sycamore's operating expenses are largely based on anticipated
organizational growth and revenue trends and a high percentage of its 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 its 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 its operating results are not a good indication of its future
performance. You should not rely on its results or growth for one quarter as
any indication of its future performance. It is likely that in some future
quarters, its operating results may be below the expectations of public market
analysts and investors. In this event, the price of its common stock will
probably decrease.
Liquidity and Capital Resources
Prior to Sycamore's initial public offering, which it completed in October
1999, it financed its operations primarily through private sales of its capital
stock totaling approximately $58.7 million and through borrowings on long-term
debt agreements for the purchase of capital equipment. In its initial public
offering, Sycamore sold 22,425,000 shares of common stock at a price to the
public of $12.67 per share. The net proceeds of its initial public offering,
after deducting underwriting discounts and other offering expenses, were
approximately $263.0 million. Sycamore completed a follow-on public offering of
10,200,000 common shares in March 2000, of which it sold 8,428,401 common
shares and existing stockholders sold 1,771,599 common shares. In this follow-
on offering, it raised approximately $1.2 billion, net of offering costs.
Sycamore primarily invests excess funds in investment grade short-term money
market funds, commercial paper, government and non-government debt securities.
At April 29, 2000, Sycamore had $677.1 million in cash and cash equivalents,
$508.6 million in marketable securities and $328.4 million in long-term
marketable securities and investments. Sycamore has primarily financed its
operations through the sale of equity securities and through borrowings on
long-term debt agreements for the purchase of capital equipment.
Cash used in operating activities was $598,000 in fiscal 1998 and $27.6
million for the year ended July 31, 1999. The increase in cash used in
operating activities in fiscal 1999 compared to fiscal 1998 reflects increases
in net losses, accounts receivables, inventory purchases and irrevocable
standby letters of credit, offset by non-cash charges for amortization of stock
compensation and depreciation and increased accounts payable and accrued
expenses, reflecting the growth in business activity. For the nine months ended
April 29, 2000, the cash provided by operating activities was $20.1 million, an
increase of $30.0 million as compared to $9.9 million cash used in fiscal 1999.
The increase in cash provided by operating activities is primarily due to
decreased net losses and increased non-cash charges for amortization of stock
compensation and depreciation, increased accrued expenses, deferred revenue and
accounts payable, partially offset by increased inventory purchases and
accounts receivable.
Cash used in investing activities was $3.7 million in fiscal 1998, $10.0
million for the year ended July 31, 1999, $847.9 million and $4.3 million in
the nine months ended April 29, 2000 and May 1, 1999, respectively. The
increase in net cash used in investing activities reflects the net investment
of Sycamore's public offerings proceeds into marketable securities and
increased purchases of property and equipment, primarily for computers and test
equipment for its development and manufacturing activities.
Cash provided by financing activities was $5.5 million in fiscal 1998, $58.4
million for the year ended July 31, 1999, $1.5 billion and $36.3 million in the
nine months ended April 29, 2000 and May 1, 1999, respectively. The increase in
cash provided by financing activities is primarily due to net proceeds raised
through Sycamore's public offerings and the exercise of stock options.
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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.
Increasingly, as a result of the financial demands of major network
deployments, service providers are looking to their suppliers for financing
assistance. From time to time Sycamore may provide or commit to extend credit
or credit support to its customers as it considers appropriate in the course of
its business, considering its limited resources. This financing may include
extending credit to customers or guaranteeing the indebtedness of customers to
third parties. Depending upon market conditions, Sycamore may seek to factor
these arrangements to financial institutions and investors to free up its
capital and reduce the amount of its commitments for such arrangements.
Sycamore's ability to provide customer financing is limited and depends upon a
number of factors, including its capital structure and level of its available
credit and its ability to factor commitments. Any extension of financing to
Sycamore's customers will limit the capital that it has available for other
uses.
Although Sycamore believes that its current cash balances will be sufficient
to fund its operations for at least the next 12 months, there can be no
assurance that it will not require additional financing within this time frame
or that such additional funding, if needed, will be available on terms
acceptable to it or at all.
Year 2000 Computer Systems Compliance
To date, the results of Sycamore's year 2000 readiness plan indicate that
its assessment, improvement and testing program succeeded in providing it with
a smooth transition to the year 2000. Sycamore has not experienced any
significant year 2000 disruptions with its products, its internal information
technology systems or its major vendors. Based on its experience to date,
Sycamore does not anticipate incurring material expenses or experiencing any
material operational disruption related to the year 2000 transition. Sycamore
will continue to monitor its mission critical computer applications and those
of its suppliers and vendors throughout the year 2000 to ensure that any latent
year 2000 matters that may arise are addressed promptly.
Market Risk
The following discussion about Sycamore's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. Sycamore is exposed to market risk
related to changes in interest rates and foreign currency exchange rates.
Sycamore does not use derivative financial instruments for speculative or
trading purposes.
Interest Rate Sensitivity
Sycamore maintains a portfolio of cash equivalents and short-term and long-
term investments in a variety of securities including: commercial paper,
certificates of deposit, money market funds and government and non-government
debt securities. These available for sale securities are subject to interest
rate risk and may fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at April 29, 2000, the fair value of the portfolio would decline by
approximately $6.7 million. Sycamore has the ability to hold its fixed income
investments until maturity, and therefore do not expect its operating results
or cash flows to be affected to any significant degree by the effect of a
sudden change in market interest rates on its securities portfolio.
Exchange Rate Sensitivity
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.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. Sycamore will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the effective date of the FASB Statement
No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is not expected to
have an impact on its financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The application of the guidance in SAB 101 will be
required in Sycamore's first quarter of fiscal year 2001. The effects of
applying this guidance, if any, will be reported as a cumulative effect
adjustment resulting in a change in accounting principle. Sycamore's evaluation
of SAB 101 is not yet complete.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events if they had occurred
after either December 15, 1998 or January 12, 2000. Sycamore does not expect
the application of FIN 44 to have a material impact on its financial position
or results of operations.
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SYCAMORE'S BUSINESS
Overview
Sycamore develops and markets software-based intelligent optical networking
products that enable network service providers to quickly and cost-effectively
provide bandwidth and create new high speed data services. Sycamore believes
that the existing public network is unable to meet the demands of high speed
data applications that are driving network growth. As data traffic on the
public network continues to grow at rates that surpass available network
capacity, Sycamore believes that service providers require new solutions to
relieve network congestion and create new data services. Its intelligent
optical networking products are designed to allow service providers to deploy,
manage and optimize the performance of their fiber optic networks. Sycamore's
products are based on a common software architecture that it believes will
accelerate its release of new products and enable its customers to upgrade with
minimal network impact and operator training. Sycamore has designed its
products to protect service providers' existing investment in fiber optic and
transmission equipment and provide a migration path to the next generation
optical public network infrastructure.
Industry Background
Increase in Data Traffic on the Public Network
Over the past decade, the volume of high speed data traffic across the
public network has grown significantly, reflecting the increasing use of the
network for Internet access, electronic mail communications, electronic
commerce, remote access by telecommuters and other network data transmission
services. To meet the growth in the demand for high speed data services,
service providers are investing significantly to upgrade the public network
infrastructure, which was originally built for voice traffic. Service providers
are laying fiber optic cable and installing transmission equipment which
transforms the fiber from available capacity to usable bandwidth by lighting
the fiber. Recent investments in building and enhancing the transmission
capability of the public network have been spread across SONET/SDH equipment,
dense wave division multiplexing equipment, known as DWDM, and optical
networking equipment.
Existing Public Network Transmission Infrastructure
Despite these investments, service providers are still unable to quickly
respond to the bandwidth demands of their customers. Sycamore believes that
this inability is due in large part to the transmission architecture of the
existing public network. This architecture is based upon telecommunications
standards, referred to as SONET in North America and SDH elsewhere in the
world, which set the hierarchical characteristics for transmitting optical
signals. A SONET/SDH network typically consists of three primary components:
. fiber optic cable that serves as the physical transmission medium and
provides the available capacity;
. DWDM equipment, which multiplies the transmission capacity of a specific
fiber by dividing a single strand into multiple lightpaths, or
wavelengths; and
. SONET/SDH transmission equipment, which converts data traffic from an
electrical signal to an optical signal for transport over the fiber
network.
In the current public network transmission infrastructure, the ability to
manage data resides in the SONET/SDH equipment which converts the data traffic
from an electrical signal to an optical signal which is transmitted over the
fiber. The optical fiber itself is only a physical transmission medium with no
imbedded
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intelligence. As a result, moving data through the network involves the
following complex processes that add cost and make scaling difficult:
. Traffic enters the network as an electrical signal and is converted by
the SONET/SDH equipment into an optical signal for transmission across
the network;
. At each network transit point, the optical data traveling across the
network is terminated at a SONET/SDH network terminal;
. The optical data is then converted into an electrical signal and
examined to see which portions of the data are to be extracted from the
network at that transit point; and
. The data is then converted back to an optical signal by the SONET/SDH
equipment for transport to the next network transit point, where the
process is repeated.
Limitations of the Existing Public Network Transmission Infrastructure
The SONET/SDH network architecture was originally designed to transport
voice traffic rather than for today's high speed data services. Unlike voice
traffic, which is generally characterized by slow growth and stable demand,
data traffic is characterized by rapid growth and unpredictable demand. Data
networks must be capable of being deployed cost-effectively and expanded
quickly.
The SONET/SDH network architecture, however, is not sufficiently flexible to
meet these requirements. Generally, the process of expanding the capacity of a
SONET/SDH network is time-consuming and requires significant capital investment
by the service provider. There are currently only two methods to expand a
SONET/SDH network. The first option is to increase the speed at which the
network operates. Because SONET/SDH equipment is designed to operate at a
specific speed and all devices on a ring must operate at the same speed, this
option requires that all equipment on the SONET/SDH ring be replaced with
higher speed devices on a concurrent basis. In addition, because the rings at
the core of the network must carry the aggregate traffic of all of the rings
feeding them, the upgrading of one SONET/SDH ring frequently requires the
upgrading of some or all of the interconnected SONET/SDH rings. Accordingly,
adding capacity to a SONET/SDH ring network is a complex and time consuming
process. The second option to expand a SONET/SDH ring network is to construct
new rings with new fiber or increase the capacity of each individual fiber on a
ring through the utilization of DWDM technology, which can transform each fiber
strand into multiple parallel optical wavelengths. Under either approach,
network complexity increases since each optical wavelength must be terminated
by SONET/SDH equipment and the interconnection of multiple SONET/SDH rings will
absorb some available network capacity.
Data traffic will typically transit through multiple SONET/SDH rings when
traversing the public network. In addition, in SONET/SDH networks, up to 50% of
network capacity must be reserved to provide alternative routing for traffic in
the event of a network outage. This redundancy, and the numerous optical-to-
electrical-to-optical conversions within each ring and between rings, create a
costly and complex network architecture.
As a result of these limitations, the buildout of a SONET/SDH network
generally requires lengthy time commitments and significant initial equipment
investment by service providers. In today's competitive environment, long lead
times for service provisioning and significant purchase commitments are often
not compatible with the need of service providers to rapidly and cost-
effectively deploy new services and be responsive to their customer demand. To
manage the frequently unpredictable demand of data traffic, service providers
need to move toward a "just-in-time" investment and service delivery model
allowing them to introduce and expand services when and where needed in
response to demand. The migration to a "just-in-time" model will require a
public network architecture that is scalable, flexible and cost-effective and
that is capable of supporting the anticipated growth in high speed data
communications services.
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The Sycamore Solution
Sycamore develops and markets software-based intelligent optical networking
products that enable service providers to quickly and cost-effectively provide
bandwidth and create new high speed data services. Sycamore's products are
designed to move data directly onto the fiber without a requirement for
intermediary SONET/SDH equipment. Once on the optical network, data moves
through the network without the need to convert the optical signals to
electrical signals at each network transit point. Sycamore believes that adding
intelligence to the optical network enhances the functionality of the network
and preserves the management and restoration benefits of SONET/SDH, while
providing the capacity benefits of DWDM. Sycamore's products will provide the
tools to enable service providers to utilize, restore, provision and maintain
intelligent optical networks and optimize the performance of these networks,
while providing a migration path to the next generation optical network.
Key benefits of Sycamore's solution include the following:
Improves Network Flexibility and Scalability. Sycamore's software-based
products are designed to allow service providers to improve the flexibility and
scalability of their networks without the long lead times and large, upfront
capital investment presently required for a network buildout. The software-
based capabilities of its products will permit service providers to change and
upgrade their network infrastructure and services without significant hardware
changes or additions. This improved flexibility and scalability will enable
service providers to more easily expand their network architecture, support new
high speed data applications and introduce value-added services for the benefit
of their customers.
Enables Rapid Service Delivery. The competitive marketplace facing service
providers and the pace of technological change require that the public network
infrastructure be adaptable to accommodate rapid changes in the demand for
service. Sycamore's products are designed to shorten the time it takes for
service providers to increase bandwidth and provide services, thereby enabling
its customers to introduce network services on a rapid basis in response to
their customers' demand. Sycamore believes that this flexibility will be cost-
effective for service providers because it will enable them to increase
capacity based on current, rather than forecasted, market demand for their
services.
Facilitates Introduction of New Data Services and Creation of New Revenue
Opportunities for Service Providers. Because Sycamore's products are software-
based, it is able to rapidly introduce new features into its products, which
can in turn be offered by service providers to their customers as new services
or service enhancements. Sycamore believes that these added features will
provide revenue opportunities for its customers and will enable them to
differentiate their network services from those of their competitors. Sycamore
has designed a comprehensive network management solution, which will enable
service providers to monitor the performance of their network, isolate and
manage network faults, and otherwise manage their network on a real-time basis.
With its network management system, service providers will be able to offer
value-added services such as customer network management to their customers.
Protects Existing Investments. Sycamore's products are designed to enable
its customers to increase the functionality and improve the performance of
their networks without sacrificing their infrastructure investments in
SONET/SDH equipment. Sycamore's products are designed to facilitate a gradual
migration from existing electro-optical SONET/SDH networks to all-optical
networks. Service providers will be able to introduce Sycamore's products into
an existing optical network environment, when and where needed, without
replacing the current architecture. For example, over a common fiber
infrastructure, a service provider's existing SONET/SDH network could be used
to continue to support low speed voice and data services, while new higher
speed data services could be supported by Sycamore's intelligent optical
network products. Furthermore, the common software architecture, which will
serve as the basis for Sycamore's future products, is intended to ensure the
continued interoperability and manageability of Sycamore's products as its
product line evolves.
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Strategy
Sycamore's objective is to be the leading provider of intelligent optical
networking products. Key elements of Sycamore's strategy include the following:
Offer End-to-End Optical Network Solutions To Customers. Sycamore intends to
develop and offer a full range of intelligent optical networking products to
its customers. Sycamore's commercially available products help service
providers improve the utilization of fiber optic capacity that has already been
deployed in the network. Sycamore's optical switch, which is in the test stage,
will facilitate the creation of meshed network environments. A meshed-based
network provides greater flexibility than a ring-based network and provides for
more direct routes between network points, enabling more efficient network
restoral or redundancy schemes. In addition, Sycamore intends to differentiate
itself from its competition by offering other products that will enable
customers to utilize, restore and provide data services over wavelengths and
monitor and improve the performance level of network traffic.
Collaborate With Customers To Generate Demand For High Speed Data
Services. Sycamore works collaboratively with its customers to help them
identify and create new high speed data services. Its professional services
team provides assistance in such areas as network planning, design,
implementation and service launch to facilitate the introduction of these
services. By helping its customers to create new services, it helps generate
additional revenue opportunities for its customers and drives additional demand
for its products.
Utilize Software-Based Product Architecture. Sycamore's products utilize a
common software-based architecture that permits improved flexibility and
interoperability and expanded network management capabilities. The common
architecture is designed to reduce the complexity of introducing new software
revisions across the network. Sycamore believes that this architecture will
accelerate the release of new products and enable its customers to upgrade with
minimal network impact and operator training.
Incorporate Commercially Available Optical Hardware Components. Sycamore
uses commercially available optical hardware components in its products
wherever feasible. Sycamore believes that by using these third-party
components, it benefits from the research and development of the vendors of
these products, as well as from the efficiencies of scale that these vendors
generate by producing the components in higher volumes. As a result of
Sycamore's use of these components, Sycamore believes that it can more quickly
bring to market a broad-based product line at a lower cost than if it had
utilized proprietary components.
Outsource Manufacturing. Sycamore outsources the manufacturing of its
products to reduce its cost structure and to maintain its focus on the
development of value-added software. Sycamore believes that most optical
networking companies have manufactured their own products in order to implement
specialized manufacturing techniques historically required for optical
componentry. However, Sycamore believes that the quality and consistency of
optical manufacturing techniques have advanced significantly and that, as a
result, it is now possible to engage third party manufacturers to build its
products without sacrificing quality or performance.
Focus On Just-In-Time Implementation. Sycamore's product architecture
strategy is to develop products that will enable service providers to expand
and upgrade their networks in response to demand on a "just-in-time" basis.
Sycamore's software-based product architecture is designed to help it achieve
this goal. Sycamore's software capabilities support a modular "plug and play"
hardware architecture which is designed to allow new and enhanced modules to be
easily and nondisruptively inserted into the network as optical component
technology advances.
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Capitalize On Extensive Industry Experience. Sycamore has significant
management, engineering and sales experience in the networking and optics
industries and long-standing relationships with key personnel in its target
customer base. Sycamore believes that its experience and relationships will be
important in enabling it to develop products to meet its customers' needs and
to penetrate its target market.
Products and Technology
Product Architecture
Sycamore's software-based intelligent optical networking products will
enable service providers to use their existing optical network infrastructure
to deliver high speed end-to-end services to meet the bandwidth intensive needs
of data applications. Its products will enable service providers to offer high
speed services over wavelengths directly from the optical network.
Sycamore's product architecture is designed to provide the following
benefits:
. lowered network infrastructure cost by reducing the number of optical-
to-electrical-to-optical conversions required to transmit data traffic
across the network;
. network simplification by eliminating the need for a separate layer of
SONET/SDH equipment for new services;
. more rapid service delivery by enabling automated end-to-end
provisioning of services;
. non-disruptive network upgrades through advanced software capabilities;
. a practical migration path from a SONET/SDH architecture to an all-
optical network; and
. new revenue opportunities for service providers through advanced
features that support value-added service offerings.
Sycamore believes that the acceptance and implementation of intelligent
optical networking technology by service providers will be a gradual process
driven by high speed data service demands and network scaling requirements. Its
product strategy will allow service providers to migrate from today's SONET/SDH
network architecture to an intelligent optical network while preserving their
investment in the existing network. As intelligent optical networking equipment
is introduced into an existing SONET/SDH network, the service provider can
increasingly deliver high speed services directly from the optical network. As
the intelligent optical network continues to grow, switching can be introduced
into the optical network to support increased scaling and efficient traffic
routing and to complete the transition to a meshed-based network architecture.
Throughout all of these stages of network development, Sycamore expects to
offer the software-based management tools which will allow the service provider
to effectively provision and manage services end-to-end.
Sycamore's intelligent optical networking products incorporate the following
features:
Intelligent Optical Networking Software. Sycamore's entire product line
shares a common software base. This software foundation allows it to minimize
product development time by leveraging its software architecture across
multiple product lines. Sycamore's software architecture is designed to provide
service providers with tools to continue to evolve their network without
requiring the replacement of existing infrastructure. In addition, the
architecture is designed to enable service providers to rapidly absorb new
optical technology and functionality into the network with minimal effort,
training and incremental investment. Software-based features such as topology
discovery, system self-inventory and dynamic power balancing will allow service
providers to quickly respond to customer needs. Additionally, advances in
optical components, such as new lasers, filters, and amplifiers, can be quickly
integrated within this software-based environment.
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SONET/SDH Functionality. Sycamore's products are designed to provide the
optical interfaces and management and restoration capabilities traditionally
offered on SONET/SDH equipment. By supporting these capabilities within the
optical domain, rather than the electrical domain, service providers can
directly offer services without the need for separate SONET/SDH products.
DWDM Technology. DWDM technology creates capacity by multiplying the number
of wavelengths that a single fiber can support. Sycamore integrates
commercially available DWDM optical technology into its products, providing a
comprehensive solution for its customers' multiplexing needs.
Network Management. Sycamore's network management products will provide end-
to-end management and control of the intelligent optical network. Network
management functions include fault management, configuration management,
accounting management, performance management and security management.
Comprised of SilvxManager, a network management platform, and SilvxSource, a
system-resident management application, Sycamore's network management products
constitute a distributed solution designed to provide end-to-end management of
the intelligent optical network. Its network management products are designed
to manage Sycamore's intelligent optical networking products, provide for the
management of third party products and integrate with other operating support
systems when introduced into an existing network environment.
Sycamore's Intelligent Optical Networking Products
The following chart describes its current and planned products:
<TABLE>
<CAPTION>
Product Application Service* Status
-------------------------------------------------------------------------------------------
<C> <C> <S> <C>
SN 6000 Intelligent Optical OC-48/STM-16 Wave Commercially available
Transport Product Service
(Long Distance)
-------------------------------------------------------------------------------------------
SN 8000 Intelligent Optical OC-48/STM-16 Wave Commercially available
Service
------------------------------------------------------------
Network Node
OC-12/STM-4 Wave Service Commercially available
------------------------------------------------------------
OC-3/STM-1 Wave Service Commercially available
------------------------------------------------------------
Gigabit Ethernet Commercially available
------------------------------------------------------------
Fiber Channel Wave In test stage
Service
------------------------------------------------------------
OC-192/STM-64 Wave In development
Service
-------------------------------------------------------------------------------------------
SilvxSource SN 6000/8000 Provides local Commercially available
Management Software management of wave
services
SN 16000 Provides local In test stage
Management Software management of wave
services
-------------------------------------------------------------------------------------------
SilvxManager Network Management Provides end-to-end Commercially available
System (Software) management of wave
services
-------------------------------------------------------------------------------------------
SN 16000 Intelligent Optical Switch Provides wave-based Commercially available
switching and routing in
a meshed network
environment
-------------------------------------------------------------------------------------------
SN 10000 Intelligent Optical Long distance OC-n/STM-n In development
Network Node and GigE/10 GigE Wave
Services
</TABLE>
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--------
* References to OC services are to data transport services at a speed
indicated by the number following the OC designation. For example, OC-48
service designates a transmission speed of 2.5 gigabytes per second. Higher
numbers denote faster transmission speeds.
SN 6000. The SN 6000 is an intelligent optical transport product designed
specifically to work within an existing SONET/SDH network. The SN 6000 enables
high speed services over fiber optic wavelengths and can be overlaid on top of
the existing network. The SN 6000 will allow a service provider to begin the
migration from a SONET/SDH network to an intelligent optical network.
SN 8000. The SN 8000 is an intelligent optical network node that will be
used to provide high speed services over fiber optic wavelengths for access,
interoffice, regional and backbone networks. The SN 8000 will provide a
complete stand-alone optical networking solution and can be configured in
point-to-point, linear or ring applications. The SN 8000 can be overlaid on top
of existing SONET/SDH networks, allowing service providers to implement optical
networking technology when and where needed, without replacing an installed
infrastructure.
SilvxSource and SilvxManager. The SILVX optical network management system
provides end-to-end management of data communications services across a service
provider's optical network. SILVX simplifies network configuration, network
provisioning and network management by implementing many of today's manual and
labor-intensive network management processes within software. Additionally,
SILVX allows service providers to offer network management-based services to
their customers. SilvxSource software runs on the intelligent optical network
elements (SN 6000, SN 8000, SN 16000 and SN 10000) and the SilvxManager
software runs on a centralized management station.
SN 16000. The SN 16000 is an intelligent optical switch for end-to-end
wavelength switching and routing, which is necessary for the creation of a
meshed topology network. The SN 16000 supports incremental network growth
through a modular architecture and has been designed to coexist with the SN
6000, SN 8000 and SN 10000, as well as other third-party optical networking
products.
SN 10000. The SN 10000 is an intelligent optical network node that will be
used to provide high speed services over fiber optic wavelengths in long
distance backbone networks. The SN 10000 is being designed to provide a
complete stand-alone optical networking solution and to be capable of being
configured in point-to-point, linear, ring or mesh applications. This product
is currently in development.
Customers
Sycamore's target customer base includes new and established local voice and
data service providers, long distance carriers, Internet service providers,
cable operators, PTTs (foreign telephone companies) and carriers who provide
service to other customers. At April 29, 2000, substantially all of its
revenues to date have been from shipments of product to one customer, Williams
Communications, Inc. It has also shipped its products to several other
customers, including Millennium Optical Networks, Louis Dreyfus Communications
and Enron Broadband Services.
Sales and Marketing
Sycamore sells its products through a combination of a direct sales force
and global distribution network. As of April 29, 2000, Sycamore's sales and
marketing organization consisted of 99 employees, of which:
. 70 were located in its headquarters in Chelmsford, Massachusetts;
. 18 were located in a total of 5 sales and support offices around the
United States;
. 11 were located in five sales offices in Germany, Korea, United Kingdom,
France and Switzerland.
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Sycamore's marketing objectives include building market awareness and
acceptance of Sycamore and its products as well as generating qualified
customer leads. Sycamore sends out direct mail and attend trade shows, and
provides information about its company and its products on its Web site.
Sycamore also conducts public relations activities, including interviews and
demonstrations for industry analysts. In addition, its senior executives have
significant industry contacts as a result of their prior experience.
Sycamore announced the formation of the Optical Domain Service Interconnect
initiative during the quarter ended January 29, 2000. This is an industry-wide
initiative of 100 networking vendors and service providers interested in
developing a practical framework for interoperability between the electrical
and optical networks. When implemented, this initiative is expected to enhance
a service provider's ability to offer real-time services on a "when you need
it" basis.
Sycamore's professional services team works collaboratively with its
customers and prospective customers to help them identify and create new high
speed data services that they can offer to their customers. It believes that
this assistance is an integral aspect of its sales and marketing efforts which
will help drive additional demand for its products.
Research and Development
Sycamore has assembled a team of highly skilled engineers with significant
telecommunications industry experience. Its engineers have expertise in optics,
hardware and software. As of April 29, 2000, it had 183 employees responsible
for product development, quality assurance and documentation. Sycamore's
development group's priority includes the release of new products which will
facilitate the deployment of optical networks. It is focused on enhancing the
scalability, performance and reliability of its intelligent optical network
products.
Sycamore has made, and will continue to make, a substantial investment in
research and development. Research and development expenses were $32.9 million
for the nine months ended April 29, 2000, $14.0 million for the year ended July
31, 1999 and $497,000 for the period from inception through July 31, 1998.
While it has developed, and expects to continue to develop, most new
products and enhancements to existing products internally, it has licensed
certain commercially available software technology from third parties.
Competition
The market for intelligent optical networking products is intensely
competitive, subject to rapid technological change and significantly affected
by new product introductions and other market activities of industry
participants. Sycamore expects competition to persist and intensify in the
future. Its primary sources of competition include vendors of network
infrastructure equipment and optical network equipment, such as Ciena
Corporation, Cisco Systems, Lucent Technologies and Nortel Networks, and
private companies that have focused on its target market. Many of its
competitors have significantly greater financial resources than Sycamore and
are able to devote greater resources to the development, promotion, sale and
support of their products. In addition, many of its competitors have more
extensive customer bases and broader customer relationships than Sycamore,
including relationships with its potential customers.
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;
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. 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 its
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 its competitors who offers such
financing.
Proprietary Rights and Licensing
Sycamore's success and ability to compete are dependent on its ability to
develop and maintain the proprietary aspects of its technology and operate
without infringing on the proprietary rights of others. It relies on a
combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of its technology.
These legal protections afford only limited protection for its technology.
Sycamore presently has patent applications pending in the United States and it
cannot be certain that patents will be granted based on these or any other
applications. It seeks to protect its source code for its software,
documentation and other written materials under trade secret and copyright
laws. Sycamore licenses its software pursuant to signed or shrinkwrap license
agreements, which impose certain restrictions on the licensee's ability to
utilize the software. Finally, it seeks to limit disclosure of its intellectual
property by requiring employees, consultants and any third party with access to
its proprietary information to execute confidentiality agreements with it and
by restricting access to its source code. Due to rapid technological change,
Sycamore believes that factors such as the technological and creative skills of
its personnel, new product developments and enhancements to existing products
are more important than the various legal protections of its technology to
establishing and maintaining a technology leadership position.
Despite its efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of Sycamore's products or to obtain and use
information that it regards as proprietary. Policing unauthorized use of its
products is difficult and while it is unable to determine the extent to which
piracy of its software exists, software piracy can be expected to be a
persistent problem. Litigation may be necessary in the future to enforce its
intellectual property rights, to protect its trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. However, the laws of many countries do
not protect its proprietary rights to as great an extent as do the laws of the
United States. Any such resulting litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on its
business, operating results and financial condition. There can be no assurance
that its means of protecting its proprietary rights will be adequate or that
its competitors will not independently develop similar technology. Any failure
by Sycamore to meaningfully protect its proprietary rights could have a
material adverse effect on its business, operating results and financial
condition.
There can be no assurance that third parties will not claim infringement
with respect to Sycamore's current or future products. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require it to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
it or at all. A successful claim of intellectual property infringement against
Sycamore and its failure or inability to license the infringed technology or
develop or license technology with comparable functionality could have a
material adverse effect on its business, financial condition and operating
results.
Sycamore integrates third-party software into its products. This third-party
software may not continue to be available on commercially reasonable terms. If
it cannot maintain licenses to this third-party software, distribution of its
products could be delayed until equivalent software could be developed or
licensed and integrated into its products, which could materially adversely
affect its business, operating results and financial condition.
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Manufacturing
The manufacturing of Sycamore's products is entirely outsourced. Sycamore
has a contract with Celestica Corporation, which provides comprehensive
manufacturing services, including assembly, test, control and shipment to its
customers, and procures materials on its behalf. This contract has an
indefinite term and is cancellable by Celestica without cause on one-year's
advance notice. Under this agreement, Celestica is committed to supply products
and services that Sycamore orders pursuant to conforming purchase orders.
Sycamore designs, specifies and monitors all of the tests that are required to
meet its internal and external quality standards, which are conducted by
Celestica with test equipment owned by Sycamore. Sycamore also has a contract
with Jabil Circuit, Inc. for comprehensive manufacturing services for certain
products that are under development. Sycamore believes that the outsourcing of
its manufacturing will enable it to conserve the working capital that would be
required to purchase inventory, will allow it to better adjust manufacturing
volumes to meet changes in demand and will better enable it to more quickly
deliver products. At present, Sycamore also purchases products from its other
manufacturers on a purchase order basis.
Employees
As of April 29, 2000, Sycamore had a total of 407 employees of which:
. 183 were in research and development;
. 99 were in sales and marketing;
. 30 were in customer service and support;
. 43 were in manufacturing; and
. 52 were in finance and administration.
Sycamore's future success will depend in part on its ability to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. Sycamore's employees are not represented by any
collective bargaining unit. It believes its relations with its employees are
good.
Properties
Sycamore's headquarters are currently located in a leased facility in
Chelmsford, Massachusetts, consisting of approximately 35,000 square feet under
a lease that expires in 2002. It also leases a facility in Chelmsford,
Massachusetts, consisting of approximately 80,000 square feet used primarily
for research and development under a lease that expires in 2004. On March 8,
2000, Sycamore entered into a lease of a facility in Chelmsford, Massachusetts,
consisting of approximately 114,000 square feet, which expires in 2007. In
addition, on March 23, 2000, Sycamore entered into a lease of a facility in
Chelmsford, Massachusetts consisting of approximately 80,000 square feet, which
expires in 2010.
Legal Proceedings
In the ordinary course of business, Sycamore becomes involved in various
lawsuits and claims. In addition, it has in certain instances agreed to assume
the costs of defending lawsuits brought against its current or prospective
employees by their former employers. While the outcome of these matters is not
currently determinable, Sycamore believes, after consultation with legal
counsel, that the outcome will not have a material adverse effect on the
results of its operations or its financial position.
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MANAGEMENT OF SYCAMORE
Executive Officers and Directors
The executive officers and directors of Sycamore, and their respective ages
and positions as of April 29, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Gururaj Deshpande......... 49 Chairman of the Board of Directors
Daniel E. Smith........... 50 President, Chief Executive Officer and Director
Frances M. Jewels......... 34 Chief Financial Officer, Vice President,
Finance and
Administration, Treasurer and Secretary
Chikong Shue.............. 48 Executive Vice President, Transport and
Central Engineering
Ryker Young............... 35 Vice President, Sales
John E. Dowling........... 46 Vice President, Operations
Kurt Trampedach........... 56 Vice President, International Sales
Jeffry A. Kiel............ 35 Vice President and General Manager, Core
Switching
Anita Brearton............ 41 Vice President, Corporate Marketing
Kevin J. Oye.............. 42 Vice President, Business Development
Richard A. Barry.......... 33 Chief Technical Officer
Eric A. Swanson........... 39 Vice President and General Manager, Core
Networking
Leif Uptegrove(1)......... 42 Vice President and General Manager, Transport
Timothy A. Barrows(2)(3).. 43 Director
Paul J. Ferri(2)(3)....... 61 Director
John W. Gerdelman(2)...... 47 Director
</TABLE>
--------
(1) Mr. Uptegrove was elected Vice President and General Manager, Transport on
July 27, 2000.
(2) Member of Audit Committee
(3) Member of Compensation Committee
Set forth below is information regarding the professional experience for
each of the above-named persons.
Gururaj Deshpande has served as Chairman of Sycamore's board of directors
since its inception in February 1998. He served as Sycamore's Treasurer and
Secretary from February 1998 to June 1999 and as Sycamore's President from
February 1998 to October 1998. Before founding Sycamore, Mr. Deshpande founded
Cascade Communications Corp., a provider of wide area network switches. From
October 1990 to April 1992, Mr. Deshpande served as President of Cascade and
from April 1992 to June 1997, he served as Cascade's Executive Vice President
of Marketing and Customer Service. Mr. Deshpande was a member of the board of
directors of Cascade since its inception and was chairman of the board of
directors of Cascade from 1996 to 1997.
Daniel E. Smith has served as Sycamore's President, Chief Executive Officer
and as a member of Sycamore's board of directors since October 1998. From June
1997 to July 1998, Mr. Smith was Executive Vice President and General Manager
of the Core Switching Division of Ascend Communications, Inc., a provider of
wide area network switches and access data networking equipment. Mr. Smith was
also a member
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of the board of directors of Ascend Communications, Inc. during that time. From
April 1992 to June 1997, Mr. Smith served as President and Chief Executive
Officer and a member of the board of directors of Cascade Communications Corp.
Frances M. Jewels has served as Sycamore's Vice President of Finance and
Administration, Treasurer and Secretary since June 1999 and Chief Financial
Officer since July 1999. From June 1997 to June 1999, Ms. Jewels served as Vice
President and General Counsel of Ascend Communications, Inc. From April 1994 to
June 1997, Ms. Jewels served as Corporate Counsel of Cascade Communications
Corp. Prior to April 1994, Ms. Jewels practiced law in private practice and,
prior to that, practiced as a certified public accountant.
Chikong Shue has served as Sycamore's Executive Vice President, Transport
and Central Engineering since May 2000. From August 1998 to April 2000, Mr.
Shue served as Sycamore's Vice President of Engineering. From June 1997 to July
1998, Mr. Shue was Vice President of Software and Systems Engineering of the
Core Switching Division of Ascend Communications, Inc. Mr. Shue was a co-
founder of Cascade Communications Corp. and served as director of software
engineering at Cascade from May 1991 to August 1994 and as a corporate fellow
and Vice President of Cascade's Remote Access Engineering division from
September 1994 until March 1997.
Ryker Young has served as Sycamore's Vice President of Sales since August
1998. From July 1997 to August 1998, Mr. Young was Central Region Director of
Sales for Ascend Communications, Inc. From January 1996 to June 1997, Mr. Young
was the South Central Regional District Manager for Cascade Communications
Corp. From October 1994 to December 1995, Mr. Young was Major Account Manager
for Cisco Systems, Inc.
John E. Dowling has served as Sycamore's Vice President of Operations since
August 1998. From July 1997 to August 1998, Mr. Dowling served as Vice
President of Operations of Aptis Communications, a manufacturer of carrier-
class access switches for network service providers. Mr. Dowling served as Vice
President of Operations of Cascade Communications Corp. from May 1994 to June
1997.
Kurt Trampedach has served as Sycamore's Vice President of International
Sales since July 1999. From June 1999 to July 1999, Mr. Trampedach was Vice
President, Carrier Market Development for Lucent Technologies, Inc. From June
1997 to June 1999 he was Vice President, Carrier Market Development for Ascend
Communications, Inc. From September 1996 to June 1997, Mr. Trampedach was Vice
President, International Sales for Cascade Communications Corp. Mr. Trampedach
was Vice President, European Operations for Alcatel USA, Inc. from April 1994
to September 1996.
Jeffry A. Kiel has served as Sycamore's Vice President and General Manager,
Core Switching since May 2000. From July 1999 to April 2000, Mr. Kiel served as
Vice President, Product Marketing and as Director of Marketing from September
1998 to July 1999. Mr. Kiel served as Director of Product Marketing at Ascend
Communications, Inc. from June 1997 to September 1998. From August 1996 to June
1997, Mr. Kiel served as Product Marketing Manager of Cascade Communications
Corp. From October 1993 to August 1996, Mr. Kiel was Senior Manager, Technical
Staff at BellSouth Telecommunications.
Anita Brearton has served as Sycamore's Vice President, Corporate Marketing
since July 1999 and as Director of Marketing Programs from September 1998 to
July 1999. From September 1997 to August 1998, Ms. Brearton served as Vice
President of Marketing for Artel Video Systems, Inc., a producer of fiber optic
video transmission and routing products. From June 1997 to September 1997, Ms.
Brearton was Director of Marketing Programs for the core switching division of
Ascend Communications, Inc. Ms. Brearton served as Director of Marketing
Programs for Cascade Communications Corp. from November 1995 to June 1997. From
July 1980 to August 1995, Ms. Brearton held several positions at General
DataCom Industries, Inc., most recently as International Marketing Programs
Manager.
Kevin J. Oye has served as Sycamore's Vice President, Business Development
since October 1999. From March 1998 to October 1999, Mr. Oye served as Vice
President, Strategy and Business Development at Lucent Technologies, Inc. and
from September 1993 to March 1998, Mr. Oye served as the Director of Strategy,
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Business Development, and Architecture at Lucent Technologies, Inc. From June
1980 to September 1993, Mr. Oye held various positions with AT&T Bell
Laboratories where he was responsible for advanced market planning as well as
development and advanced technology management.
Richard A. Barry has served as Sycamore's Chief Technical Officer since July
1999 and as Sycamore's Director of Architecture from Sycamore's inception in
February 1998 to July 1999. Prior to co-founding Sycamore, from September 1994
to February 1998, Mr. Barry was Chief Network Architect of the Advanced
Networks Group at MIT's Lincoln Laboratory. Mr. Barry was an assistant
professor in the Electrical Engineering and Computer Science Department at
George Washington University from September 1993 to August 1994.
Eric A. Swanson, a co-founder of Sycamore, has served as Sycamore's Vice
President and General Manager, Core Networking since May 2000. From Sycamore's
inception in February 1998 to April 2000, Mr. Swanson served as Sycamore's
Chief Scientist. From 1982 to February 1998, Mr. Swanson was Associate Group
Leader of the Advanced Networks Group at MIT's Lincoln Laboratory.
Leif Uptegrove has served as Sycamore's Vice President and General Manager,
Transport since July 2000. From August 1998 to July 2000, Mr. Uptegrove served
as Sycamore's Director, SQA. From June 1997 to July 1998, Mr. Uptegrove served
as a Consulting Engineer at Ascend Communications, Inc. From September 1992 to
June 1997, Mr. Uptegrove held several positions at Cascade Communications
Corp., most recently as Manager, SQA and Consulting Engineer.
Timothy A. Barrows has served as a director since February 1998. Mr. Barrows
has been a general partner of Matrix Partners since September 1985. Mr. Barrows
also serves on the board of directors of SilverStream Software, Inc. and
OnDisplay, Inc.
Paul J. Ferri has served as a director since February 1998. Mr. Ferri has
been a general partner of Matrix Partners, a venture capital firm, since
February 1982. Mr. Ferri also serves on the board of directors of Sonus
Networks, Inc. and Applix, Inc.
John W. Gerdelman has served as a director since September 1999. Mr.
Gerdelman has been Managing Director of River 2 Communications since January
2000. From April 1999 through December 1999, he was President and Chief
Executive Officer of USA Net Inc. Mr. Gerdelman was employed by MCI
Telecommunications Corporation as President of the Network and Information
Technology Division from September 1994 to April 1999 and Senior Vice President
of Sales and Service Operations from June 1992 to September 1994. Mr. Gerdelman
also serves on the board of directors of Genuity Inc.
Each executive officer serves at the discretion of the board of directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of Sycamore.
Election of Directors
Sycamore's board of directors is divided into three classes, each of whose
members serve for a staggered three-year term. Messrs. Barrows and Gerdelman
serve in the class whose term expires at the annual meeting of stockholders in
2000; Messrs. Ferri and Deshpande serve in the class whose term expires at the
annual meeting of stockholders in 2001; and Mr. Smith serves in the class whose
term expires at the annual meeting of stockholders in 2002. Upon the expiration
of the term of a class of directors, directors in such class will be elected
for three-year terms at the annual meeting of stockholders in the year in which
such term expires.
Compensation of Directors
Sycamore reimburses directors for reasonable out-of-pocket expenses incurred
in attending meetings of the board of directors. Sycamore also grants options
to its non-employee directors pursuant to its 1999 Non-Employee Director Plan,
which is described below.
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Compensation Committee Interlocks and Insider Participation
Prior to the appointment of the Compensation Committee, Sycamore's full
board of directors (which includes Messrs. Deshpande and Smith) was responsible
for the functions of a Compensation Committee. No interlocking relationship
exists between any member of Sycamore's board of directors or its Compensation
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
Board Committees
The board of directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Messrs. Ferri and
Barrows, reviews executive salaries, administers bonuses, incentive
compensation and stock plans, and approves the salaries and other benefits of
Sycamore's executive officers. In addition, the Compensation Committee consults
with Sycamore's management regarding its benefit plans and compensation
policies and practices.
The Audit Committee, which consists of Messrs. Ferri, Barrows and Gerdelman,
reviews the professional services provided by Sycamore's independent
accountants, the independence of such accountants from Sycamore's management,
Sycamore's annual financial statements and Sycamore's system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to its accounting, auditing and financial reporting practices and
procedures as it may find appropriate or may be brought to its attention.
Executive Compensation
The table below sets forth, for the fiscal year ended July 31, 2000, the
cash compensation earned by:
. Sycamore's Chief Executive Officer; and
. the four other most highly compensated executive officers who received
annual compensation in excess of $100,000, collectively referred to
below as the Named Executive Officers.
In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table below does not include medical, group life
or other benefits which are available to all of Sycamore's salaried employees,
and perquisites and other benefits, securities or property which do not exceed
the lesser of $50,000 or 10% of the person's salary and bonus shown in the
table. In the table below, columns required by the regulations of the
Securities and Exchange Commission have been omitted where no information was
required to be disclosed under those columns.
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------- ------------------------- -------
Securities
Other Annual Underlying All Other
Salary Bonus Compensation Options/SARS Compensation
Year ($) ($) ($) (#) ($)
---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel E. Smith
President and Chief
Executive 2000 100,000 -- -- -- --
Officer............... 1999 73,077(2)
Ryker Young 2000 125,000 650,920(3) --
Vice President, Sales.. 1999 117,788 49,998(4) 9,326(5) 180,000
Kurt Trampedach 2000 125,000 98,723(6)
Vice President,
International Sales... 1999 (7) 1,125,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ -------------------------
Securities
Other Annual Underlying All Other
Salary Bonus Compensation Options/SARS Compensation
Year ($) ($) ($) (#) ($)
---- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Frances M. Jewels
Chief Financial Officer,
Vice
President, Finance and
Administration,Treasurer
and 2000 125,000 30,000
Secretary............... 1999 22,980(8) 180,000
Jeffry A. Kiel
Vice President and
General Manager, 2000 100,000 25,000
Core Switching........... 1999 84,769 360,000
</TABLE>
--------
(1) As of July 31, 2000, the remaining number of shares of restricted common
stock held by the above executive officers that had not vested and the
value of this stock was as follows: Mr. Smith: 6,581,250 shares,
$811,513,536; Mr. Young: 1,875,532 shares, $231,266,037; Ms. Jewels:
900,000 shares, $110,881,260; and Mr. Kiel: 585,000 shares, $72,141,849.
The value is based on the fair market value at July 31, 2000 ($123.3125 per
share as quoted on the Nasdaq National Market) less the purchase price paid
per share. Holders of restricted common stock are entitled to receive any
dividends the Company may pay on its common stock.
(2) Represents compensation Mr. Smith received in fiscal 1999. Mr. Smith joined
Sycamore in October 1998.
(3) Includes $630,920 of commissions paid in fiscal 2000.
(4) Represents advance commission income.
(5) Represents reimbursement for relocation expenses.
(6) Includes $92,473 of commissions paid in fiscal 2000 and $6,250 sign-on
bonus.
(7) No compensation was paid in fiscal 1999. Mr. Trampedach joined Sycamore in
July 1999.
(8) Represents compensation Ms. Jewels received in fiscal 1999. Ms. Jewels
joined Sycamore in May 1999.
Change in Control Agreements
Each of Sycamore's executive officers has entered into a change in control
agreement with Sycamore. Under these agreements, each option or restricted
stock grant held by the executive officer which is scheduled to vest within the
12 months after the effectiveness of a change of control of Sycamore will
instead vest immediately prior to the change in control. In addition, in the
event of a "Subsequent Acquisition" of Sycamore (as defined in these
agreements) following a change in control, all options or restricted stock
granted by Sycamore to such officers will vest immediately prior to the
effectiveness of such acquisition. If an officer is subject to any excise tax
on amounts characterized as excess parachute payments, due to the benefits
provided under this agreement, the officer shall be entitled to reimbursement
of up to $1,000,000 for any excess parachute excise taxes the officer may
incur.
In the event of a termination of an executive officer's employment following
a change of control, either by the surviving entity without cause or by the
executive due to a constructive termination, (1) all options and restricted
stock of the officer vest, (2) the officer is entitled to continued paid
coverage under Sycamore's group health plans for 18 months after such
termination, (3) the officer shall receive a pro rata portion of his or her
incentive bonus for the year in which the termination occurred, (4) the officer
shall receive an amount equal to 18 months of his or her base salary and (5)
the officer shall receive an amount equal to 150% of his or her annual
incentive bonus for the year in which the termination occurred.
Under these agreements, each executive officer agrees to abide by Sycamore's
confidentiality and proprietary rights agreements and, for a period of one year
after such termination, not to solicit Sycamore's employees or customers.
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Limitations on Directors' Liability and Indemnification
Sycamore's amended and restated certificate of incorporation provides that
its directors and officers shall be indemnified by Sycamore to the fullest
extent authorized by Delaware law. This indemnification would cover all
expenses and liabilities reasonably incurred in connection with their services
for or on behalf of Sycamore. In addition, Sycamore's amended and restated
certificate of incorporation provides that its directors will not be personally
liable for monetary damages to Sycamore for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to Sycamore or its
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.
In addition to the indemnification provided for in Sycamore's amended and
restated certificate of incorporation, Sycamore has entered into agreements to
indemnify each of its directors and executive officers against liabilities that
may arise by reason of their status or service as directors and executive
officers and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. These agreements, among
other things, provide for indemnification for judgments, fines, settlement
amounts, penalties and expenses for any action or proceeding, including, in
certain instances, actions taken by Sycamore or on its behalf, arising out of
the status or services of such persons as directors and executive officers.
The limited liability and indemnification provisions in Sycamore's amended
and restated certificate of incorporation and by-laws may discourage
stockholders from bringing a lawsuit against Sycamore's directors for breach of
their fiduciary duty and may reduce the likelihood of a derivative action
against its directors and executive officers, even though a derivative action,
if successful, might otherwise benefit Sycamore and its stockholders. A
stockholder's investment in Sycamore may be adversely affected to the extent
Sycamore pays the costs of settlement or damage awards under these
indemnification provisions.
Benefit Plans
1998 and 1999 Stock Incentive Plans. Sycamore's 1999 Stock Incentive Plan
was adopted by its board of directors in August 1999 and approved by its
stockholders in September 1999. As of April 29, 2000, 39,722,112 shares were
available for issuance under the 1999 Plan. In addition, there will be an
annual increase in the number of shares available for issuance under the 1999
Plan beginning on August 1, 2000 of the lesser of:
. 9,000,000 shares;
. 5% of the outstanding shares on the date of the increase; or
. a lesser amount determined by the board.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, non-qualified stock
options, restricted stock awards and other stock-based awards.
Sycamore's officers, employees, directors, consultants and advisors and
those of its subsidiaries are eligible to receive awards under the 1999 plan.
Under present law, however, incentive stock options may only be granted to
employees. No participant may receive any award for more than 1,500,000 shares
in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Sycamore may
grant options at an exercise price less than, equal to or greater than the fair
market value of its common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant and options must
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have an exercise price not less than 110% of the fair market value of the
common stock on the date of grant in the case of incentive stock options
granted to optionees holding more than 10% of the voting power of Sycamore. The
1999 plan permits Sycamore's board of directors to determine how optionees may
pay the exercise price of their options, including by cash, check or in
connection with a "cashless exercise" through a broker, by surrender to
Sycamore of shares of common stock, by delivery to Sycamore of a promissory
note, or by any combination of the permitted forms of payment.
Sycamore's board of directors administers the 1999 plan. Its board of
directors has the authority to adopt, amend and repeal the administrative
rules, guidelines and practices relating to the plan and to interpret its
provisions. It may delegate authority under the 1999 plan to one or more
committees of the board of directors and, subject to certain limitations, to
one or more of its executive officers. Its board of directors has authorized
the compensation committee or another committee appointed by the board to
administer the 1999 plan, including the granting of options to its executive
officers. Subject to any applicable limitations contained in the 1999 plan,
Sycamore's board of directors, its compensation committee or any other
committee or executive officer to whom its board of directors delegates
authority, as the case may be, selects the recipients of awards and determines:
. the number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. the exercise price of options;
. the duration of options; and
. the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
Options granted under this plan have, to date, been immediately exercisable on
the date of grant. However, shares purchased on exercise of such options are
subject to a repurchase right in favor of Sycamore that generally entitles
Sycamore to repurchase these shares at their original exercise price upon a
termination of employment of the holder of the option prior to completion of
the applicable vesting period.
In the event of a merger, consolidation, asset sale, liquidation or similar
transaction resulting in a change of control of Sycamore, each outstanding
option will immediately become fully vested with respect to the total number of
shares subject to the option. However, an option would not so accelerate if the
option is assumed or otherwise continued in full force by the successor entity,
if the option is replaced with a cash incentive program of the successor
corporation which presents the spread at the time of the change of control on
the shares which were not otherwise then exercisable, or if the acceleration of
the option is subject to other limitations imposed on the date of grant. If
following a change of control the successor corporation terminates the employee
without cause, all of his or her options will become vested upon the
termination of his or her employment. Notwithstanding the foregoing, options
that would have become fully vested within 12 months of the change in control
will vest immediately prior to the change in control for employees that have
been employed by Sycamore for 12 months or more. If the employee has been
employed by Sycamore for less than 12 months prior to the change in control,
options that would have become fully vested within six months of the change in
control will vest immediately prior to the change in control.
No award may be granted under the 1999 plan after the tenth anniversary of
the effective date, but the vesting and effectiveness of awards previously
granted may extend beyond that date. Sycamore's board of directors may at any
time amend, suspend or terminate the 1999 plan, except that no award granted
after an amendment of the 1999 plan and designated as subject to Section 162(m)
of the Internal Revenue Code by its board of directors shall become
exercisable, realizable or vested, to the extent such amendment was required to
grant such award, unless and until such amendment is approved by its
stockholders.
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As of April 29, 2000, there were options to purchase 24,389,310 shares of
common stock outstanding under the 1998 Stock Incentive Plan and the 1999 Stock
Incentive Plan. The 1998 Stock Incentive Plan has terms and conditions that are
substantially the same as the 1999 Plan and no additional issuances of options
will be made under the 1998 Stock Incentive Plan.
1999 Employee Stock Purchase Plan. Sycamore's 1999 Employee Stock Purchase
Plan was adopted by its board of directors in August, 1999 and received
stockholder approval in September, 1999. The purchase plan authorizes the
issuance of up to a total of 2,250,000 shares of its common stock to
participating employees. On August 1 of each year, commencing with August 1,
2000, the aggregate number of shares available for purchase during the life of
the plan is automatically increased by the number of shares necessary to cause
the number of shares then available for purchase to be restored to 2,250,000.
All of Sycamore's employees, including directors who are employees, and all
employees of any participating subsidiaries:
. whose customary employment is more than 20 hours per week for more than
five months in a calendar year,
. whose customary employment is at least five months in any calendar year,
and
. who hold less than five percent of the total combined voting power of
the Company
are eligible to participate in the purchase plan. As of April 29, 2000,
approximately 212 of Sycamore's employees would have been eligible to
participate in the purchase plan.
On the first day of an offering period, Sycamore will grant to each eligible
employee who has elected to participate in the purchase plan an option to
purchase shares of common stock as follows: the employee may authorize an
amount (up to 10%, or such lesser amount as shall be determined by the Board,
of such employee's base pay) to be deducted from such employee's base pay
during the offering period. On the last day of the offering period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
purchase plan, the option exercise price is an amount equal to 85% of the
closing price per share of the common stock on either the first day or the last
day of the offering period, whichever is lower. In no event may an employee
purchase in any one offering period a number of shares which exceeds the number
of shares determined by dividing (1) $12,500 by (2) the closing market price of
a share of common stock on the first business day of the offering period or
such other number as may be determined by the Board prior to the commencement
date of the offering period. Each future offering period is expected to be of
approximately 6 months; provided that the board of directors may, in its
discretion, choose a different offering period of 27 months or less.
An employee who is not a participant on the last day of the offering period,
as a result of voluntary withdrawal or termination of employment or for any
reason, is not entitled to exercise any option, and the employee's accumulated
payroll deductions will be refunded. However, upon termination of employment
because of death, the employee's beneficiary has certain rights to elect to
exercise the option to purchase the shares that the accumulated payroll
deductions in the participant's account would purchase at the date of death.
Because participation in the purchase plan is voluntary, Sycamore cannot now
determine the number of shares of its common stock to be purchased in any
current or future offering period by any of its current executive officers, by
all of its current executive officers as a group or by its non-executive
employees as a group.
1999 Non-Employee Director Option Plan. Sycamore's 1999 Non-Employee
Director Option Plan was adopted by its board of directors in August 1999 and
received stockholder approval in September 1999. The option plan authorizes the
issuance of up to a total of 1,500,000 shares of Sycamore's common stock to
participating directors who are not also an employee or officer. On August 1 of
each year, commencing with August 1, 2000, the aggregate number of shares
available for the grant of options under this plan is automatically increased
by the number of shares necessary to cause the total number of shares then
available for grant to 1,500,000.
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Each director who is not also an employee or officer shall be automatically
granted an option to purchase 90,000 shares of common stock on the date the
person is first elected to the board.
In addition, each of these directors will be automatically granted an option
to purchase 30,000 shares immediately following each annual meeting of
stockholders. The option exercise price per share for all options granted under
the option plan will be equal to the fair market value of Sycamore's common
stock on the date of grant. Under the plan, options are fully exercisable on
the date of grant, however, shares purchased on exercise of such options are
subject to repurchase by Sycamore prior to completion of the applicable vesting
period. The term of each option is 10 years from the date of grant. Sycamore's
board of directors has discretion to establish the terms of options granted
under the plan. As of April 29, 2000, options to purchase 270,000 shares have
been granted under this plan.
401(k) Plan. On December 9, 1998, Sycamore adopted an employee savings and
retirement plan qualified under Section 401 of the Internal Revenue Code and
covering all of its employees. Pursuant to the 401(k) plan, employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit and have the amount of such reduction contributed to the 401(k) plan.
Sycamore may make matching or additional contributions to the 401(k) plan in
amounts to be determined annually by its board of directors. Sycamore has made
no contributions to the 401(k) plan to date.
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CERTAIN TRANSACTIONS OF SYCAMORE
Preferred Stock Issuances
Since its inception in February 1998, Sycamore has issued and sold shares of
redeemable convertible preferred stock to the following persons and entities
who are its executive officers, directors or principal stockholders. Upon the
closing of Sycamore's initial public offering in October 1999, each share of
preferred stock converted into three shares of common stock, which were
subsequently split 3-for-1 in February 2000. For more detail on shares held by
these purchasers, see "Stock Ownership of Management and Principal Stockholders
of Sycamore."
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Investor Stock Stock Stock
-------- --------- --------- ---------
<S> <C> <C> <C>
Gururaj Deshpande................................. 2,750,000 1,059,076 385,647
Daniel E. Smith................................... 2,475,000 953,979 347,082
Chikong Shue...................................... 300,000 115,634 42,071
John E. Dowling................................... -- 71,429 --
Leif Uptegrove.................................... -- 28,571 --
Matrix V Management Co., L.L.C.(1)................ 2,750,000 1,059,976 385,647
</TABLE>
--------
(1) Composed of Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P.
Matrix V Management Co., L.L.C. is the general partner of each of Matrix
Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. Timothy Barrows and
Paul J. Ferri, directors of Sycamore, are general partners of Matrix V
Management Co., L.L.C.
Series A Financing. On February 19, 1998, April 2, 1998, July 31, 1998 and
October 29, 1998, Sycamore issued an aggregate of 8,961,812 shares of Series A
preferred stock to 8 investors, including Gururaj Deshpande, Daniel E. Smith,
Chikong Shue and Matrix Partners V, L.P. The per share purchase price for its
Series A preferred stock was $.91.
Series B Financing. On December 3, 1998 and February 11, 1999, Sycamore
issued an aggregate of 3,607,062 shares of Series B preferred stock to 11
investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue, John E.
Dowling, Leif Uptegrove and Matrix Partners V, L.P. The per share purchase
price for its Series B preferred stock was $3.50.
Series C Financing. On March 2, 1999, Sycamore issued an aggregate of
2,500,000 shares of Series C preferred stock to 15 investors, including Gururaj
Deshpande, Daniel E. Smith, Chikong Shue, Matrix Partners V, L.P. and Matrix V
Entrepreneurs Fund, L.P. The per share purchase price for its Series C
preferred stock was $8.00.
Common Stock Issuances
During fiscal 1999, Frances M. Jewels, Sycamore's Chief Financial Officer,
purchased an aggregate of 1,305,000 shares of common stock for $.11 per share
and Kurt Trampedach, Sycamore's Vice President of International Sales,
purchased an aggregate of 1,125,000 shares of common stock for $.33 per share,
each pursuant to stock restriction agreements that give Sycamore the right to
repurchase all or a portion of the shares at their purchase price in the event
that the employee ceases to be employed by Sycamore. During October 1999, Kevin
Oye, Sycamore's Vice President of Business Development, purchased an aggregate
of 7,893 shares of common stock for $12.67 per share. Kevin Oye's purchase of
Sycamore's stock was financed by a loan from Sycamore in the principal amount
of $99,978 that bears interest at 8.25% per annum. This loan is due December 1,
2000 and is secured by shares of Sycamore's common stock. During fiscal 1999,
Eric Swanson, Sycamore's Vice President and General Manager, Core Networking,
purchased an aggregate of 1,912,500
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shares of common stock at prices ranging from $.04 to $.11 per share. Mr.
Swanson's purchases of Sycamore's stock were financed by loans from Sycamore in
an aggregate principal amount of $180,000 which were repaid in full in March,
2000. Other executive officers have purchased shares of common stock pursuant
to similar stock restriction agreements for aggregate purchase prices which did
not exceed $60,000 for any one executive officer. The repurchase right
generally lapses as to 20% of the shares subject to such option approximately
one year from the hire date of the executive officer and thereafter lapses as
to an additional 5% of the shares for each full three months of employment
completed by such person.
All future transactions, including loans between Sycamore and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors on the board of directors, and will be on terms no less
favorable to Sycamore than could be obtained from unaffiliated third parties.
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF SYCAMORE
The following table sets forth certain information regarding beneficial
ownership of Sycamore's common stock as of June 5, 2000 by:
. each person who is known to Sycamore to own beneficially more than 5% of
the outstanding shares of its common stock;
. each of Sycamore's directors and the Named Executive Officers; and
. all of Sycamore's directors and executive officers as a group.
For purposes of the following table, beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Except as
otherwise noted in the footnotes below, Sycamore believes that each person or
entity named in the table has sole voting and investment power with respect to
all shares of its common stock shown as beneficially owned by them, subject to
applicable community of property laws. The percentage of shares of its common
stock outstanding is based on 244,829,774 shares of common stock outstanding as
of June 5, 2000. In computing the number of shares beneficially owned by a
person named in the following table and the percentage ownership of that
person, shares of its common stock that are subject to options held by that
person that are currently exercisable or exercisable within 60 days of June 5,
2000 are deemed outstanding. These shares are not, however, deemed outstanding
for the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
Percentage
Name and Address of Amount and Nature of of
Beneficial Owner(1) Beneficial Ownership Outstanding
------------------- -------------------- -----------
<S> <C> <C>
Gururaj Deshpande(2).......................... 48,822,807 19.9
Daniel E. Smith(3)............................ 43,946,349 17.9
Ryker Young(4)................................ 2,773,107 1.1
Kurt Trampedach............................... 1,128,000 *
Frances M. Jewels............................. 1,311,905 *
Jeffry A. Kiel................................ 1,175,178 *
Timothy A. Barrows(5)......................... 31,556,898 12.9
Paul J. Ferri(5).............................. 31,286,175 12.8
John W. Gerdelman(6).......................... 102,000 *
Matrix V Management Co., L.L.C.(7)............ 31,160,607 12.7
Platyko Partners, L.P......................... 22,275,000 9.1
The Gururaj Deshpande Grantor Retained Annuity
Trust........................................ 17,918,400 7.3
All executive officers and directors as a
group (16 persons)(8)........................ 152,569,403 62.0
</TABLE>
--------
* Less than 1% of the total number of outstanding shares of common stock.
(1) Except as otherwise noted, the address of each person owning more than 5%
of the outstanding shares of common stock is: c/o Sycamore Networks, Inc.,
10 Elizabeth Drive, Chelmsford, Massachusetts 01824.
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<PAGE>
(2) Includes 3,937,500 shares held by the Deshpande Irrevocable Trust and
17,918,400 shares held by the Gururaj Deshpande Grantor Retained Annuity
Trust. Mr. Deshpande's wife serves as a trustee of each of these trusts.
Mr. Deshpande disclaims beneficial ownership of these shares.
(3) Includes 22,275,000 shares held by Platyko Partners, L.P., of which Mr.
Smith and his wife serve as general partners.
(4) Includes 180,000 shares held by the E. Ryker Young Irrevocable Trust. Mr.
Young disclaims beneficial ownership of these shares.
(5) Includes 27,984,540 shares held by Matrix Partners V, L.P. and 3,176,067
shares held by Matrix V Entrepreneurs Fund, L.P. Matrix V Management Co.,
L.L.C. is the general partner of each of Matrix Partners V, L.P. and Matrix
V Entrepreneurs Fund, L.P. Messrs. Barrows and Ferri, directors of
Sycamore, are general partners of Matrix V Management Co., L.L.C. Messrs.
Barrows and Ferri disclaim beneficial ownership of the shares held by
Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. except to the
extent of their pecuniary interests therein arising from their general
partnership interests in Matrix V Management Co., L.L.C.
(6) Includes 90,000 options that are currently exercisable.
(7) Comprised of 27,984,540 shares held by Matrix Partners V, L.P. and
3,176,067 shares held by Matrix V Entrepreneurs Fund, L.P. Matrix V
Management Co., L.L.C. is the general partner of each of Matrix Partners V,
L.P. and Matrix V Entrepreneurs Fund, L.P. Messrs. Barrows and Ferri,
directors of Sycamore, are general partners of Matrix V Management Co.,
L.L.C. Messrs. Barrows and Ferri disclaim beneficial ownership of the
shares held by Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund,
L.P. except to the extent of their pecuniary interests therein arising from
their general partnership interests in Matrix V Management Co., L.L.C. The
address of Matrix V Management Co., L.L.C. is 1000 Winter Street, Suite
4500 Waltham, MA 02154.
(8) Includes an aggregate of 1,084,107 options that are currently exercisable.
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DESCRIPTION OF SYCAMORE CAPITAL STOCK
Sycamore's authorized capital stock consists of 1,500,000,000 shares of
common stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.01 par value per share. As of June 5, 2000, there were outstanding:
. 244,829,774 shares of common stock held by approximately 828
stockholders of record; and
. options to purchase an aggregate of 26,068,760 shares of common stock.
The following summary of provisions of Sycamore's securities, various
provisions of its amended and restated certificate of incorporation, amended
and restated by-laws and provisions of applicable law is not intended to be
complete and is qualified by reference to the provisions of applicable law and
to its amended and restated certificate of incorporation and amended and
restated by-laws.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any such dividends declared by the board of directors, subject
to any preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of Sycamore, the holders of common stock
are entitled to receive ratably the net assets of Sycamore available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to the rights of the holders
of shares of any series of preferred stock which Sycamore may designate and
issue in the future. Certain holders of common stock have the right to require
it to register their shares of common stock under the Securities Act of 1933,
as amended, in certain circumstances.
Preferred Stock
Under the terms of Sycamore's amended and restated certificate of in
corporation, the board of directors is authorized to issue shares of preferred
stock in one or more series without stockholder approval. The board has
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of the
outstanding voting stock of Sycamore. Sycamore has no present plans to issue
any shares of preferred stock.
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
Sycamore is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to certain
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
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Sycamore's amended and restated certificate of incorporation and amended
and restated by-laws provide:
. that the board of directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
. that directors may be removed only for cause by the affirmative vote of
the holders of at least 66 2/3% of the shares of its capital stock
entitled to vote; and
. that any vacancy on the board of directors, however occurring, including
a vacancy resulting from an enlargement of the board, may only be filled
by vote of a majority of the directors then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, Sycamore.
Sycamore's amended and restated certificate of incorporation and amended
and restated by-laws also provide that:
. any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if
it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting; and
. special meetings of the stockholders may only be called by the Chairman
of the board of directors, the President, or by the board of directors.
Sycamore's amended and restated by-laws provide that, in order for any
matter to be considered "properly brought" before a meeting, a stockholder
must comply with requirements regarding advance notice to Sycamore. These
provisions could delay until the next stockholders' meeting stockholder
actions which are favored by the holders of a majority of its outstanding
voting securities. These provisions may also discourage another person or
entity from making a tender offer for its common stock, because such person or
entity, even if it acquired a majority of its outstanding voting securities,
would be able to take action as a stockholder (such as electing new directors
or approving a merger) only at a duly called stockholders meeting, and not by
written consent.
Delaware's corporation law provides generally that the affirmative vote of
a majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a
greater percentage. Sycamore's amended and restated certificate of
incorporation requires the affirmative vote of the holders of at least 66 2/3%
of the shares of its capital stock entitled to vote to amend or repeal any of
the foregoing provisions of Sycamore's amended and restated certificate of
incorporation. Generally Sycamore's amended and restated by-laws may be
amended or repealed by a majority vote of the board of directors or the
holders of a majority of the shares of its capital stock issued and
outstanding and entitled to vote. To amend Sycamore's amended and restated by-
laws regarding special meetings of stockholders, written actions of
stockholders in lieu of a meeting, and the election, removal and
classification of members of the board of directors requires the affirmative
vote of the holders of at least 66 2/3% of the shares of its capital stock
entitled to vote. The stockholder vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
series preferred stock that might be outstanding at the time any such
amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for Sycamore's common stock is EquiServe
Limited Partnership.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SIROCCO
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with "Selected Historical Financial
Data of Sirocco" and the financial statements of Sirocco and the related notes
included elsewhere in this proxy statement/prospectus.
Overview
Sirocco Systems, Inc. designs and markets optical networking equipment for
telecommunications carriers. This equipment is anticipated to enable carriers
to transmit a wide range of data, voice and private line services over optical
communications facilities. Sirocco commenced operations in July of 1998 under
the name of FNR Systems, Inc. and in January of 1999 it changed its name to
Sirocco Systems, Inc. Since inception, Sirocco has funded operations from
private financings that have raised gross proceeds of $27.3 million in the
aggregate.
Sirocco has incurred operating losses and net losses for each month since
its formation. As of March 31, 2000 Sirocco had an accumulated deficit of
$11,325,224. Sirocco intends to increase its operating expenses and capital
expenses in an effort to accelerate the continued development of its optical
networking products and the development of its sales channels and support
organizations. Sirocco's losses and net operating cash flows are expected to
continue and to increase as it expands its operations.
Research and development expenses include compensation and benefits for the
engineering and related staff, expenses for contract engineers, materials to
build prototype units, fees paid to outside suppliers for sub-contracted
components and services, supplies used, facility related costs, such as
computer and network services and other general overhead costs. To date Sirocco
has expensed its research and development costs as they were incurred.
Marketing, general and administrative expenses include compensation and
benefits for the marketing, general and administrative staff, expenses for
promotional and public relations activities, expenses for corporate development
activities and related legal expenses, market research, sales activities and
travel expenses.
Sirocco expects to commence customer trials of its Zephyr optical access
devices and Typhoon optical edge switches in the third calendar quarter of
2000. Revenues are expected to be derived primarily from product sales with
additional contribution from maintenance fees. To date Sirocco has not realized
any revenues from product sales.
Sirocco issued 1,172,950 stock options and restricted shares from April 1,
2000 through June 5, 2000, all at exercise prices of $0.41 per share which are
deemed to be below fair market value. Sirocco expects to record additional
deferred compensation of approximately $43.9 million attributable to those
shares of restricted stock purchased by and common stock options granted to
employees and nonemployees from April 1, 2000 through June 5, 2000. These
grants have been made on terms consistent with those described in the footnotes
to the financial statements. Amortization of deferred compensation for the
three-month period ended June 30, 2000 is expected to be approximately $6.0
million. Remaining unamortized deferred compensation expense at June 30, 2000
is expected to be approximately $63.8 million.
Results of Operations
Period from inception (July 7, 1998) through December 31, 1998 (fiscal 1998)
and the year ended December 1999
For the fiscal year ended December 31, 1999 Sirocco recorded a net loss
attributable to common stockholders of $5,573,833, compared to a net loss of
$256,888 for the period from Sirocco's inception in July 1998 through December
31, 1998.
Research and Development Expenses
Research and development expenses for the fiscal year ended December 31,
1999 were $4,024,455 as compared to $216,947 for the fiscal period ended
December 31, 1998. The increase in expenses from 1998 to
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<PAGE>
1999 reflect a full year of operations in 1999 as compared to 1998 and a
significant increase in hiring of additional personnel and purchases of
materials and supplies and a general expansion of facilities.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the fiscal year ended
December 31, 1999 were $1,650,829 as compared to $48,183 for the fiscal period
ended December 31, 1998. The increase in expenses from 1998 to 1999, reflect an
increase in hiring additional personnel, public relations activities, market
research activities and other corporate development activities.
Amortization of Stock Compensation
Amortization of stock compensation expense was $179,000 for fiscal 1999.
Amortization of stock compensation expense resulted from the granting of stock
options and restricted shares with the exercise or sales prices below the
deemed fair value of Sirocco's common stock on the date of grant.
Interest Income
Interest income for the fiscal year ended December 31, 1999 was $291,451 as
compared to $8,242 for the fiscal period ended December 31, 1998. This increase
is primarily due to an increase in our cash balances due to the issuance of
stock during 1999.
Fiscal Quarters Ended March 31, 1999 and March 31, 2000
For the fiscal quarter ended March 31, 2000 Sirocco recorded a net loss
attributable to common stockholders of $5,490,952, compared to a net loss of
$579,975 for the fiscal quarter ended March 31, 1999.
Research and Development Expenses
Research and development expenses for the fiscal quarter ended March 31,
2000 were $3,829,368 as compared to $412,988 for the fiscal quarter ended March
31, 1999. The increase in expenses from 1999 to 2000 reflects a significant
increase in hiring of additional personnel and purchases of materials and
supplies and expansion of facilities.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the fiscal quarter ended
March 31, 2000 were $1,309,740 as compared to $174,030 for the fiscal quarter
ended March 31, 1999. The increase in expenses from 1999 to 2000 reflect the
hiring of personnel, commencement of public relations, market research and
sales activities.
Amortization of Stock Compensation
Amortization of stock compensation expense was $532,000 for the fiscal
quarter ended March 31, 2000. Amortization of stock compensation expense
resulted from the granting of stock options and restricted shares with the
exercise or sales prices below the deemed fair value of Sirocco's common stock
on the date of grant.
Interest Income
Interest income for the fiscal quarter ended March 31, 2000 was $185,102 as
compared to $8,242 for the fiscal quarter ended March 31, 1999. This increase
primarily results from an increase in our cash balances due to the issuance of
stock during 1999.
Liquidity and Capital Resources
Sirocco has financed its operations and capital expenditures primarily with
the proceeds from stock issuances and borrowings. As of March 31, 2000 Sirocco
had cash and cash equivalents of $15,699,525 as compared to $968,470 as of
March 31, 1999. Sirocco's investment policy has been to preserve principal
value and to maintain a high degree of liquidity while providing current
income.
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<PAGE>
In August 1998, Sirocco issued 60,000 shares of Series A Preferred Stock at
$9.99 per share and 2,025,000 shares of Common Stock at $0.0003 per share for
gross proceeds of $600,000.
In January 1999, Sirocco issued 85,000 shares of Series B Preferred Stock at
$14.99 per share and 2,868,750 shares of Common Stock at $0.0003 per share for
total gross proceeds of $1,275,000.
In April 1999, Sirocco issued 2,654,548 shares of Series C Preferred Stock
at $2.19 per share and 8,959,100 shares of Common Stock at $0.003 per share for
gross proceeds of $5,840,006.
In October 1999, Sirocco issued 4,878,049 shares of Series D Preferred Stock
at $3.69 per share for gross proceeds of $18,000,000. From January to March
2000, Sirocco issued an additional 491,998 shares of Series D Preferred Stock
at $3.69 per share for gross proceeds of $1,614,050.
In May 1999, Sirocco entered into a $500,000 revolving line of credit and
financing agreement with Silicon Valley Bank for equipment purchases. The line
of credit allows for draw downs through June 2000 for equipment purchases, then
converts into a loan payable in equal monthly installments through May 2003.
Interest is computed based on the average daily balance outstanding, at a per
annum rate of .5% above the prime rate. All assets of Sirocco have been pledged
as collateral and the agreement contains covenants and restrictions relating to
asset protection, financial condition, dividends investments mergers,
acquisitions and certain other matters. At December 31, 1999, $500,000 was
outstanding under the line of credit and the stated interest rate was 9.0%.
In January 2000, Sirocco refinanced its line of credit and increased the
amount available under the credit facility to $7.5 million, of which $2.5
million is available for equipment purchases and $5.0 million is available as a
working capital line. As of May 31, 2000, $2,200,000 had been drawn on the
equipment line of credit and $300,000 remained available. As of May 31, 2000,
the $5,000,000 working capital line of credit had not been drawn upon. Stated
interest is computed at the per annum rate of 36 month U.S. Treasury note yield
to maturity plus 350 basis points. Interest for working capital advances is
computed at a per annum rate of the 36 month U.S. Treasury note yield to
maturity plus 6.25%.
Sirocco leases space in two facilities under operating leases. Aggregate
future minimum lease payments under non-cancellable operating leases are:
$496,147 for 2000, $599,895 for 2001, $469,791 for 2002 and $477,248 for 2003
and 2004.
Although Sirocco believes that it will continue to finance its operations
with existing cash and cash equivalents, borrowings under its existing credit
facility and funds raised in future private financings, there can be no
assurance that additional financing will be available on terms acceptable to us
or at all.
Qualitative Disclosures About Market Risk
Sirocco has no derivative financial instruments in our cash and cash
equivalents. Sirocco invests in money market funds which in turn invest in:
commercial paper (rated at least tier one), bank obligations, short-term
corporate obligations, US Treasury securities, US Government obligations and
repurchase agreements.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events if they had occurred
after either December 15, 1998 or January 12, 2000. Sirocco does not expect the
application of FIN 44 to have a material impact on its financial position or
results of operations.
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SIROCCO'S BUSINESS
Overview
Sirocco develops and markets optical networking products that collect,
transmit and manage a wide range of data, voice and private line communications
services over the public network of fiber optic cable lines. Sirocco products
are designed to enable telecommunications service providers to make efficient
use of the greater potential bandwidth capability and speed afforded by optical
data transmission.
Sirocco products are intended to focus particularly on the needs of
telecommunications service providers that link end users to fiber optic
infrastructures or optical bandwidth services that they own or lease. Sirocco's
product line is expected to offer the following to these service providers:
. Direct access to the high speed and capacity of optical backbone
networks via a modular, scalable family of products;
. Significantly reduced capital costs by combining the ability to support
highly diverse services in a single, unified platform as opposed to
several independent platforms;
. Significantly reduced network complexity by reducing the number of
discrete network elements required to support their multi-service
portfolio offerings; and
. Intelligent network management capabilities that radically reduce the
time required to provision services for end users for maximum
competitive advantage.
By offering a scalable family of products, each with different service
interfaces, capacities and cost points, all managed by a common network
management platform, Sirocco expects to be able to allow service providers to
build complete optical access networks using Sirocco products.
Sirocco expects the first testing of its products at potential customer
sites to begin in the third calendar quarter of 2000. Products are expected to
be available for shipment in the following quarter.
Industry Background
Over the past decade, the volume of high-speed data traffic across the
public network has grown significantly, as discussed above under "Sycamore's
Business--Industry Background." The existing infrastructure, which was
originally built for voice traffic and designed for relatively slow,
incremental growth, is expected to require significant upgrades in order to
handle the rapidly increasing volume of bandwidth-intensive data.
The principal components of the existing fiber optic telecommunications
network are:
. Fiber optic cable for the physical transmission of data;
. Dense Wave Division Multiplexing equipment, known as DWDM, which
multiplies the transmission capacity of a specific fiber by dividing a
single strand into multiple light paths, or wavelengths; and
. Electronic routing and switching equipment, meeting standards referred
to as SONET in North America and SDH elsewhere in the world, for
converting data from an electronic signal to an optical signal for
transport over the fiber optic network
As described above under "Sycamore's Business--Industry Background," the
existing electronic switching and routing system requires data that have been
converted into optical wavelengths to be converted back into electronic signals
and then re-transmitted as optical wavelengths at various routing points before
the data reach their destination. This slows down the transmission of data and
uses up system capacity.
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Optical access and optical switching devices offer the possibility of
greater transmission capacities and more cost effective bandwidth utilization
by:
. Delivering the power of optical data transmission at a point closer to
the end users; and
. Providing grooming and switching capabilities which ensure that the
optical paths are efficiently filled or utilized before they are
transmitted long distances.
Optical access and switching technologies thus offer the possibility of
increasing network capacity without laying new cable or deploying multiple
electronic switching, routing and aggregation platforms each time a network
upgrade is required.
While optical switching and DWDM transmission equipment is becoming more
widely deployed in both long haul and metropolitan area networks, service
providers continue to deploy multiple electronic platforms, arranged in
discrete "overlay" networks, to provide simultaneous support for the various
data, voice and private line services that they offer to their subscribers.
Historically, a different product line has been required to support each of the
conflicting technologies employed by circuit-, packet- and cell-based services.
Each of these platforms provides unique service access connection points,
service provisioning and management functionality, and switching/grooming
capabilities. Each type of platform then feeds their respective outputs into
larger communications facilities for metropolitan area or long haul
transmission. Deploying multiple platforms in this fashion consumes excessive
capital and wastes expensive service provider resources. A single, unified
platform that can support multiple services would significantly reduce the
capital costs needed to outfit a new location and would consume less end office
space, environmental and human resources.
Another challenge service providers face when managing multiple platforms is
the increased complexity and cost in deploying a multi-service portfolio to
their subscribers. Each platform has its own network management system used to
configure the platform, detect and manage alarms and provision services for end
users. It is rare for platforms from different vendors to interoperate with
each other. As a result, multiple management systems have to be used to
provision services for a subscriber. Historically, it has taken as long as
several weeks to months for service providers to put into place new services
for a customer in certain environments. A multi-service platform that can
provision different service types from a common management system can greatly
reduce the time it takes to provision new services, giving service providers
that use such equipment a powerful competitive advantage over those that do
not.
In many metropolitan areas the total bandwidth that each of these services
requires may be less than the capacity of an optical transmission facility.
Additionally, a high capacity optical path may be inefficiently used, as it is
carrying a much smaller amount of a specific circuit, packet or cell service.
This may result in multiple, high-speed optical paths being dedicated to each
service, with each path possibly being underutilized. Multi-service platforms
that have the ability to support multiple, optical connections can combine
smaller amounts of different traffic types into a single optical path,
maximizing bandwidth utilization. When traffic volumes are heavy, these
platforms may take different services from multiple locations and efficiently
groom them into larger optical paths on a service-by-service basis.
Many service providers cannot accurately predict the specific volumes of
each service type a new market may generate for them. Thus a multi-service,
multi-wavelength platform gives them the flexibility they need to open a new
market area in a cost effective manner, while also having the ability to expand
and upgrade as the subscriber base grows without having to change platforms.
Providers of telecommunications services using fiber optic cable
transmission include new and established providers of voice and data transport
services, long distance carriers, Internet service providers, cable operators
and multi-national telephone companies. New service providers have appeared in
this group as a result of the growth of the Internet and electronic mail, as
well as the growth of telecommuting and interoffice computer networks. High
volume end users, such as large office buildings and other commercial complexes
are also expected to provide a new market for companies specializing in access-
level telecommunications services.
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The increased volume of telecommunications traffic, the additional services
that are demanded and the emergence of new service providers on both a large
and a small scale create a potentially strong market for optical networking
equipment. The equipment needs of new and existing service providers vary,
however, depending on the volume of traffic that they handle at any particular
point and the relationship of that point to the point of initial access. This
creates a need for a wide range of products that can function together and in
tandem with existing electronic SONET/SDH switching and transmission networks.
Sirocco's Strategy
Sirocco has designed its product line to meet the needs of the market for
optical networking products by:
. Incorporating software-based technology with optical access and
switching technologies to provide more efficient multi-service data
management capabilities
. Developing products designed to meet the needs of service providers at
the initial data access point as well as at metropolitan and regional
levels
. Establishing an open architecture to allow compatibility with existing
electronic switching technologies that enable service providers to build
and upgrade their systems as needed
While Sirocco's product line includes products under development that are
intended to meet the needs of regional and long haul service providers, its
principal focus has been on the development of products designed to meet the
needs of new and existing access and metropolitan level telecommunications
providers for additional bandwidth capacity and data management services.
Sirocco's Product Line
The Sirocco product line consists of the following products under
development:
. Sirocco Zephyr Optical Access Devices (OADs). The Zephyr line of
products sit at the edge of the optical network, deployed in a central
office, multi-tenant building, or at the customer premise. Their
function is to aggregate and switch multiple streams of communications
services, including private line, SONET/SDH, wavelength transport, LAN
transport, asynchronous transfer mode (ATM) switching, and high-speed
packet services. The Zephyr comes in two versions, the Z-12 and the Z-
48, with the primary difference being the capacity supported.
. Sirocco Typhoon Optical Edge Switches (OESs). The Typhoon line of
products are edge devices that perform aggregation, grooming, and
switching functions, primarily in the metro layer of optical networks.
Typhoons are highly redundant systems designed for central office
applications. Their compact design provides extremely high port density
and efficient space utilization. Featuring an integrated optical
subsystem for DWDM trunking and wavelength cross-connect, Typhoon
platforms gather traffic from Zephyr OADs, existing SONET/SDH rings, or
directly from subscribers. And, like the Zephyr, the Typhoon platforms
support a full complement of service interfaces. There are two members
of the Typhoon product family, the T-48 and the T-192, which differ
primarily in the capacity of their respective network links.
. Sirocco Tornado F-1 Regional Core Switch (RCS). The Tornado F-1 is a
core switch designed for use in regional backbone optical networks. Like
the Typhoon, the Tornado is a highly redundant system designed for
central office environments. A single Tornado F-1 supports up to 24 OC-
192 ports (capable of transmitting 9.953 gigabits of information per
second) or 96 OC-48 ports (capable of transmitting 2.488 gigabits of
information per second), which can be interconnected as needed. The
Tornado F-1 provides regional aggregation and switching, gathering
traffic from Typhoon-based metro networks and existing SONET add/drop
multiplexers and cross-connects. An entire network of these devices can
be constructed to form an independent optical backbone network, or they
can act as a regional tier, feeding an existing optical backbone.
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. Sirocco Tempest Optical Network Management System (OMS). The complete
network of Sirocco products is managed by the Tempest OMS suite of
management and provisioning tools designed to enable service providers
to rapidly deploy services with simple "point and click" operations.
Marketing
As of June 5, 2000, Sirocco employed a marketing staff of 11 persons.
Sirocco markets its products through direct contacts with potential customers,
attendance at trade shows and the publication of product news on its Web site
and in industry publications.
Manufacturing
As of June 5, 2000, Sirocco had 7 employees engaged in manufacturing, and
has contracted with third parties to provide contract manufacturing services to
Sirocco.
Intellectual Property
Sirocco has applied for a patent on an automatic provisioning mechanism used
in its products and has applied for trademark protection of its name. Sirocco's
products incorporate software licensed from various third parties, as well as
internally developed software. Sirocco employees who are engaged in significant
research and development activities have signed agreements with Sirocco
acknowledging that Sirocco is the owner of any inventions or other intellectual
property developed by them during their employment by Sirocco.
Employees
As of June 5, 2000, Sirocco employed 120 persons, of whom 4 were involved in
management, 87 in research and development, 11 in marketing, 7 in
manufacturing, 5 in sales and 6 in administration.
Properties
Sirocco leases its headquarters and one other facility under operating
leases expiring on December 31, 2004 and December 31, 2001, with options to
renew for two additional years, respectively.
Legal Proceedings
In the ordinary course of its business, Sirocco has received letters from
companies seeking to discourage Sirocco from continuing to hire former
employees of those companies. Sirocco does not believe that these potential
claims are material to its business.
Competition
A number of telecommunications equipment companies are developing and
marketing optical networking products. Many of these companies, including
Lucent and Cisco, are substantially larger and have greater access to financing
and greater resources for research and development than Sirocco. Sirocco will
attempt to compete in this market by offering a product line that it believes
to have technological advantages over some of the optical networking products
currently on the market. As a small, development stage company, it faces
substantial hurdles that are not faced by its larger competitors. Given its
small size and limited resources, there can be no assurance that Sirocco would
be able to continue to develop technologically competitive products or to
compete successfully in the manufacture, sale and support of these products.
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MANAGEMENT OF SIROCCO
Certain information with respect to directors and executive officers of
Sirocco is set forth below. All directors serve a term of one year. All
executive officers are elected by the Board of Directors and serve until their
successors are duly elected by the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan Reeves......... 40 President, Chief Executive Officer and Director
W. Thomas Shea.......... 45 Treasurer, Chief Operating Officer and Chief Financial Officer
Edward Stern............ 50 Chief Technology Officer
G. Felda Hardymon....... 53 Director
Roger Evans............. 55 Director
</TABLE>
Jonathan Reeves has served as the President and Chief Executive Officer
since January 1999, at which time he was also appointed as Chairman of the
Board of Directors. Prior to founding Sirocco, Mr. Reeves was a founder of
Sahara Networks, Inc., and served in the position of Chief Executive Officer
and Chairman of the Board of Directors. In 1997, Sahara Networks was acquired
by Cascade Communications Corp., and Mr. Reeves served as Vice President and
General Manager of the Broadband Access Division for Cascade. Cascade was then
acquired by Ascend Communications, Inc., in July of 1997 and from December of
1997 until November of 1998, Mr. Reeves served as the Vice President of
Strategic Planning for Ascend.
W. Thomas Shea has served as Secretary, Chief Operating Officer and Chief
Financial Officer since January 1999. Prior to founding Sirocco, Mr. Shea was a
founder of Sahara Networks Inc., and served in the position of Chief Operating
Officer and Chief Financial Officer. In 1997, Sahara Networks was acquired by
Cascade Communications Corp., and Mr. Shea served as Vice President of Field
Operations for the Broadband Access Division for Cascade. Cascade was then
acquired by Ascend Communications, Inc., in July of 1997, and Mr. Shea served
as Vice President of Carrier Business Development for Ascend until January
1999.
Edward Stern is one of Sirocco's founders and served as Chief Executive
Officer of Sirocco from Sirocco's founding in 1998 until January 1999. In
January 1999, Mr. Stern assumed the role of Chief Technology Officer of
Sirocco. Mr. Stern served as Technology Manager and Business Development
Manager at Lucent Technologies Inc. from July of 1995 until Sirocco's inception
in August of 1998. Prior to joining Lucent, he served as the Senior Scientist
for General Datacomm Industries, Inc.
G. Felda Hardymon has served as a director of Sirocco since January 1999.
Mr. Hardymon has been a partner of Bessemer Venture Partners, a venture capital
firm, since 1981. Since 1998 he has also been a Senior Lecturer of Business
Administration at Harvard Business School.
Roger Evans has served as a director of Sirocco since 1999. Mr. Evans has
been associated with Greylock, a venture capital firm since 1989, serving as a
general partner since January 1991. He also serves as a director of Copper
Mountain Networks and Phone.com.
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Executive Compensation
The table below sets forth, for the year ended December 31, 1999, the
compensation earned by Jonathan Reeves, Sirocco's Chief Executive Officer, who
will become a Vice President and General Manager of Optical Networking for
Sycamore after the merger. Mr. Reeves does not receive a salary, bonus or other
cash compensation from Sirocco, but purchased 3,657,285 shares of Sirocco
common stock for $.01 per share in 1999 pursuant to stock restriction
agreements described below under "Certain Transactions of Sirocco." Mr. Reeves
joined Sirocco in January 1999.
In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table below does not include medical, group life,
or other benefits which are available to all of Sirocco's salaried employees,
and perquisites and other benefits, securities and other property which do not
exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in
the table. In the table below, columns required by the regulations required by
the Securities and Exchange Commission have been omitted where no information
was required to be disclosed under those columns.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
------------------- ----------------------
Salary(1) Restricted
($) Stock Grants (#)
------------------- ----------------------
<S> <C> <C>
Jonathan Reeves
Chief Executive Officer............. -- 3,657,285(2)
</TABLE>
--------
(1) Mr. Reeves did not draw a salary for the year ended December 31, 1999.
(2) This stock was issued to Mr. Reeves pursuant to certain stock restriction
agreements. As of May 31, 2000, 1,182,735 of Mr. Reeves shares were fully
vested, while the remaining 2,474,550 shares are subject to a vesting
schedule pursuant to the stock restriction agreements. Please see "Certain
Transactions of Sirocco" for further information.
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CERTAIN TRANSACTIONS OF SIROCCO
In 1999 and 2000, Sirocco executed various stock splits of its common stock.
All common stock shares, common stock options and related prices per share have
been adjusted to reflect the effects of these splits.
Series A Preferred Stock Financing
In August 1998, Sirocco completed its first round of private equity
financing with Bessemer Venture Investors L.P., Bessemer Venture Partners IV
L.P. and Bessec Ventures IV L.P. (the "Bessemer Funds"). In this financing, the
Bessemer Funds purchased an aggregate of 60,000 shares of Sirocco's series A
preferred stock and 2,025,000 shares of Sirocco's common stock for an aggregate
purchase price of $600,000.
In connection with this stock financing, Sirocco entered into a Stock
Purchase Agreement, a Stockholders' Agreement and a Registration Rights
Agreement with the Bessemer Funds. Under the terms of the Stock Purchase
Agreement, the Bessemer Funds received certain rights which were later
superseded by similar rights provided in Sirocco's Series D Preferred Stock
Financing. Please see the section entitled "Series D Preferred Stock
Financing." The Stockholders' Agreement, to which Edward Stern is also a party,
provides the Bessemer Funds with a right of first refusal, in certain
instances, upon the sale or disposition of Sirocco's common stock by any of its
stockholders. Pursuant to the Registration Rights Agreement, Sirocco granted to
the Bessemer Funds demand and "piggy-back" registration rights.
Series B Preferred Stock Financing
In January 1999, Sirocco completed its second round of private equity
financing which included the Bessemer Funds. In this financing, the Bessemer
Funds purchased an aggregate of 83,333 shares of Sirocco's series B preferred
stock and 2,812,489 shares of Sirocco's common stock for an aggregate purchase
price of $1,249,995.
In connection with this stock financing, Sirocco entered into a Stock
Purchase Agreement with the Bessemer Funds. Under the terms of the Stock
Purchase Agreement, the Bessemer Funds received certain rights which were later
superseded by similar rights provided in Sirocco's Series D Preferred Stock
Financing. Please see the section entitled "Series D Preferred Stock
Financing." Sirocco also amended and restated the Stockholders' Agreement to
include Jonathan Reeves and W. Thomas Shea as parties to the agreement.
Series C Preferred Stock Financing
In April 1999, Sirocco completed its third round of private equity financing
which included Greylock IX Limited Partnership ("Greylock"), Bessemer Venture
Partners IV L.P. and Bessec Ventures IV L.P. In this financing, Greylock
purchased an aggregate of 1,818,182 shares of Sirocco's series C preferred
stock and 6,136,364 shares of Sirocco's common stock for an aggregate purchase
price of $4,000,000. Bessemer Venture Partners IV L.P. and Bessec Ventures IV
L.P. together purchased an aggregate of 681,818 shares of Sirocco's series C
preferred stock and 2,301,136 shares of Sirocco's common stock for an aggregate
purchase price of $1,500,000.
In connection with this stock financing, Sirocco entered into a Stock
Purchase Agreement with Greylock, Bessemer Funds, Mr. Reeves, Mr. Shea and Mr.
Stern. Under the terms of the Stock Purchase Agreement, Greylock and the
Bessemer Funds received certain rights which were later superseded by similar
rights provided in Sirocco's Series D Preferred Stock Financing. Please see the
section entitled "Series D Preferred Stock Financing." Sirocco also amended and
restated the Stockholders' Agreement and the Registration Rights Agreement to
include Greylock as a party to those agreements.
Series D Preferred Stock Financing
In October 1999, Sirocco commenced an additional round of private equity
financing which included Weiss, Peck & Greer Venture Associates V, LLC, Weiss,
Peck & Greer Venture Associates V-A, LLC, Weiss, Peck & Greer Venture
Associates V Cayman, LLC (collectively referred to as "the Weiss, Peck and
Greer Funds"), Greylock, Bessemer Venture Investors L.P. and Bessec Ventures IV
L.P. In this financing, the Weiss, Peck and Greer Funds
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purchased an aggregate of 2,168,021 shares of Sirocco's series D preferred
stock for an aggregate purchase price of $7,999,997, Greylock purchased an
aggregate of 1,355,014 shares of Sirocco's series D preferred stock for an
aggregate purchase price of $5,000,002 and Bessemer Venture Partners IV L.P.
and Bessec Ventures IV L.P. together purchased an aggregate of 1,355,014 shares
of Sirocco's series D preferred stock for an aggregate purchase price of
$5,000,002.
In connection with this stock financing, Sirocco entered into a Stock
Purchase Agreement with the Weiss, Peck & Greer Funds, Greylock, the Bessemer
Funds, Mr. Reeves, Mr. Shea and Mr. Stern. The Stock Purchase Agreement
provides the parties with, among other things, preemptive rights in the case of
Sirocco's issuance of any stock and certain approval rights in the event of any
capital restructuring by Sirocco. Sirocco also amended and restated the
Stockholders' Agreement and the Registration Rights Agreement to include the
Weiss, Peck & Greer Funds as a party to the agreement.
Stock Restriction Agreements
Sirocco has issued an aggregate of 8,633,890 shares of its common stock to
Jonathan Reeves, W. Thomas Shea and Edward Stern, at a price of $.01 per share,
pursuant to certain stock restriction agreements. Under the terms of these
stock restriction agreements, Sirocco has the right to repurchase certain of
these shares at the original purchase price (i.e., $.01 per share) in the event
of termination of such person's employment with Sirocco for any reason, which
right lapses as to 20% of such shares one year from the date that such stock
was purchased by each of the above persons and, as to the remainder of such
shares, in equal monthly increments over the following four years. If the
merger is completed, Sirocco will immediately forfeit its repurchase right with
respect to 50 percent of the common stock that was subject to repurchase at the
time the merger is consummated and vesting of the remaining shares will be
accelerated over a period of either one or two years. In the event that any of
the above executives is terminated without cause or resigns for just cause
after the transaction is completed, all of such executive's unvested shares
will immediately become vested.
Proprietary Information and Invention Agreements
Each of Jonathan Reeves, W. Thomas Shea and Edward Stern has entered into a
Proprietary Information and Invention Agreement with Sirocco.
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STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF SIROCCO
The following table sets forth selected ownership information with respect
to the beneficial ownership of Sirocco's stock as of May 31, 2000 for:
. each of the executive officers of Sirocco;
. each director of Sirocco;
. all directors and executive officers of Sirocco as a group; and
. each person who is known by Sirocco to own beneficially more than 5% of
any class of Sirocco stock.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power or shares this power with his or her
spouse with respect to all shares of capital stock listed as owned by that
person or entity. Ownership of less than 1% is designated in the table by an
asterisk.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting power or investment power and
any shares as to which the individual or entity has the right to acquire
beneficial ownership within 60 days after May 31, 2000 through the exercise of
any stock option or other right.
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Name of Beneficial Owner Stock(1) % Stock % Stock % Stock % Stock %
------------------------ --------- ----- --------- --- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and Directors:
Jonathan Reeves(2)...... 3,657,285 11.90% 0 * 0 * 0 * 0 *
W. Thomas Shea(3)....... 2,614,105 8.51% 0 * 0 * 0 * 0 *
Edward Stern(4)......... 2,362,500 7.69% 0 * 0 * 0 * 0 *
Felda Hardymon(5)....... * * 0 * 0 * 0 * 0 *
Roger Evans(6).......... * * 0 * 0 * 0 * 0 *
All executive officers
and directors
as a group (5
persons)............... 8,633,890 28.1%
Other 5% Stockholders:
Greylock IX Limited
Partnership............ 8,168,886 24.94% 0 * 0 * 1,818,182 68.49% 1,355,014 25.23%
Entities associated with
Bessemer Venture
Partners(7)............ 9,171,148 28.00% 60,000 100% 83,333 98.00% 681,818 25.68% 1,355,014 25.23%
Entities associated with
Weiss, Peck & Greer
Venture Associates(8).. 3,252,032 9.57% 0 * 0 * 0 * 2,168,021 40.37%
</TABLE>
--------
(1) Includes, where applicable, shares of common stock issuable upon
conversion of the Series D preferred stock.
(2) Includes 318,000 shares held by a family limited partnership and
certain trusts for the benefit of certain members of Mr. Reeves'
family. Mr. Reeves disclaims beneficial ownership of these shares. Also
includes 2,474,550 shares of common stock that, as of May 31, 2000, are
subject to Sirocco's repurchase option pursuant to certain stock
restriction agreements. Please refer to the section entitled "Certain
Transactions of Sirocco" for more detailed information with respect to
Sirocco's repurchase option. The address for Mr. Reeves is 95 Barnes
Road, Wallingford, CT 06492.
94
<PAGE>
(3) Includes 150,000 shares held by trusts for the benefit of certain
members of Mr. Shea's family. Mr. Shea disclaims beneficial ownership
of these shares. Also includes 1,732,185 shares of common stock that,
as of May 31, 2000, are subject to Sirocco's repurchase option pursuant
to certain stock restriction agreements. Please refer to the section
entitled "Certain Transactions of Sirocco" for more detailed
information with respect to Sirocco's repurchase option. The address
for Mr. Shea is 95 Barnes Road, Wallingford, CT 06492.
(4) Includes 1,732,185 shares of common stock that, as of May 31, 2000, are
subject to Sirocco's repurchase option pursuant to certain stock
restriction agreements. Please refer to the section entitled "Certain
Transactions of Sirocco" for more detailed information with respect to
Sirocco's repurchase option.
(5) Does not include shares held by entities associated with Bessemer
Venture Partners. Mr. Hardymon is a general partner of the general
partners of these entities and disclaims beneficial ownership of the
shares held by these entities except to the extent of his pecuniary
interest in them. The address for Mr. Hardymon is 83 Walnut Street,
Wellesley Hills, MA 02181.
(6) Does not include shares by Greylock IX Limited Partnership. Mr. Evans
is a general partner of the general partner of Greylock IX and
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest in them. The address for Mr. Evans is 755 Page
Mill Road, Bldg. A Suite 100 Palo Alto, CA 94304.
(7) Represents 5,260,808 shares of common stock (giving effect to
conversion of the Series D Preferred Stock), 33,000 shares of Series A
preferred stock, 45,833 shares of Series B preferred stock, 409,091
shares of Series C preferred stock and 813,008 shares of Series D
preferred stock held by Bessemer Venture Partners IV, L.P.; 3,426,600
shares of common stock (giving effect to conversion of the Series D
preferred stock), 21,000 shares of Series A preferred stock, 29,167
shares of Series B preferred stock, 272,727 shares of Series C
preferred stock and 542,006 shares of Series D preferred stock held by
Bessec Ventures IV, L.P.; and 483,740 shares of common stock, 6,000
shares of Series A preferred stock and 8,333 shares of Series B
preferred stock held by Bessemer Venture Investors, L.P.
(8) Represents 2,675,123 shares of common stock (giving effect to the
conversion of the Series D preferred stock) and 1,783,415 shares of
Series D preferred stock held by Weiss, Peck & Greer Venture Associates
V, L.L.C.; 554,147 shares of common stock (giving effect to the
conversion of the Series D preferred stock) and 369,431 shares of
Series D preferred stock held by Weiss, Peck and Greer Venture V
Cayman, L.L.C., and 22,763 shares of common stock (giving effect to the
conversion of Series D preferred stock) and 15,175 shares of Series D
preferred stock held by Weiss, Peck & Greer Venture Associates V.A.,
L.L.C.
95
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following tables present selected unaudited pro forma combined financial
data of Sycamore and Sirocco which are derived from the unaudited pro forma
condensed combined financial statements which are presented elsewhere in this
proxy statement/prospectus. The data has been prepared giving effect to the
merger under the "pooling of interests" method of accounting. This information
should be read in conjunction with the unaudited pro forma statements and
related notes. The selected unaudited pro forma combined financial data is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have been achieved had
the merger been consummated as of the dates indicated or that may be achieved
in the future.
The unaudited pro forma condensed combined balance sheet gives effect to the
merger as if it occurred on April 29, 2000. The unaudited pro forma condensed
combined statements of operations give effect to the merger as if it occurred
at the beginning of the periods presented.
Since the fiscal years of Sycamore and Sirocco differ, the periods combined
for purposes of the pro forma combined financial data are as follows giving
effect to the merger as if it had occurred at the beginning of each period
presented:
<TABLE>
<CAPTION>
Sycamore Sirocco
-------- -------
<S> <C>
Period from inception
(February 17, 1998) to
July 31, 1998 Period from inception (July 7, 1998) to December 31, 1998
Fiscal year ended July
31, 1999 Fiscal year ended December 31, 1999
Nine months ended April
29, 2000 and May 1,
1999 Nine months ended April 29, 2000 and May 1, 1999
</TABLE>
The nine months ended April 29, 2000 and May 1, 1999 include five months of
Sirocco's financial results which are also recorded in the fiscal year ended
December 31, 1999 and the period from inception (July 7, 1998) to December 31,
1998, respectively. Sirocco's net loss for the five month periods ended
December 31, 1998 and 1999 was $257,000 and $3,659,000 respectively.
96
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
AS OF APRIL 29, 2000
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Sycamore Sirocco Adjustments Combined
---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 677,063 $ 13,954 $ -- $ 691,017
Marketable securities.. 508,597 -- -- 508,597
Accounts receivable.... 30,473 -- -- 30,473
Inventories............ 26,641 -- -- 26,641
Prepaids and other
current assets........ 15,989 1,252 773 (3) 18,014
---------- -------- ------- -----------
Total current assets.... 1,258,763 15,206 773 1,274,742
Property and equipment,
net.................... 21,453 3,514 -- 24,967
Marketable securities... 328,418 -- -- 328,418
Other assets............ 2,023 1 -- 2,024
---------- -------- ------- -----------
Total assets............ $1,610,657 $ 18,721 $ 773 $ 1,630,151
========== ======== ======= ===========
Liabilities, Preferred Stock and
Stockholders' Equity (Deficit)
Current liabilities:
Current portion of
notes payable......... $ -- $ 178 $ $ 178
Accounts payable....... 20,490 1,581 22,071
Accrued compensation... 1,816 -- 1,816
Accrued expenses....... 5,319 607 4,000 (2) 9,926
Deferred revenue....... 32,026 -- 32,026
Other current
liabilities........... 5,643 -- (1,460) (3) 4,183
---------- -------- ------- -----------
Total current
liabilities............ 65,294 2,366 2,540 70,200
Long term debt.......... -- 328 328
Commitments and
contingencies
Series A Redeemable
Preferred stock........ -- 589 (589) (1) --
Series B Redeemable
Preferred stock........ -- 1,267 (1,267) (1) --
Series C Redeemable
Preferred stock........ -- 5,790 (5,790) (1) --
Series D Convertible
Preferred stock........ -- 19,665 (19,665) (1) --
---------- -------- ------- -----------
Total preferred stock... -- 27,311 (27,311) --
Stockholders' equity
(deficit):
Preferred stock, $.01
par value............. -- -- --
Common stock, $.001 par
value................. 245 31 27 (1) 303
Additional paid-in
capital............... 1,607,440 3,121 62,574 (1)(4) 1,673,135
Accumulated deficit.... (18,114) (14,436) (37,057) (2)(3)(4) (69,607)
Notes receivable....... (280) -- -- (280)
Deferred compensation.. (47,508) -- -- (47,508)
Accumulated other
comprehensive loss.... 3,580 -- -- 3,580
---------- -------- ------- -----------
Total stockholders'
equity (deficit)....... 1,545,363 (11,284) 25,544 1,559,623
---------- -------- ------- -----------
Total liabilities,
preferred stock and
stockholders' equity... $1,610,657 $ 18,721 $ 773 $ 1,630,151
========== ======== ======= ===========
</TABLE>
(1) Reflects the conversion of Sirocco preferred and common stock based on
the exchange rates per the merger agreement.
(2) Reflects expenses of $4.0 million in connection with the merger, mainly
advisor fees, legal and accounting services and other integration costs.
(3) Reflects an estimated adjustment to recognize certain deferred tax
assets and the reversal of a valuation allowance related to Sirocco's
deferred tax assets.
(4) Reflects a non-cash compensation charge for 50% acceleration of options
granted as of March 31, 2000.
97
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 29, 2000
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Sycamore Sirocco Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $107,742 $ -- $ $107,742
Cost of revenues ................ 57,103 -- 57,103
-------- --------
Gross profit..................... 50,639 -- 50,639
Operating expenses:
Research and development......... 32,911 7,943 40,854
Sales and marketing.............. 16,457 -- 16,457
General and administrative ...... 3,819 2,793 6,612
Amortization of stock
compensation.................... 9,494 1,960 11,454
-------- -------- ------- --------
Total operating expenses......... 62,681 12,696 75,377
-------- -------- ------- --------
Loss from operations............. (12,042) (12,696) (24,738)
-------- -------- ------- --------
Interest income, net............. 17,595 447 18,042
-------- -------- --------
Income (loss) before income
taxes........................... 5,553 (12,249) (6,696)
-------- -------- ------- --------
Provision for income taxes....... 3,484 -- (2,233) (1) 1,251
-------- -------- ------- --------
Net income (loss)................ $ 2,069 $(12,249) $ 2,233 $ (7,947)
======== ======== ======= ========
Preferred stock accretion........ -- (13) 13 (2) --
-------- -------- ------- --------
Net income (loss) attributable to
common stockholders............. $ 2,069 (12,262) 2,246 (7,947)
======== ======== ======= ========
Basic net income (loss) per
share........................... $ 0.02 $ (0.43) $ (0.05)
Diluted net income (loss) per
share........................... $ 0.01 $ (0.43) $ (0.05)
Shares used in calculating:
Basic net income (loss) per
share......................... 135,944 28,696 155,452
Diluted net income (loss) per
share......................... 195,915 28,696 155,452
</TABLE>
--------
(1) Reflects an estimated adjustment to recognize certain tax assets and the
reversal of a valuation allowance related to Sirocco's previously reserved
deferred tax asset prior net losses.
(2) Reflects the conversion of Sirocco preferred and common stock based on the
exchange rates per the merger agreement.
98
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 1, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Sycamore Sirocco Adjustments Combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................ $ -- $ -- $ --
Cost of revenues ................... 1,173 -- 1,173
-------- ------- --------
Gross profit (loss)................. (1,173) -- (1,173)
Operating expenses:
Research and development............ 6,572 834 7,406
Sales and marketing................. 1,598 -- 1,598
General and administrative ......... 752 301 1,053
Amortization of stock compensation.. 802 -- 802
-------- ------- ---- --------
Total operating expenses............ 9,724 1,135 10,859
-------- ------- ---- --------
Loss from operations................ (10,897) (1,135) (12,032)
-------- ------- ---- --------
Interest income, net................ 488 27 515
-------- ------- ---- --------
Loss before income taxes............ $(10,409) $(1,108) (11,517)
-------- ------- ---- --------
Provision for income taxes.......... -- -- --
-------- ------- ---- --------
Net loss............................ $(10,409) $(1,108) $ $(11,517)
======== ======= ==== ========
Preferred stock accretion........... -- (1) 1 (1) --
-------- ------- ---- --------
Net loss attributable to common
stockholders....................... $(10,409) $(1,109) $ 1 $(11,517)
======== ======= ==== ========
Basic and diluted net loss per
share.............................. $ (1.13) $ (0.12) $ (0.75)
Shares used in calculating:
Basic and diluted net loss per
share............................ 9,248 9,109 15,440
</TABLE>
--------
(1) Reflects the conversion of Sirocco preferred and common stock based on the
exchange rates per the merger agreement.
99
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Sycamore Sirocco Adjustments Combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................. $ 11,330 $ -- $ $ 11,330
Cost of revenues .................... 8,486 -- 8,486
-------- ------- --- --------
Gross profit (loss).................. 2,844 -- 2,844
Operating expenses:
Research and development............. 13,955 4,024 17,979
Sales and marketing ................. 4,064 1,651 5,715
General and administrative .......... 1,405 -- 1,405
Amortization of stock compensation... 3,469 179 3,648
-------- ------- --- --------
Total operating expenses............. 22,893 5,854 28,747
-------- ------- --- --------
Loss from operations................. (20,049) (5,854) (25,903)
Interest income, net................. 559 291 850
-------- ------- --- --------
Net loss............................. $(19,490) $(5,563) $(25,053)
======== ======= === ========
Preferred stock accretion............ -- (11) 11(1) --
-------- ------- --- --------
Net loss attributable to common
stockholders........................ $(19,490) $(5,574) 11 $(25,053)
======== ======= === ========
Basic and diluted net loss per
share............................... $ (2.09) $ (0.24) $ (1.01)
Shares used in calculating:
Basic and diluted net loss per
share............................. 9,324 22,891 24,885
</TABLE>
--------
(1) Reflects the conversion of Sirocco preferred and common stock based on the
exchange rates per the merger agreement.
100
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JULY 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Sycamore Sirocco Adjustments Combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ --
Cost of revenues......................... -- -- --
------ ------ --- ------
Gross profit (loss)...................... -- -- --
Operating expenses:
Research and development ................ 497 217 714
Sales and marketing...................... 92 -- 92
General and administrative............... 199 48 247
Amortization of stock compensation....... 5 -- 5
------ ------ --- ------
Total operating expenses................. 793 265 1,058
------ ------ --- ------
Loss from operations..................... (793) (265) (1,058)
Interest income, net..................... 100 8 108
------ ------ --- ------
Net loss................................. $ (693) $ (257) $ (950)
====== ====== === ======
Basic and diluted net loss per share..... $(0.18) $(0.07) $(0.15)
Shares used in calculating:
Basic and diluted net loss per share... 3,753 3,768 6,314
</TABLE>
101
<PAGE>
NOTES TO PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. PERIODS PRESENTED
Sycamore's fiscal year ends on July 31. Sirocco's fiscal year ends on
December 31. The unaudited pro forma combined balance sheet is as of April 29,
2000. The unaudited pro forma combined statements of operations combine the
results of operations of Sycamore for the years ended July 31, 1998 and 1999
and for the nine months ended May 1, 1999 and April 29, 2000 with the results
of operations of Sirocco for the period from July 7, 1998 (date of inception)
to December 31, 1998, the year ended December 31, 1999 and for the three months
ended March 31, 1999 and 2000.
The nine months ended May 1, 1999 and April 29, 2000 include five months of
Sirocco's financial results, which are also recorded in the period from
inception (July 7, 1998) to December 31, 1998 and the year ended December 31,
1999. Sirocco's net loss for the five months ended December 1998 and 1999 was
$257,000 and $3,659,000, respectively.
2. PRO FORMA NET INCOME (LOSS) PER SHARE
The unaudited basic net income (loss) per common share is based upon the
weighted average number of Sycamore and Sirocco common shares outstanding for
each period using an exchange ratio of .6798 of Sycamore common stock for each
share of Sirocco common stock. The unaudited diluted net income (loss) per
common and dilutive potential common share is based upon the weighted average
number of Sycamore and Sirocco common and potential dilutive common shares
outstanding for each period using an exchange ratio of .6798 of Sycamore common
stock for each share of Sirocco common stock. Since the unaudited pro forma
condensed combined statements of operations result in a net loss for all
periods presented, no dilutive common shares have been included in the
calculation of pro forma net loss per share.
3. CONFORMING ADJUSTMENTS AND INTERCOMPANY TRANSACTIONS
There are no material intercompany transactions included in the unaudited
pro forma condensed combined financial statements. There were no material
adjustments required to conform the accounting policies of Sycamore and
Sirocco.
4. TRANSACTION COSTS
Sycamore and Sirocco estimate they will incur direct transaction costs of
approximately $4.0 million associated with the merger. The $4.0 million
consists of fees, legal and accounting services and other integration costs.
These charges have been reflected in the unaudited pro forma combined balance
sheet but have not been included in the unaudited pro forma combined statement
of operations.
5. STOCK COMPENSATION
Sycamore and Sirocco estimate that they will incur a non-cash charge of
approximately $36 million related to the acceleration of certain restricted
stock and stock options granted through June 5, 2000. The actual non-cash
charge for the acceleration of certain restricted stock and stock options will
be determined on the date the merger is consummated.
In addition, Sirocco has issued certain restricted stock and stock options
at a price deemed below fair market value from April 1, 2000 and June 5, 2000.
Sycamore and Sirocco estimate that they will incur an additional non cash
compensation charge of $43.9 million related to the issuance of these shares.
102
<PAGE>
6. INCOME TAXES
Sycamore currently estimates its annual effective income tax rate will be
approximately 27.0% for the remainder of its fiscal year ending July 31, 2000
primarily due to the reduction in the deferred tax asset valuation allowance
and the use of net operating loss carryforwards.
The pro forma adjustment reflects the reversal of Sirocco's valuation
allowance to recognize certain deferred tax assets as of April 29, 2000. Actual
income taxes and reversals of valuation allowances will be calculated at the
time the merger is consumated.
103
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF SIROCCO COMMON STOCK
AND SYCAMORE COMMON STOCK
This section of the proxy statement/prospectus describes differences between
the rights of holders of Sirocco stock and Sycamore common stock. While we
believe that the description covers the material differences between the two,
this summary may not contain all of the information that is important to you.
You should carefully read this entire proxy statement/prospectus and the other
documents we refer to for a more complete understanding of the differences
between being a stockholder of Sirocco and being a stockholder of Sycamore.
As a stockholder of Sirocco, your rights are governed by Sirocco's Seventh
Amended and Restated Certificate of Incorporation and Sirocco's By-laws, each
as currently in effect. After completion of the merger, you will become a
stockholder of Sycamore. As a Sycamore stockholder, your rights will be
governed by Sycamore's Amended and Restated Certificate of Incorporation and
Sycamore's Amended and Restated By-laws, each as currently in effect. We are
each incorporated under the laws of the State of Delaware and accordingly, your
rights as a stockholder will continue to be governed by the Delaware General
Corporation Law after completion of the merger.
Classes of Common Stock of Sirocco and Sycamore
We each have one class of common stock issued and outstanding. Holders of
Sycamore common stock and holders of Sirocco common stock are each entitled to
one vote for each share held.
Classified Board of Directors
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Sycamore's board of
directors is divided into three classes, as nearly equal in size as possible,
with one class being elected annually. Sycamore's directors are elected for a
term of three years and until their successors are elected and qualified.
Sirocco has only one class of directors, with each director being elected by
resolution of the board of directors or by stockholders at an annual meeting
and holding office until their successors are elected and qualified.
Number of Directors
Sycamore's board of directors currently consists of five directors. The size
of the board of directors may be increased by the resolution of a majority of
the directors then in office. The size of the board of directors may be
decreased, but not below three persons, by the resolution of a majority of the
directors then in office only to eliminate vacancies existing because of the
death, resignation, removal or expiration of the term of one or more directors.
Sirocco's board of directors currently consists of three members. The size
of the board of directors may be changed by the resolution of a majority of the
directors then in office or by the stockholders at an annual meeting.
Removal of Directors
Sycamore directors may be removed only for cause by the affirmative vote of
the holders of at least two-thirds of the shares of capital stock of Sycamore
entitled to vote. "Cause" is not defined in either Sycamore's certificate of
incorporation or by-laws.
104
<PAGE>
Any director or the entire board of directors of Sirocco may be removed with
or without cause by the holders of a majority of shares entitled to vote at an
election of directors. "Cause" is not defined in either Sirocco's certificate
of incorporation or by-laws.
Filling Vacancies on the Board of Directors
Any newly created directorships in either of our boards of directors,
resulting from any increase in the number of authorized directors or any
vacancies, may be filled only by a vote of a majority of the remaining members
of such board of directors, even though less than a quorum, or by a sole
remaining director.
Newly created or eliminated directorships in the Sycamore board of directors
are to be apportioned among the three classes of directors so as to make all
classes as nearly equal in number as practicable. Each remaining director will
continue to serve as a director of the class of which he or she is a member. To
the extent possible, any newly created Sycamore directorship will be added to
the class whose term of office is to expire at the latest date following the
creation of that directorship, unless otherwise provided by resolution of a
majority of the directors then in office. Any newly eliminated directorship
will be subtracted from the class whose term of office is to expire at the
earliest date following the elimination of the directorship, unless otherwise
provided by the resolution of a majority of the directors then in office.
Under Sirocco's by-laws, if at the time of filling any vacancy or any newly
created directorship, the directors then in office constitute less than a
majority of the board (as constituted immediately prior to such vacancy or
newly created directorship), the Delaware Court of Chancery may, upon
application of any stockholder or stockholders holding at least 10% of the
total number of the shares at the time outstanding having the right to vote for
such directors, summarily order an election to be held to fill any vacancy or
newly created directorship, or to replace the directors chosen by the directors
then in office.
Stockholder Action by Written Consent
Sycamore stockholders may take action at annual or special meetings of
stockholders, but may not take action by written consent.
Sirocco stockholders may take action at annual or special meetings of
stockholders or by the written consent of Sirocco stockholders having at least
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote were present and
voted.
Ability to Call Special Meeting
Special meetings of Sycamore stockholders may be called by Sycamore's
chairman of the board of directors, the president or a majority of the
directors then in office.
Special meetings of Sirocco's stockholders may be called by the president,
and are required to be called by the president or the secretary at the written
request of a majority of the board of directors or at the written request of
holders of a majority of the capital stock of Sirocco entitled to vote.
Advance Notice of Provisions for Stockholder Nominations and Proposals
Sycamore's by-laws allow stockholders to
. nominate candidates for election to Sycamore's board of directors at any
annual or special stockholder meeting at which the board of directors
has determined that directors will be elected and
. propose business to be brought before any annual stockholder meeting.
105
<PAGE>
However, nominations and proposals may only be made by a stockholder who has
given timely written notice to the Secretary of Sycamore before the annual
meeting. Sycamore stockholders may not propose business to be brought before a
special stockholder meeting.
Under Sycamore's by-laws, to be timely, notice of stockholders nominations
or proposals to be made at an annual stockholder meeting must be received by
the Secretary of Sycamore no less than 70 days nor more than 90 days before the
first anniversary of the preceding year's annual stockholder meeting. If the
date of the annual meeting is advanced by more than 20 days, or delayed by more
than 70 days, from the first anniversary of the preceding year's annual
stockholder meeting, then notice by the stockholder must be delivered or
received not earlier than 90 days before the annual meeting and not later than
the close of business on the later of 70 days prior to the annual meeting or 10
days following the day the notice of the annual meeting was mailed or publicly
disclosed, whichever occurs first. With respect to the 2000 annual meeting of
Sycamore stockholders, to be timely, a stockholder's notice must be received
not earlier than 90 days before the annual meeting and not later than the close
of business on the later of 60 days before the annual meeting and 10 days
following the day notice of the annual meeting was mailed or publicly
disclosed, whichever occurs first.
A stockholder's notice to Sycamore must set forth all of the following:
. the stockholder's name and address as they appear on Sycamore's books
and the class and number of Sycamore shares which are beneficially owned
by the stockholder;
. all information required to be disclosed in solicitations of proxies for
election of directors, or information otherwise required by applicable
law, relating to any person that the stockholder proposes to nominate
for election or reelection as a director, including that person's
written consent to being named in the proxy statement as a nominee and
to serving as a director if elected; and
. a brief description of the business the stockholder proposes to bring
before the meeting, the reasons for conducting that business at that
meeting and any material interest of the stockholder in the business
proposed.
Stockholder nominations and proposals will not be brought before any
Sycamore stockholder meeting unless the nomination or proposal was brought
before the meeting in accordance with Sycamore's stockholder advance notice
procedure.
The chairman of the Sycamore stockholder meeting will have the power to
determine whether the nomination or proposal was made by the stockholder in
accordance with the advance notice procedures set forth in Sycamore's by-laws.
If the chairman determines that the nomination or proposal is not in compliance
with Sycamore's advance notice procedures, the chairman may declare that the
defective proposal or nomination will be disregarded.
Sirocco's by-laws do not require advance notice for stockholder nominations
or proposals to be brought before a stockholder meeting.
Preferred Stock
Sycamore's certificate of incorporation provides that its board of directors
is authorized to provide for the issuance of shares of undesignated preferred
stock in one or more series, and to fix the voting powers, designations,
preferences and rights of the shares of each series and any qualifications,
limitations or restrictions of each series. Currently, Sycamore has no shares
of preferred stock outstanding.
Sirocco has four series of preferred stock issued and outstanding but is not
authorized to provide for the issuance of additional shares of preferred stock.
Shares of Sirocco preferred stock have the following rights:
Voting. Holders of Sirocco Series A preferred stock, Series B preferred
stock, Series C preferred stock and Series D preferred stock are not entitled
to vote, except on matters involving:
106
<PAGE>
. the issuance of any security senior to or on par with such series with
respect to dividends, redemption or liquidation;
. the amendment or elimination of any provision of the Sirocco certificate
of incorporation; or
. the amendment or elimination of any provision of the Sirocco by-laws
which materially adversely affects the rights, preferences or privileges
of such series of preferred stock.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of Sirocco, holders of the Sirocco preferred stock are entitled to
receive the following amounts, plus any declared but unpaid dividends, in
preference to any distribution to holders of Sirocco common stock:
. $9.99 per share of Sirocco Series A preferred stock;
. $14.99 per share of Sirocco Series B preferred stock;
. $2.19 per share of Sirocco Series C preferred stock; and
. $3.69 per share of Sirocco Series D preferred stock.
Unless holders of a majority of the shares of the Sirocco Series A preferred
stock, Series B preferred stock, Series C preferred stock or Series D preferred
stock request otherwise, under the Sirocco certificate of incorporation,
holders of each series of Sirocco preferred stock are entitled to treat any
merger, consolidation or sale of Sirocco in which Sirocco stockholders will not
own more than 50% of the outstanding voting power of the surviving corporation
as a liquidation. Holders of a majority of each such series have agreed not to
elect to not treat the proposed merger as a liquidation, dissolution or winding
up of Sirocco.
Redemption. Unless holders of a majority of the shares of the Sirocco Series
A preferred stock, Series B preferred stock or Series C preferred stock request
otherwise, each of the Series A preferred stock, Series B preferred stock and
Series C preferred stock is automatically redeemable upon a merger,
consolidation or sale of Sirocco in which Sirocco stockholders will not own
more than 50% of the outstanding voting power of the surviving corporation.
Holders of a majority of each such series have irrevocably requested Sirocco
not to redeem the Sirocco Series A preferred stock, Series B preferred stock
and Series C preferred stock in connection with the proposed merger. The
Sirocco Series D preferred stock is not redeemable.
Conversion Rights. Each share of Sirocco Series D preferred stock is
convertible, at the option of the holder, into 1.5 shares of Sirocco common
stock, subject to weighted average antidilution adjustment. This conversion
ratio will also be adjusted for any stock split, dividend, subdivision,
reclassification, exchange or similar transaction. There will be no further
adjustment to the Sirocco Series D preferred stock conversion ratio. We expect
that all of the issued and outstanding shares of Sirocco Series D Preferred
Stock will be converted into shares of Sirocco common stock before the
completion of the merger. The Sirocco Series A preferred stock, Series B
preferred stock and Series C preferred stock are not convertible.
Dividend Rights. Beginning on June 30, 2003, each issued and outstanding
share of Sirocco's Series A preferred stock, Series B preferred stock and
Series C preferred stock is entitled to receive cumulative preferential
dividends, payable in cash or Sirocco common stock at the option of the holder,
at the annual rate of $1.20 per share of Series A preferred stock, $1.80 per
share of Series B preferred stock and $0.264 per share of Series C preferred
stock, payable quarterly, in arrears, on each of March 31, June 30, September
30 and December 31.
Each issued and outstanding share of Sirocco's Series D preferred stock is
entitled to receive annual preferential dividends of $0.30, payable when, if
and as declared by the board. These dividends are not cumulative.
107
<PAGE>
Amendment of Certificate of Incorporation
Under Delaware law, a certificate of incorporation of a Delaware corporation
may be amended by approval of the board of directors of the corporation and the
affirmative vote of the holders of a majority of the outstanding shares
entitled to vote for the amendment, unless a higher vote is required by the
corporation's certificate of incorporation.
Sycamore's certificate of incorporation provides that the affirmative vote
of the holders of the majority of the stock of Sycamore entitled to vote will
be required to reduce or eliminate the number of authorized shares of Sycamore
common stock. In addition, Sycamore's certificate of incorporation provides
that the affirmative vote of the holders of at least 66 2/3% of the shares of
stock of Sycamore entitled to vote is required to amend or repeal, or to adopt
any provision inconsistent with, provisions of Sycamore's certification of
incorporation which deal with the following:
. matters relating to the board of directors, including the number of
members, board classification, nomination and election of members,
removal, terms of office, quorum, action at meetings and vacancies;
. the manner in which stockholder action may be effected;
. procedures for calling regular and special meetings of the board of
directors and stockholders; and
. the business transacted at the annual and special meetings of
stockholders.
Sirocco's certificate of incorporation contains no provisions requiring a
vote greater than that required by Delaware law to amend its certificate of
incorporation.
Amendment of By-laws
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal by-laws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal by-laws, even though the board
may also be delegated such power.
Both Sycamore's and Sirocco's boards of directors are expressly authorized
to adopt, amend and repeal their by-laws in accordance with Delaware law.
Sycamore's by-laws provide that the affirmative vote of holders of at least
66 2/3% of the shares of stock of Sycamore entitled to vote is required to
amend or repeal, or to adopt any provision inconsistent with, by-laws which
deal with the following:
. directors;
. procedures for calling special meetings of the stockholders;
. advance notice procedures for stockholder nominations and proposals;
. the manner in which stockholder action may be effected; and
. amendment of the by-laws.
State Anti-Takeover Statutes
Sycamore is subject to Section 203 of the Delaware General Corporation Law
which under certain circumstances, may make it more difficult for a person who
would be an "Interested Stockholder", as defined in Section 203, in Sycamore,
to effect various business combinations with Sycamore for a three-year period.
Under Delaware law, a corporation's certificate of incorporation or by-laws may
exclude a corporation from the
108
<PAGE>
restrictions imposed by Section 203. Sycamore's certificate of incorporation
and by-laws do not exclude it from the restrictions imposed under Section 203.
As prescribed by Delaware law, Sirocco is not subject to Section 203.
Limitation of Liability of Directors
The Delaware General Corporation Law permits a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation or its
stockholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. Our respective certificates of incorporation include
such a provision to the maximum extent permitted by law.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate the
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his duty of care.
Indemnification of Directors and Officers
The Delaware General Corporation Law permits a corporation to indemnify
officers and directors for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
Each of Sycamore and Sirocco's certificates of incorporation and by-laws
provide that any person who was or is a party or is threatened to be a party to
or is involved in any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, because that person is or was a director or
officer, or is or was serving at the request of either Sycamore or Sirocco, as
applicable, as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, will be indemnified
against expenses, including attorney's fees, judgments, fines and amounts paid
in settlement and held harmless by Sycamore or Sirocco, as applicable, to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
each of us is authorized to purchase and maintain insurance on behalf of our
directors and officers.
Additionally, Sycamore may pay expenses incurred by its directors or
officers in defending a civil or criminal action, suit or proceeding because
that person is a director or officer, in advance of the final disposition of
that action, suit or proceeding. However, payment will be made only if Sycamore
receives an understanding by or on behalf of that director or officer to repay
all amounts advanced if it is ultimately determined that he or she is not
entitled to be indemnified by Sycamore, as authorized by its certificate of
incorporation.
Sycamore's indemnification rights conferred are not exclusive of any other
right to which persons seeking indemnification or advancement of expenses may
be entitled under any statute, Sycamore's certificate of incorporation or by-
laws, any agreement, or vote of stockholders or disinterested directors or
otherwise. In addition, Sycamore may, to the extent authorized from time to
time by its board of directors, grant indemnification rights to other
employees, or agents or other persons serving Sycamore, and such rights may be
equivalent to, or greater or less than, those granted to directors and
officers.
109
<PAGE>
LEGAL OPINIONS
The legality of the shares of Sycamore common stock offered by this proxy
statement/prospectus will be passed upon for Sycamore by Skadden, Arps, Slate,
Meagher & Flom LLP, Boston, Massachusetts. Certain members of Skadden, Arps,
Slate, Meagher & Flom LLP involved in this transaction beneficially own, in the
aggregate, approximately 500 shares of Sycamore common stock.
Certain United States federal income tax consequences of the merger will be
passed upon for Sirocco by its special counsel, Day, Berry & Howard LLP, and
certain United States federal income tax consequences of the merger will be
passed upon for Sycamore by its special counsel, Skadden, Arps, Slate, Meagher
& Flom LLP. Certain partners of Day, Berry & Howard LLP beneficially own, in
the aggregate, 15,000 shares of Sirocco Series D preferred stock.
EXPERTS
The financial statements as of July 31, 1998 and 1999 and for the period
from inception (February 17, 1998) through July 31, 1998 and for the year ended
July 31, 1999 of Sycamore included in this proxy statement/prospectus have been
so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Sirocco Systems, Inc. (a development stage
company) as of December 31, 1998 and 1999 and for the period from inception
(July 7, 1998) through December 31, 1998, for the year ended December 31, 1999
and for the period from inception (July 7, 1998) through December 31, 1999
included in this proxy statement/prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
CAUTIONARY FACTORS CONCERNING FORWARD-LOOKING STATEMENTS
Some of the information set forth or incorporated by reference in this proxy
statement/prospectus constitutes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include the information concerning possible or assumed future
benefits of the merger to Sycamore and the stockholders of Sirocco after the
proposed merger. When we use such words as "believes," "expects,"
"anticipates," or similar expressions, we are making forward-looking
statements. All such forward-looking statements are necessarily only estimates
of future results, and there can be no assurance that actual results will not
materially differ from expectations. Factors which could cause actual results
to differ from expectations include, among others, one-time events and other
important factors disclosed previously and from time to time in Sycamore's
other filings with the Commission, as well as the risks and uncertainties
described under "Risk Factors."
110
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Sycamore is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith file reports,
proxy and information statements and other information with the Commission.
Sycamore has filed with the Commission a registration statement on Form S-4
with respect to the common stock being issued in the merger. This proxy
statement/prospectus, which constitutes part of that registration statement,
does not contain all of the information set forth in the registration statement
and the exhibits and schedules thereto. For further information with respect to
Sycamore or the shares of common stock being issued in the merger, reference is
made to the registration statement, including the exhibits and schedules
thereto. Statements contained in this proxy statement/prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and, where such contract is an exhibit to the registration
statement, each such statement is qualified in all respects by the provisions
of such exhibit, to which such reference is hereby made. Any document that
Sycamore files may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048 and Chicago Regional Office, Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained by mail at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C. 20549 or by calling the Commission at 1-800-732-0330. The Commission
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov. Sycamore common
stock is listed on the Nasdaq National Market. Reports and other information
concerning Sycamore may also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
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<PAGE>
SYCAMORE NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets at July 31, 1998, July 31, 1999 and April 29,
2000 (unaudited).......................................................... F-3
Consolidated Statements of Operations for the period from inception
(February 17, 1998) through July 31, 1998, the year ended July 31, 1999
and the nine month periods ended May 1, 1999 and April 29, 2000
(unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Equity/(Deficit) for the period
from inception (February 17, 1998) through July 31, 1998, the year ended
July 31, 1999 and the nine month period ended April 29, 2000 (unaudited).. F-5
Consolidated Statements of Cash Flows for the period from inception
(February 17, 1998) through July 31, 1998, the year ended July 31, 1999
and the nine month period ended May 1, 1999 and April 29, 2000
(unaudited)............................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Sycamore Networks, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Sycamore Networks, Inc. at July
31, 1998 and 1999, and the results of its operations and its cash flow for the
period from inception (February 17, 1998) to July 31, 1998 and for the year
ended July 31, 1999 in conformity with generally accepted accounting
principals. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers llp
Boston, Massachusetts
August 23, 1999 (except as
to the fourth paragraph of
Note 6 for which the date is
February 11, 2000)
F-2
<PAGE>
SYCAMORE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
July 31, July 31, April 29,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $1,197 $ 21,969 $ 677,063
Marketable securities......................... 3,082 7,020 508,597
Accounts receivable........................... -- 11,410 30,473
Inventories................................... -- 6,608 26,641
Prepaids and other current assets............. 200 5,153 15,989
------ -------- ----------
Total current assets........................... 4,479 52,160 1,258,763
Property and equipment, net.................... 500 5,288 21,453
Marketable securities.......................... -- -- 328,418
Other assets................................... 102 464 2,023
------ -------- ----------
Total assets................................... $5,081 $ 57,912 $1,610,657
====== ======== ==========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable.............. $ -- $ 1,097 $ --
Accounts payable.............................. 42 5,750 20,490
Accrued compensation.......................... 30 1,334 1,816
Accrued expenses.............................. 66 1,751 5,319
Deferred revenue.............................. -- 472 32,026
Income tax payable............................ -- -- 5,026
Other current liabilities..................... -- 1,306 617
------ -------- ----------
Total current liabilities...................... 138 11,710 65,294
Notes payable.................................. -- 4,054 --
Commitments and contingencies (Note 5)
Series A Redeemable Convertible Preferred Stock
$.01 par value; 6,380,000 and 8,975,000
authorized at July 31, 1998 and July 31, 1999,
respectively; 6,186,812 and 8,961,812 shares
issued and outstanding at July 31, 1998 and
July 31, 1999, respectively; none authorized,
issued and outstanding at April 29, 2000...... 5,621 8,146 --
Series B Redeemable Convertible Preferred Stock
$.01 par value; 3,625,000 shares authorized at
July 31, 1999; 3,607,062 shares issued and
outstanding at July 31, 1999; none authorized,
issued and outstanding at April 29, 2000...... -- 12,625 --
Series C Redeemable Convertible Preferred Stock
$.01 par value; 2,500,000 shares authorized,
issued and outstanding at July 31, 1999; none
authorized, issued and outstanding at April
29, 2000...................................... -- 20,000 --
Series D Redeemable Convertible Preferred Stock
$.01 par value; 692,201 authorized, issued and
outstanding at July 31, 1999; none authorized,
issued and outstanding at April 29, 2000...... -- 15,000 --
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued and
outstanding at April 29, 2000................ -- -- --
Common stock, $.001 par value; 91,000,000 and
1,500,000,000 shares authorized at July 31,
1998 and 1999 and April 29, 2000,
respectively; 21,105,000, 69,819,336 and
244,793,474 shares issued and outstanding at
July 31, 1998 and 1999 and April 29, 2000,
respectively.................................. 21 69 245
Additional paid-in capital.................... 173 30,780 1,607,440
Accumulated deficit........................... (693) (20,183) (18,114)
Notes receivable.............................. -- (360) (280)
Deferred compensation......................... (179) (23,929) (47,508)
Accumulated other comprehensive loss.......... -- -- 3,580
------ -------- ----------
Total stockholders' equity (deficit)........... (678) (13,623) 1,545,363
------ -------- ----------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)..................................... $5,081 $ 57,912 $1,610,657
====== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SYCAMORE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
Inception Year Nine Months Ended
(February 17, Ended -----------------------
1998) through July 31, April 29,
July 31, 1998 1999 May 1, 1999 2000
------------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues...................... $ -- $ 11,330 $ -- $107,742
Cost of revenues (exclusive of
the non-cash stock
compensation expense of $0,
$101, $45 and $918, at
July 31, 1998, July 31, 1999,
May 1, 1999 and April 29,
2000)........................ -- 8,486 1,173 57,103
------ -------- -------- --------
Gross profit (loss)........... -- 2,844 (1,173) 50,639
Operating expenses:
Research and development
(exclusive of the non-cash
stock compensation expense of
$5, $736, $292 and $3,168, at
July 31, 1998, July 31, 1999,
May 1, 1999 and April 29,
2000)........................ 497 13,955 6,572 32,911
Sales and marketing (exclusive
of the non-cash stock
compensation expense of $0,
$346, $126 and $3,448, at
July 31, 1998, July 31, 1999,
May 1, 1999 and April 29,
2000)........................ 92 4,064 1,598 16,457
General and administrative
(exclusive of the non-cash
stock compensation expense of
$0, $2,286, $339 and $1,960,
at July 31, 1998, July 31,
1999, May 1, 1999 and April
29, 2000).................... 199 1,405 752 3,819
Amortization of stock
compensation................. 5 3,469 802 9,494
------ -------- -------- --------
Total operating expenses...... 793 22,893 9,724 62,681
------ -------- -------- --------
Loss from operations.......... (793) (20,049) (10,897) (12,042)
Interest income, net.......... 100 559 488 17,595
------ -------- -------- --------
Income (loss) before income
taxes........................ (693) (19,490) (10,409) 5,553
Provision for income taxes.... -- -- -- 3,484
------ -------- -------- --------
Net income (loss)............. $ (693) $(19,490) $(10,409) $ 2,069
====== ======== ======== ========
Basic net income (loss) per
share........................ $(0.18) $ (2.09) $ (1.13) $ 0.02
Diluted net income (loss) per
share........................ $(0.18) $ (2.09) $ (1.13) $ 0.01
Shares used in calculating:
Basic net income (loss) per
share...................... 3,753 9,324 9,248 135,944
Diluted net income (loss)
per share.................. 3,753 9,324 9,248 195,915
Pro forma basic net income
(loss) per share (1)......... $(0.01) $ (0.17) $ (0.10) $ 0.01
Pro forma diluted net income
(loss) per share (1)......... $(0.01) $ (0.17) $ (0.10) $ 0.01
Shares used in calculating:
Pro forma basic net income
(loss) per share........... 56,268 114,435 104,189 179,070
Pro forma diluted net income
(loss) per share........... 56,268 114,435 104,189 239,042
</TABLE>
--------
(1) Pro forma basic and diluted net income (loss) per share assumes the
conversion of all redeemable convertible preferred stock into common stock
as if such conversion occurred at the date of original issuance.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SYCAMORE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Other Stockholders'
--------------- Paid-in Accumulated Notes Deferred Comprehensive Equity
Shares Amount Capital Deficit Receivable Compensation Loss (Deficit)
------- ------ ----------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 21,105 $ 21 $ (11) $ -- $ -- $ -- $ -- $ 10
Deferred compensation
expense associated with
equity awards.......... -- -- 184 -- -- (184) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 5 -- 5
Net loss................ -- -- -- (693) -- -- -- (693)
------- ---- ----------- -------- ----- -------- ------- -----------
Balance, July 31, 1998.. 21,105 21 173 (693) -- (179) -- (678)
------- ---- ----------- -------- ----- -------- ------- -----------
Exercise of stock
options................ 18,222 18 2,923 -- -- -- -- 2,941
Issuance of common
stock.................. 30,492 30 465 -- -- -- -- 495
Deferred compensation
expense associated with
equity awards.......... -- -- 25,159 -- -- (25,159) -- --
Issuance of equity
awards in exchange
Services............... -- -- 2,060 -- -- -- -- 2,060
Amortization of deferred
compensation........... -- -- -- -- -- 1,409 -- 1,409
Issuance of common stock
in exchange for notes
receivable............. -- -- -- -- (360) -- -- (360)
Net loss................ -- -- -- (19,490) -- -- -- (19,490)
------- ---- ----------- -------- ----- -------- ------- -----------
Balance, July 31, 1999.. 69,819 69 30,780 (20,183) (360) (23,929) -- (13,623)
------- ---- ----------- -------- ----- -------- ------- -----------
Exercise of stock
options................ 2,451 3 5,166 -- -- -- -- 5,169
Issuance of common
stock, net............. 30,853 31 1,482,820 -- -- -- -- 1,482,851
Conversion of preferred
stock into common
stock.................. 141,850 142 55,629 -- -- -- -- 55,771
Deferred compensation
expense associated with
equity awards.......... -- -- 31,701 -- -- (31,701) -- --
Issuance of equity
awards in exchange for
services............... -- -- 1,372 -- -- -- -- 1,372
Amortization of deferred
compensation........... -- -- -- -- -- 8,122 -- 8,122
Issuance of common stock
in exchange for notes
receivable............. -- -- -- -- (100) -- -- (100)
Payments of notes
receivable............. -- -- -- -- 180 -- -- 180
Purchase and retirement
of treasury shares..... (180) -- (28) -- -- -- -- (28)
Unrealized gain on
marketable securities.. -- -- -- -- -- -- 3,580 3,580
Net income (loss)....... 2,069 -- -- -- 2,069
------- ---- ----------- -------- ----- -------- ------- -----------
Balance, April 29, 2000
(unaudited)............ 244,793 $245 $ 1,607,440 $(18,114) $(280) $(47,508) $ 3,580 $ 1,545,363
======= ==== =========== ======== ===== ======== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SYCAMORE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
Inception Nine Months Ended
(February 17, -----------------------
1998) through Year Ended April 29,
July 31, 1998 July 31, 1999 May 1, 1999 2000
------------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ (693) $(19,490) $(10,409) $ 2,069
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 27 948 404 3,741
Amortization of stock
compensation........... 5 3,469 802 9,494
Deferred income taxes... -- -- -- (2,000)
Changes in operating
assets and liabilities:
Accounts receivable..... -- (11,410) -- (19,063)
Inventories............. -- (6,608) (6,220) (20,033)
Prepaids and other
current assets......... (75) (4,953) (164) (8,836)
Deferred revenue........ -- -- -- 31,554
Accounts payable........ 42 5,708 5,479 14,739
Accrued expenses and
other current
liabilities............ 96 4,767 227 8,387
------- -------- -------- -----------
Net cash provided by
(used in) operating
activities............. (598) (27,569) (9,881) 20,052
------- -------- -------- -----------
Cash flows from investing
activities:
Purchases of property
and equipment.......... (528) (5,736) (4,295) (19,906)
Purchases of marketable
securities............. (3,082) (10,115) (6,030) (1,027,718)
Maturities of marketable
securities............. -- 6,177 6,177 201,303
Increase in other
assets................. (102) (362) (105) (1,559)
------- -------- -------- -----------
Net cash used in
investing activities... (3,712) (10,036) (4,253) (847,880)
------- -------- -------- -----------
Cash flows from financing
activities:
Proceeds from issuance
of redeemable
convertible preferred
stock, net............. 5,496 50,150 35,150 --
Proceeds from issuance
of common stock, net... 11 3,076 193 1,487,893
Payments received for
notes receivable....... -- -- -- 180
Proceeds from notes
payable................ -- 5,184 1,000 --
Payments on notes
payable................ -- (33) -- (5,151)
------- -------- -------- -----------
Net cash provided by
financing activities..... 5,507 58,377 36,343 1,482,922
------- -------- -------- -----------
Net increase in cash and
cash equivalents......... 1,197 20,772 22,209 655,094
Cash and cash equivalents,
beginning of period...... -- 1,197 1,197 21,969
------- -------- -------- -----------
Cash and cash equivalents,
end of period............ $ 1,197 $ 21,969 $ 23,406 $ 677,063
======= ======== ======== ===========
Supplemental cash flow
information:
Cash paid for interest.. -- $ 170 $ 48 $ 139
Cash paid for income
taxes.................. -- -- -- 458
Supplementary non-cash
activity:
Preferred Stock note
receivable............. $ 125 -- -- --
Issuance of common stock
in exchange for notes
receivable............. -- $ 360 -- $ 100
Conversion of preferred
stock into common
stock.................. -- -- -- $ 55,771
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
1. Nature of the Business:
Sycamore Networks, Inc. (the "Company") was incorporated in Delaware on
February 17, 1998. The Company develops and markets networking products that
enable service providers to quickly and cost effectively provide bandwidth and
create new high-speed data services. To date, the Company has principally
marketed its products in the United States. Through May 1, 1999, the Company
was considered to be in the development stage and was principally engaged in
research and development, raising capital and building its management team. The
Company shipped its first product in May 1999.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, dependence on key personnel, and the
ability to obtain additional capital as needed to meet its product plans. The
Company has a limited operating history and has never achieved profitability.
The Company's ultimate success is dependent upon its ability to successfully
develop and market its products.
2. Significant Accounting Policies:
The accompanying financial statements of the Company reflect the application
of certain significant accounting policies as described below:
Basis of Presentation
The consolidated financial statements include the accounts of Sycamore
Networks, Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
Interim Financial Information
The financial information at April 29, 2000 and for the nine months ended
May 1, 1999 and April 29, 2000 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, the Company considers
necessary for a fair statement of its financial position, operating results,
and cash flows for the interim date and periods presented. Results of the nine
month period ended April 29, 2000 are not necessarily indicative of the results
to be expected for the entire fiscal year or future periods.
Cash Equivalents and Marketable Securities
Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less at the date of acquisition. Cash
equivalents are carried at cost, which approximates fair market value. The
Company's marketable securities are classified as available-for-sale and are
recorded at fair value with any unrealized gain or loss recorded as an element
of stockholders' equity (deficit). As of July 31, 1999 and 1998, the fair value
of marketable securities, which were comprised of commercial paper and
certificate of deposits, approximated amortized cost. As of April 29, 2000,
marketable securities consisted of:
<TABLE>
<CAPTION>
Fair
Amortized Market Unrealized
Cost Value Gain/(Loss)
--------- -------- -----------
<S> <C> <C> <C>
Certificates of Deposits...................... $109,388 $109,045 $ (343)
Commercial Paper.............................. 475,814 474,221 (1,593)
Common stock.................................. 2,500 8,402 5,902
Government securities......................... 245,733 245,347 (386)
-------- -------- -------
Total......................................... $833,435 $837,015 $ 3,580
======== ======== =======
</TABLE>
F-7
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
The fair value of marketable securities was determined based on quoted
market prices at the reporting date for those instruments.
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).
Revenue Recognition
Revenue from product sales is recognized upon shipment provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the fee is fixed and determinable
and collectibility is deemed probable. If uncertainties regarding customer
acceptance exist, revenue is recognized when such uncertainties are resolved.
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the period of the related agreements. The Company
records a warranty liability for parts and labor on its products. Warranty
periods are generally three years from installation date. Estimated warranty
costs are recorded at the time of revenue recognition.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:
<TABLE>
<S> <C>
Computer and
telecommunications
equipment.................. 2 to 3 years
Computer software........... 2 to 3 years
Furniture and office
equipment.................. 5 years
Leasehold improvements...... Shorter of lease term or useful life of asset
</TABLE>
The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost and related accumulated
depreciation of the assets are removed from the accounts and any resulting gain
or loss is reflected in the determination of net income or loss.
Research and Development and Software Development Costs
The Company's products are highly technical in nature and require a large
and continuing research and development effort. All research and development
costs are expensed as incurred. Software development costs incurred prior to
the establishment of technological feasibility are charged to expense.
Technological feasibility is demonstrated by the completion of a working model.
Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized until the product is available for
general release to customers. Amortization is based on the greater of (i) the
ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues for that product or (ii) the straight-
line method over remaining estimated life of the product. To date, the period
between achieving technological feasibility and the general availability of the
related products has been short and software development costs qualifying for
capitalization have not been material. Accordingly, the Company has not
capitalized any software development costs.
Income Taxes
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are recorded based on temporary
differences between the financial statement amounts and the tax
F-8
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
bases of assets and liabilities measured using enacted tax rates in effect for
the year in which the differences are expected to reverse. The Company
periodically evaluates the realizability of its net deferred tax assets and
records a valuation allowance if, based on the weight of available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Concentrations of Credit Risk and Significant Customer Information
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
marketable securities and accounts receivable. The Company invests its excess
cash primarily in deposits with commercial banks and high-quality corporate
securities. For the year ended July 31, 1999, one customer accounted for all of
the Company's revenue. The Company does not require collateral for sales to
customers.
Certain components and parts used in the Company's products are procured
from a single source. The Company obtains parts from one vendor only, even
where multiple sources are available, to maintain quality control and enhance
working relationships with suppliers. These purchases are made under existing
contracts or purchase orders. The failure of a supplier, including
subcontractor, to deliver on schedule could delay or interrupt the Company's
delivery of products and thereby adversely affect the Company's revenues and
profits.
Other Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net income (loss) for the period from inception
(February 17, 1998) through July 31, 1998 and for the year ended July 31, 1999
does not differ from the reported net income (loss). For the nine months ended
April 29, 2000, comprehensive net income, net of tax was $4,682,000.
<TABLE>
<CAPTION>
Period from
Inception Nine months ended
(February 17, -------------------
1998) through Year Ended May 1, April 29,
July 31, 1998 July 31, 1999 1999 2000
------------- ------------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss).............. $(693) $(19,490) $(10,409) $2,069
Other comprehensive income, net
of tax........................
Unrealized holding gain
(loss) on investments....... -- -- -- 2,613
----- -------- -------- ------
Comprehensive income (loss).... $(693) $(19,490) $(10,409) $4,682
===== ======== ======== ======
</TABLE>
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share
F-9
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
is computed by dividing the net income (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 and unvested restricted common shares. There were no
dilutive common equivalent shares for the period.
Pro forma net income (loss) per share for the year ended July 31, 1999 and
the nine months ended May 1, 1999 and April 29, 2000 is computed using the
weighted average number of common shares outstanding, including the pro forma
effects of the automatic conversion of the Company's Series A, B, C and D
redeemable convertible preferred stock into shares of the Company's common
stock effective upon the closing of the Company's initial public offering as if
such conversion occurred at the date of original issuance. There were no
dilutive common equivalent shares for any of the periods presented.
The Company effected a three-for-one stock split paid as a 200% stock
dividend on February 11, 2000 to stockholders of record as of February 4, 2000.
This stock split has been reflected in the consolidated financial statements
for all periods presented.
F-10
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Period from
inception Nine Months Ended
(February 17, ------------------
1998) through Year Ended May 1, April
July 31, 1998 July 31, 1999 1999 29, 2000
------------- ------------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).............. $ (693) $(19,490) $(10,409) $ 2,069
======== ======== ======== ========
Denominator
Historical:
Weighted-average shares of
common stock outstanding.... 19,521 45,585 42,372 187,336
Weighted-average subject to
repurchase.................. (15,768) (36,261) (33,124) (51,392)
-------- -------- -------- --------
Shares used in calculating
basic net income (loss) per
share........................ 3,753 9,324 9,248 135,944
Weighted common stock
equivalents................. -- -- -- 59,971
-------- -------- -------- --------
Shares used in calculating
dilutive net income (loss)
per share.................... 3,753 9,324 9,248 195,915
======== ======== ======== ========
Net income (loss) per share:
Basic........................ $ (0.18) $ (2.09) $ (1.13) $ 0.02
======== ======== ======== ========
Diluted...................... $ (0.18) $ (2.09) $ (1.13) $ 0.01
======== ======== ======== ========
Denominator
Pro Forma:
Weighted-average shares of
common stock outstanding.... 3,753 9,324 42,372 230,462
Weighted-average number of
shares assumed upon
conversion of redeemable
convertible preferred
stock....................... 52,515 105,111 94,941 --
Weighted-average subject to
repurchase.................. -- -- (33,124) (51,392)
-------- -------- -------- --------
Shares used in calculating pro
forma basic net income (loss)
per share.................... 56,268 114,435 104,189 179,070
Weighted common stock
equivalents................. -- -- -- 59,972
Shares used in calculating pro
forma diluted net income
(loss) per share............. 56,268 114,435 104,189 239,042
======== ======== ======== ========
Net income (loss) per share:
Pro forma basic.............. $ (0.01) $ (0.17) $ (0.10) $ 0.01
======== ======== ======== ========
Pro forma diluted............ $ (0.01) $ (0.17) $ (0.10) $ 0.01
======== ======== ======== ========
</TABLE>
Options to purchase 5,058,900, 1,578,728 and 2,467,000 shares of common
stock at average exercise prices of $.45, $0.03 and $70.71 have not been
included in the computation of diluted net income (loss) per share, for the
year ended July 31, 1999 and for the nine months ended May 1, 1999 and April
29, 2000, respectively, as their effect would have been anti-dilutive.
F-11
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123").
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company has determined that it conducts its operations in one
business segment.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. The Company will adopt SFAS No. 133
as required by SFAS No. 137, "Deferral of the effective date of the FASB
Statement No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is not
currently expected to have an impact on our financial condition or results of
operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The application of the guidance in SAB 101 will be
required in the Company's first quarter of fiscal year 2001. The effects of
applying this guidance, if any, will be reported as a cumulative effect
adjustment resulting in a change in accounting principle. The Company's
evaluation of SAB 101 is not yet required.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events if they had occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on its financial position
or results of operations.
3. Inventory:
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
July April
31, 29,
1999 2000
------ -------
<S> <C> <C>
Raw materials................................................. $2,164 $ 6,058
Work in process............................................... 3,026 7,091
Finished goods................................................ 1,418 13,492
------ -------
$6,608 $26,641
====== =======
</TABLE>
F-12
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
4. Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
July April
July 31, 31, 29,
1998 1999 2000
-------- ------ -------
<S> <C> <C> <C>
Computer software and equipment................... $500 $5,433 $23,275
Furniture and office equipment.................... 27 221 934
Leasehold improvements............................ -- 609 1,184
---- ------ -------
527 6,263 25,393
Less accumulated depreciation and amortization.... (27) (975) (3,940)
---- ------ -------
$500 $5,288 $21,453
==== ====== =======
</TABLE>
Depreciation and amortization expense was $27,000, $948,000 and $3,741,000
for the period from inception (February 17, 1998) through July 31, 1998, for
the year ended July 31, 1999 and for the nine months ended April 29, 2000,
respectively.
5. Commitments and Contingencies:
Capital and Operating Leases
The Company's office facility is leased under a noncancellable lease that
expires in 2002. The lease is collateralized by an irrevocable standby letter
of credit in the amount of $92,000, which is collateralized by a U.S. Treasury
Bill. Rent expense under operating leases was $27,500 and $266,000 for the
period from inception (February 17, 1998) through July 31, 1998 and the year
ended July 31, 1999, respectively. At July 31, 1999 future minimum lease
payments under all non-cancellable operating leases are as follows, in
thousands:
<TABLE>
<S> <C>
2000................................................................... $272
2001................................................................... 319
2002................................................................... 159
----
Total future minimum lease payments.................................... $750
====
</TABLE>
Letter of Credit
Included in prepaid expenses and other current assets at July 31, 1999 is a
$4 million U.S. Government security which collateralizes a stand-by letter of
credit used for inventory purchases made by a third party manufacturer on
behalf of the Company. The letter of credit is irrevocable and expired in
October 1999.
Notes Payable
In August 1998, the Company entered into an equipment loan agreement with a
bank. Under this loan agreement, the Company may borrow up to $1 million, for
the purpose of acquisition of equipment, for a period of ten months. On July 1,
1999 the Company commenced payments to be repaid in thirty equal monthly
installments. At July 31, 1999, $967,000 was outstanding under this loan
agreement.
In April 1999, the Company entered into an additional equipment loan
agreement with the same bank. Under this loan agreement, the Company may borrow
up to $5 million, for the purpose of acquisition of
F-13
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
equipment, for a period of six months. At January 31, 2000, the outstanding
balance will be converted into a term loan, to be repaid in thirty-six equal
monthly installments commencing February 1, 2000. At July 31, 1999, $4,184,000
was outstanding under this loan agreement.
The interest on the outstanding loan balances is calculated daily at the
bank's prime rate, plus .5% (8.5% at July 31, 1999). The loans are
collateralized by all the Company's assets, including accounts receivable,
inventory and fixed assets. The Company is required to maintain certain
financial covenants and tangible net worth calculations. Principal payments
under notes payable for the years ended July 31, were as follows: $1,097,000 in
2000; $1,795,000 in 2001; $1,562,000 in 2002 and $697,000 in 2003. In October
1999, the Company paid all outstanding debt with the proceeds of the initial
public offering.
6. Stockholders' Equity:
Common Stock
On October 21, 1999, Sycamore completed its initial public offering ("IPO")
in which it sold 22,425,000 shares of common stock at a price to the public of
12.67 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 141,849,675 shares of common stock.
On March 17, 2000, the Company completed a follow-on public offering of
10,200,000 shares of common stock at $150.25 per share. Of the 10,200,000
shares offered, 8,428,401 shares were sold by the Company and 1,771,599 shares
were sold by existing stockholders of the Company. The net proceeds of this
offering, to the Company, after deducting underwriting discounts and other
expenses, were approximately $1.2 billion.
In August 1999, the shareholders approved amendments to the Company's
Articles of Incorporation to increase the authorized shares of the Company's
common stock from 91,000,000 to 250,000,000 shares. This amendment was
effective upon the closing of the Company's IPO. In January 2000, the
stockholders approved amendments to the Company's Articles of Organization to
increase the authorized number of shares of the Company's common stock from
250,000,000 to 1,500,000,000.
The Company effected the following stock splits in the form of stock
dividends: 3-for-1 in August 1999 and 3-for-1 in February 2000. All common
shares, common options and per share amounts in the accompanying financial
statements have been adjusted to reflect the stock splits.
The holders of the common stock are entitled to one vote for each share
held. The Board of Directors (the "Board") may declare dividends from lawfully
available funds, subject to any preferential dividend rights of any outstanding
preferred stock and restrictions under the Company's loan agreements. Holders
of the common stock are entitled to receive all assets available for
distribution on the dissolution or liquidation of the Company, subject to any
preferential rights of any outstanding preferred stock.
1998 and 1999 Stock Incentive Plans
In August 1998, the 1998 Stock Incentive Plan (the "Plan") was adopted by
the Board and received stockholder approval on October 19, 1998. A total of
79,695,000 shares of common stock have been reserved for issuance under the
Plan. The Plan provides for the grant of incentive stock options, nonstatutory
stock options, restricted stock awards and other stock-based awards to
officers, employees, directors, consultants and advisors of the Company. No
participant may receive any award for more than 1,500,000 shares in any
calendar year. Options may be granted at an exercise price less than, equal to
or greater than the fair market value on the date of grant. The Board
determines the term of each option, the option exercise price, and the vesting
terms. Stock options generally expire ten years from the date of grant and vest
over five years.
F-14
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
All employees who have been granted options by the Company under the 1998
Stock Incentive Plan are eligible to elect immediate exercise of all such
options. However, shares obtained by employees who elect immediate exercise
prior to the original option vesting schedule are subject to the Company's
right of repurchase, at the option exercise price, in the event of termination.
The Company's repurchase rights lapse at the same rate as the shares would have
become exercisable under the original vesting schedule. As of July 31, 1999,
17,936,100 shares related to immediate option exercises are subject to
repurchase by the Company at per share prices ranging from $.01 to $1.00 and
55,916,100 were reserved for future issuance. As of April 29, 2000, 16,812,021
shares related to immediate option exercises are subject to repurchase by the
Company at per share prices ranging from $.01 to $12.67.
In August 1999, the Board approved the 1999 Stock Incentive Plan. The terms
and conditions of the 1999 Stock Incentive Plan are similar to the 1998 Stock
Incentive Plan. The 1999 plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock awards and other stock-
based awards to officers, employees, directors, consultants and advisors of the
Company. Shares not yet issued under the 1998 Stock Incentive Plan will now be
available under the 1999 plan. The total amount of shares that may be issued
under the 1999 plan is the remaining shares to be issued under the 1998 Stock
Incentive Plan plus an annual increase beginning August 1, 2000 of the lesser
of 9,000,000 or 5% of the outstanding shares on that date. As of April 29,
2000, there were no shares related to immediate option exercises subject to
repurchase by the Company.
Restricted Stock
Restricted stock may be issued to employees, officers, directors,
consultants, and other advisors. Shares acquired pursuant to a restricted stock
agreement are subject to a right of repurchase by the Company which lapses as
the restricted stock vests. In the event of termination of services, the
Company has the right to repurchase unvested shares at the original issuance
price. The vesting period is generally five years. The Company issued
22,095,000, and 29,502,936 shares of restricted stock, of which 5,557,500
shares were issued through the 1998 Stock Incentive Plan, for the period from
inception (February 17, 1998) through July 31, 1998 and the year ended July 31,
1999, respectively. The number of shares of restricted stock outstanding at
July 31, 1999 and April 29, 2000 was 51,597,936, of which 42,296,436 and
30,927,804 were subject to repurchase at their original issuance prices ranging
from $.01 to $.11.
1999 Employee Stock Purchase Plan
In August 1999, the Board approved the Employee Stock Purchase Plan. A total
of 2,250,000 shares of common stock have been reserved for issuance under this
plan. Eligible employees may purchase common stock at a price equal to 85% of
the lower of the fair market value of the common stock at the beginning or end
of each six-month offering period. Participation is limited to 10% of an
employee's eligible compensation not to exceed amounts allowed by the Internal
Revenue Code. On August 1 of each year, commencing with August 1, 2000, the
aggregate number of common shares available for purchase during the life of the
Employee Stock Purchase Plan shall automatically be increased by the number of
common shares necessary to cause the number of common shares available for
purchase to be 2,250,000. The initial offering period commenced on the
effectiveness of the IPO and ended on April 30, 2000.
1999 Non-Employee Director Option Plan
In August 1999, the Board approved the 1999 Non-Employee Director Option
Plan. A total of 1,500,000 shares of common stock have been reserved for
issuance under this plan. As of August 1 of each year,
F-15
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
commencing with August 1, 2000, the aggregate number of common shares available
for the grant of options under this plan shall automatically be increased by
the number of common shares necessary to cause the total number of common
shares available for grant to be 1,500,000. The Company granted 270,000 options
with a vesting period of three years, as of April 29, 2000.
Deferred Stock Compensation
In connection with the grant of certain stock options and restricted shares
to employees during the period from inception (February 17, 1998) to July 31,
1998, the year ended July 31, 1999 and the nine months ended May 1, 1999 and
April 29, 2000, the Company recorded deferred stock compensation of $184,000,
$25,159,000, $9,168,000 and $31,701,000, respectively, representing the
difference between the deemed fair market value of the common stock on the date
of grant and the exercise price. Compensation related to options and restricted
shares which vest over time was recorded as a component of stockholders' equity
(deficit) and is being amortized over the vesting periods of the related
options. During the period from inception (February 17, 1998) to July 31, 1998,
the year ended July 31, 1999 and the nine months ended May 1, 1999 and April
29, 2000, the Company recorded compensation expense relating to these options
and restricted shares totaling $5,000, $1,409,000, $802,000 and $8,122,000,
respectively.
Non-Employee Stock Compensation
During the year ended July 31, 1999, the Company granted 1,230,300 shares of
common stock awards which were fully vested by July 31, 1999 to non-employees
and recognized compensation expense of $2,060,000. During the nine months ended
April 29, 2000, the Company granted 208,000 shares of common stock awards which
were fully vested by April 29, 2000 to non-employees and recognized
compensation expense of $1,371,000. The fair value of each stock option was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions for the year-ended July 31, 1999 and the nine
months ended April 29, 2000: a weighted-average risk free interest rate of 5.2%
and 6.5%, a weighted-average expected option life of 4 and 3 years, no dividend
yield and a 60% and 84% volatility, respectively.
Valuation of Stock Awards
Had compensation cost of our stock awards been determined in accordance with
the provisions of SFAS No. 123, the historical net loss and net loss per share
would have been increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
Inception Year
(February 17, Ended
1998) to July 31,
July 31, 1998 1999
------------- --------
<S> <C> <C>
As reported
Net loss.......................................... $(693) $(19,490)
Basic and diluted net loss per share.............. $(.18) $ (2.09)
Pro forma
Net loss.......................................... $(807) $(21,314)
Basic and diluted net loss per share.............. $(.22) $ (2.29)
</TABLE>
F-16
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
The fair value of these stock awards at the date of grant was estimated
using the Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
Period from Year
Inception Ended
(February 17, July
1998) to 31,
July 31, 1998 1999
------------- -------
<S> <C> <C>
Risk free interest rate............................... 5.4% 4.5%
Dividend yield........................................ 0% 0%
Expected volatility................................... 0% 0%
Expected life......................................... 4 years 5 years
</TABLE>
The weighted average grant date fair value of the stock award granted during
the period from inception (February 17, 1998) to July 31, 1998 and the year
ended July 31, 1999 was $.05 and $.35 per share, respectively. The pro forma
effect of applying SFAS No. 123 for prior years is not necessarily
representative of pro forma effect to be expected in future years.
All stock option transactions issued under the stock plans are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------- --------
<S> <C> <C>
Outstanding at July 31, 1998........................... -- --
Options granted........................................ 23,280,300 $ .16
Options exercised...................................... (18,221,400) .22
Options cancelled...................................... -- --
----------- ------
Outstanding at July 31, 1999........................... 5,058,900 .45
=========== ======
Options granted........................................ 21,932,451 48.08
Options exercised...................................... (2,350,041) 1.74
Options cancelled...................................... (162,000) 33.06
----------- ------
Outstanding at April 29, 2000.......................... 24,479,310 $42.78
=========== ======
</TABLE>
The following table summarizes information about stock options outstanding
at July 31, 1999:
<TABLE>
<CAPTION>
Vested Options
Options Outstanding Exercisable
--------------------------------------- -------------------------
Number of Weighted Avg. Weighted Avg. Weighted Avg.
Range of Shares Remaining Exercise Number Exercise
Exercise Prices Outstanding Contract Life Price Exercisable Price
--------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .04 122,400 9.55 $ .04 90,000 $.04
.11 1,754,100 9.82 .11 90,000 .11
.33 1,310,697 9.94 .33 270,000 .33
.67 640,503 9.98 .67 -- --
1.00 1,231,200 10.00 1.00 -- --
--------- -------
$ .04-
$1.00 5,058,900 9.91 $ .45 450,000 $.23
</TABLE>
F-17
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
The following table summarizes information about stock options outstanding
at April 29, 2000:
<TABLE>
<CAPTION>
Vested Options
Options Outstanding Exercisable
------------------------------------------------------------------------------------------
Number Weighted Avg. Weighted Avg. Weighted Avg.
Range of Outstanding Remaining Exercise Number Exercise
Exercise Prices As of 4/29/00 Contractual Life Price Exercisable Price
--------------------------------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.04 - $ 1.33 4,976,703 9.20 $ 0.67 4,976,703 $ 0.67
$ 1.67 - $ 3.33 4,991,472 9.34 $ 2.52 4,991,472 $ 2.52
$ 3.83 - $ 51.00 6,252,423 9.61 $ 21.55 6,252,423 $ 21.55
$ 53.13 - $109.38 5,331,462 9.74 $ 89.58 5,329,962 $ 89.58
$110.06 - $189.94 2,927,250 9.85 $143.16 2,927,250 $143.16
---------- ---- ------- ---------- -------
$ 0.04 - $189.94 24,479,310 9.53 $ 42.78 24,477,310 $ 42.78
</TABLE>
Stockholder Notes Receivable
At July 31, 1999 and April 29, 2000, the Company held notes receivable in
the amount of $360,000 and $280,000, respectively, from stockholders in
consideration for the purchase of common stock. The notes are due five years
from the date of issuance and are collateralized by the underlying common stock
and, consequently, are reflected as a component of stockholders' equity
(deficit).
Common Stock Purchase Option
In March 1999, the Company signed a definitive Purchase and License
Agreement (the "Agreement") with a customer to provide certain Company
products. Under the terms of the Agreement, the customer also has the right to
purchase shares of the Company in the Company's IPO of shares on a national
exchange at the IPO price to an upper limit equal to the number of shares,
which when multiplied by the initial public offering price, equals 5% of the
dollar value of the customer's accumulated purchases of the Company's products
and services as of the date of the initial public offering, but in no event
more than 5% of the shares offered in the IPO. The ability of the customer to
exercise its right to purchase such shares is contingent upon a closing of an
IPO. Accordingly, the measurement date for a charge to record this option would
be at the closing of the IPO. The Company does not believe that this option
will have any material value and any charge will be necessary.
7. Preferred Stock
The Company's Board authorized 15,792,201 shares of Series A, Series B,
Series C and Series D preferred stock ("Series A, Series B, Series C, Series
D") at $.01 par value of which 15,761,075 were issued and outstanding at July
31, 1999. Issuances are as follows:
In February 1998, the Company authorized 6,380,000 shares of Series A
preferred stock.
In February 1998 and April 1998, the Company sold 5,500,000 and 549,450
shares, respectively of Series A at a price of $.91 per share and received
proceeds of approximately $5,505,000. In July 1998, the Company issued 137,362
shares of Series A and received proceeds of approximately $125,000 in October
1998.
In October 1998, the Company sold 2,775,000 shares of Series A at a price of
$.91 per share and received proceeds of approximately $2,525,250. In December
1998, the Company authorized 3,625,000 shares of Series B $.01 par value. In
December 1998 and February 1999, the Company sold 3,607,062 shares of Series B
at a price of $3.50 per share and received proceeds of approximately
$12,625,000.
F-18
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
In February 1999, the Company authorized 2,500,000 shares of Series C $.01
par value. In March 1999, the Company sold 2,500,000 shares of Series C at a
price of $8.00 per share and received proceeds of approximately $20,000,000.
In July 1999, the Company authorized 692,201 shares of Series D $.01 par
value. In July 1999, the Company sold 692,201 shares of Series D at a price of
$21.67 per share and received proceeds of approximately $15,000,000.
All shares of redeemable convertible preferred stock converted into
141,849,675 shares of common stock at the time of our initial public offering.
The terms of Series A, Series B, Series C and Series D redeemable
convertible preferred stock were as follows:
Conversion
Each share of Series A, Series B, Series C and Series D may be converted
into three shares of common stock at any time at the option of the holder,
subject to adjustment for certain events such as a stock split, stock dividend,
or stock issuance. At July 31, 1999, Series A, Series B, Series C and Series D
are convertible into 141,849,675 shares of common stock. Upon the earlier of
the closing of an initial public offering of the Company's common stock at a
price which equals or exceeds $3.22 per share and results in proceeds of a
least $10,000,000, or the date on which at least 10,000,000 shares of preferred
stock have been converted to common stock, all outstanding shares of preferred
stock automatically convert into shares of common stock. Upon the closing of
the IPO, all redeemable convertible preferred Stock (Series A, B, C and D)
automatically converted to 141,849,675 shares of Common Stock.
Dividend and Voting Rights
When and if declared by the Company's Board, dividends on Series A, Series
B, Series C and Series D are payable in cash in preference and prior to any
payment of any dividend on common shares. The holders are entitled to the per
share amount of dividends or distributions declared for common stock,
multiplied by the number of shares of common stock into which the preferred
stock is convertible. The holders are entitled to vote on all matters and are
entitled to the number of votes equal to the number of common shares into which
the Series A, Series B, Series C and Series D, are convertible as of the date
of record.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A, Series B, Series C and Series D are entitled to
receive, prior and in preference to any payment or distribution of any assets
or surplus funds of the Company to holders of the common shares, an amount for
each share of Series A, Series B, Series C and Series D held, equal to $.91,
$3.50, $8.00 and $21.67, respectively, plus any declared and unpaid dividends.
The liquidation preferences are subject to adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization.
Redemption
If the holders of at least a majority of Series A, Series B, Series C and
Series D preferred stock, at any time after February 26, 2004, so demand, the
Company will be required to redeem 33% of the shares
F-19
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
outstanding, an additional 50% on February 26, 2005 and all shares remaining on
February 26, 2006. The redemption prices of each share of Series A, Series B,
Series C and Series D are $.91, $3.50, $8.00 and $21.67, respectively plus all
declared and unpaid dividends, if any.
The following table sets forth the redeemable convertible preferred stock
activity (in thousands):
<TABLE>
<CAPTION>
Series A Series B Series C Series D Total
------------- -------------- -------------- -------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance--February
1998................... 5,500 $5,005 5,500 $ 5,005
Issuance--April 1998.... 550 500 550 500
Issuance--July 1998..... 137 116 137 116
----- ------ ------ -------
Balance--July 31, 1998.. 6,187 5,621 6,187 5,621
----- ------ ------ -------
Issuance--October 1998.. 2,775 2,525 2,775 2,525
Issuance--December
1998................... 3,506 $12,270 3,506 12,270
Issuance--February
1999................... 101 355 101 355
Issuance--March 1999.... 2,500 $20,000 2,500 20,000
Issuance--July 1999..... 692 $15,000 692 15,000
----- ------ ----- ------- ----- ------- --- ------- ------ -------
Balance--July 31, 1999.. 8,962 $8,146 3,607 $12,625 2,500 $20,000 692 $15,000 15,761 $55,771
===== ====== ===== ======= ===== ======= === ======= ====== =======
</TABLE>
In August 1999, the shareholders of the Company approved amendments to the
Company's Articles of Incorporation to authorize the issuance of 5,000,000
shares of $.01 par value undesignated preferred stock that may be issued by the
Board from time to time in one or more series without stockholder approval.
This amendment was effective upon the closing of the Company's IPO.
8. Income Tax:
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
July
July 31, 31,
1998 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 122 $ 6,163
Capitalized start up costs............................... 124 98
Research and development credits......................... 15 515
Other.................................................... 6 63
----- -------
267 6,839
Deferred tax liabilities:
Depreciation............................................. -- 196
----- -------
Net deferred tax assets.................................. 267 6,643
Valuation allowance...................................... (267) (6,643)
----- -------
$ -- $ --
===== =======
</TABLE>
At July 31, 1999, the Company has available net operating loss carryforwards
for federal and state tax income purposes of approximately $16.6 million
available to offset future taxable income which expire in varying amounts
beginning in 2019 and 2004, respectively. As required by statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the management of
the Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets and has established a full
F-20
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended May 1, 1999 and April 29, 2000 is
unaudited)
valuation allowance for such assets, which are comprised principally of net
operating loss carryforwards. Management reevaluates the positive and negative
evidence periodically. The net operating loss carryforwards could be limited in
future years if there is a significant change in the Company's ownership.
During the quarter ended April 29, 2000, the Company reduced its valuation
allowance related to its deferred tax asset by $2 million as the realization of
such assets became probable. The Company currently estimates that its annual
effective income tax rate will be 27.0% for the remainder of its fiscal year
ended July 31, 2000 primarily due to the reduction in the valuation allowance
and the use of net operating loss carryforwards.
9. Employee Benefit Plan:
The Company sponsors a defined contribution plan covering substantially all
of its employees which is designed to be qualified under Section 401(k) of the
Internal Revenue Code. Eligible employees are permitted to contribute to the
401(k) plan through payroll deductions within statutory and plan limits. To
date, the Company has made no contributions to the plan.
F-21
<PAGE>
SIROCCO SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-23
Balance Sheets at December 31, 1998 and 1999, and March 31, 2000
(unaudited)............................................................. F-24
Statements of Operations for the period from inception (July 7, 1998)
through December 31, 1998 and the year ended December 31, 1999, for the
period from inception (July 7, 1998) through December 31, 1999, for the
three-month periods ended March 31, 1999 (unaudited) and 2000
(unaudited), and for the period from inception (July 7, 1998) through
March 31, 2000 (unaudited).............................................. F-25
Statements of Cash Flows for the period from inception (July 7, 1998)
through December 31, 1998 and the year ended December 31, 1999, for the
period from inception (July 7, 1998) through December 31, 1999, for the
three-month periods ended March 31, 1999 (unaudited) and 2000
(unaudited), and for the period from inception (July 7, 1998) through
March 31, 2000 (unaudited).............................................. F-26
Statement of Changes in Stockholders' Deficit for the period from
inception (July 7, 1998) through December 31, 1998, for the year ended
December 31, 1999, and for the three-month period ended March 31, 2000
(unaudited)............................................................. F-27
Notes to Financial Statements............................................ F-28
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sirocco Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in stockholders' deficit present
fairly, in all material respects, the financial position of Sirocco Systems,
Inc. (the "Company"), a development stage company, at December 31, 1998 and
1999 and the results of its operations and its cash flows for the period from
inception (July 7, 1998) through December 31, 1998, for the year ended December
31, 1999, and for the period from inception (July 7, 1998) through December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
June 4, 2000
F-23
<PAGE>
SIROCCO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December March 31,
1998 31, 1999 2000
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 320,226 $18,900,024 $15,699,525
Prepaid expenses...................... -- 110,335 168,201
Other current assets.................. -- 208,540 732,487
--------- ----------- -----------
Total current assets................ 320,226 19,218,899 16,600,213
Fixed assets, net (Note 3).............. 103,611 1,404,128 2,707,003
Other assets............................ 17,814 503,299 12,299
--------- ----------- -----------
Total assets........................ $ 441,651 $21,126,326 $19,319,515
========= =========== ===========
Liabilities, Mandatorily Redeemable
Preferred Stock and Stockholders'
Deficit
Current liabilities:
Accounts payable...................... $ 83,874 $ 206,681 $ 856,063
Accrued liabilities................... 28,133 105,744 219,239
Line of credit, current portion (Note
4)................................... -- 64,983 171,446
--------- ----------- -----------
Total current liabilities........... 112,007 377,408 1,246,748
--------- ----------- -----------
Line of credit, long-term portion (Note
4)..................................... -- 435,017 350,791
--------- ----------- -----------
Total liabilities................... 112,007 812,425 1,597,539
Commitments and contingencies (Note 8)
Mandatorily redeemable preferred stock
(Note 5):
Series A redeemable preferred stock,
$.01 par value; 60,000 shares
authorized; 60,000 shares issued and
outstanding.......................... 585,037 587,910 588,627
Series B redeemable preferred stock,
$.01 par value; 85,000 shares
authorized; 85,000 shares issued and
outstanding.......................... -- 1,266,463 1,267,214
Series C redeemable preferred stock,
$.01 par value; 2,775,000 shares
authorized; 2,654,548 shares issued
and outstanding...................... -- 5,789,090 5,790,524
Series D convertible preferred stock,
$.01 par value; 5,609,757 shares
authorized; 0, 4,878,049 and
5,370,047 shares issued and
outstanding, respectively............ -- 17,955,616 19,596,716
--------- ----------- -----------
Total mandatorily redeemable
preferred stock.................... 585,037 25,599,079 27,243,081
Stockholders' deficit (Note 6):
Common stock, $.001 par value;
18,562,500, 46,749,011 and 46,749,011
shares authorized, respectively;
5,045,625, 29,156,529 and 30,607,529
shares issued, respectively;
5,045,625, 29,055,279 and 30,506,279
shares outstanding, respectively..... 5,046 29,055 30,506
Additional paid-in capital............ -- 520,039 1,773,613
Deficit accumulated during the
development stage.................... (260,439) (5,834,272) (11,325,224)
--------- ----------- -----------
Total stockholders' deficit......... (255,393) (5,285,178) (9,521,105)
--------- ----------- -----------
Total liabilities, mandatorily
redeemable preferred stock and
stockholders' deficit.............. $ 441,651 $21,126,326 $19,319,515
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SIROCCO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the For the For the
Period from Period from Period from
Inception Inception Inception
(July (July 7, (July 7,
7, 1998) 1998) Three Months Ended 1998)
through through ------------------------ through
December 31, December 31, December March 31, March 31, March 31,
1998 1999 31, 1999 1999 2000 2000
------------ ------------ ----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ -- $ -- $ --
Costs and expenses:
Research and
development,
exclusive of the non-
cash compensation
expense of $0,
$115,000, $115,000,
$0, $397,000, and
$512,000,
respectively......... 216,947 4,024,455 4,241,402 412,988 3,829,368 8,070,770
Marketing, general and
administrative,
exclusive of the non-
cash compensation
expense of $0,
$64,000, $64,000, $0,
$135,000, and
$199,000,
respectively......... 48,183 1,650,829 1,699,012 174,030 1,309,740 3,008,752
Non-cash compensation
expense.............. -- 179,000 179,000 -- 532,000 711,000
--------- ----------- ----------- ---------- ----------- ------------
Total costs and
expenses........... 265,130 5,854,284 6,119,414 587,018 5,671,108 11,790,522
--------- ----------- ----------- ---------- ----------- ------------
Interest income, net.... 8,242 291,451 299,693 8,242 185,102 484,795
--------- ----------- ----------- ---------- ----------- ------------
Net loss................ (256,888) (5,562,833) (5,819,721) (578,776) (5,486,006) (11,305,727)
--------- ----------- ----------- ---------- ----------- ------------
Preferred stock
accretion.............. -- (11,000) (11,000) (1,199) (4,946) (15,946)
--------- ----------- ----------- ---------- ----------- ------------
Net loss attributable to
common stockholders.... $(256,888) $(5,573,833) $(5,830,721) $ (579,975) $(5,490,952) $(11,321,673)
========= =========== =========== ========== =========== ============
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (0.07) $ (0.24) $ (0.35) $ (0.04) $ (0.19) $ (0.61)
Shares used in computing
basic and diluted net
loss per share
attributable to common
stockholders........... 3,767,960 22,891,042 16,622,334 13,570,875 29,637,795 18,490,483
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
SIROCCO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
------------------------
For the
Period from
Inception For the Period
(July 7, from Inception For the Period
1998) (July 7, 1998) from Inception
through through (July 7, 1998)
December 31, December 31, December 31, March 31, March 31, through March
1998 1999 1999 1999 2000 31, 2000
------------ ------------ -------------- ----------- ----------- --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(256,888) $(5,562,833) $(5,819,721) $ (578,776) $(5,486,006) $(11,305,727)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization.......... 3,479 146,170 149,649 10,319 178,924 328,573
Non-cash compensation
expense............... -- 179,000 179,000 -- 532,000 711,000
Decrease (increase) in
other assets.......... (17,814) 14,515 (3,299) 14,714 491,000 487,701
Increase in prepaid
expenses.............. -- (110,335) (110,335) (15,019) (57,866) (168,201)
Increase in other
current assets........ -- (208,540) (208,540) (20,832) (523,947) (732,487)
Increase in accounts
payable and accrued
expenses.............. 112,007 200,418 312,425 37,358 762,877 1,075,302
--------- ----------- ----------- ---------- ----------- ------------
Net cash used in
operating
activities........... (159,216) (5,341,605) (5,500,821) (552,236) (4,103,018) (9,603,839)
--------- ----------- ----------- ---------- ----------- ------------
Cash flows from
investing activities:
Purchases of marketable
securities............ -- (500,000) (500,000) -- -- (500,000)
Purchases of fixed
assets................ (107,090) (1,446,687) (1,553,777) (103,153) (1,481,799) (3,035,576)
--------- ----------- ----------- ---------- ----------- ------------
Net cash used in
investing activities: (107,090) (1,946,687) (2,053,777) (103,153) (1,481,799) (3,535,576)
--------- ----------- ----------- ---------- ----------- ------------
Cash flows from
financing activities:
Proceeds from sale of
common stock, net..... 1,495 365,048 366,543 38,706 180,025 546,568
Proceeds from sale of
preferred stock, net.. 585,037 25,003,042 25,588,079 1,264,927 1,639,056 27,227,135
Proceeds from issuance
of debt and warrants.. -- 500,000 500,000 -- 565,237 1,065,237
--------- ----------- ----------- ---------- ----------- ------------
Net cash provided by
financing
activities........... 586,532 25,868,090 26,454,622 1,303,633 2,384,318 28,838,940
--------- ----------- ----------- ---------- ----------- ------------
Net increase in cash.... 320,226 18,579,798 18,900,024 648,244 (3,200,499) 15,699,525
Cash at beginning of
period................. -- 320,226 -- 320,226 18,900,024 --
--------- ----------- ----------- ---------- ----------- ------------
Cash at end of period... $ 320,226 $18,900,024 $18,900,024 $ 968,470 $15,699,525 $ 15,699,525
--------- ----------- ----------- ---------- ----------- ------------
Supplemental disclosure
of cash flow
information:
Cash paid for
interest............. $ -- $ 16,210 $ 16,210 $ -- $ 29,931 $ 46,141
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
SIROCCO SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
------------------- Paid-In Development Stockholders'
Shares Amount Capital Stage Deficit
---------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at inception.... -- $ -- $ -- $ -- $ --
Issuance of common
stock.................. 5,045,625 1,495 -- -- 1,495
Stock splits............ -- 3,551 -- (3,551) --
Net loss................ -- -- -- (256,888) (256,888)
---------- ------- ---------- ------------ -----------
Balance at December 31,
1998................... 5,045,625 5,046 -- (260,439) (255,393)
---------- ------- ---------- ------------ -----------
Issuance of common stock
and stock options...... 24,110,904 24,110 520,241 -- 544,351
Common stock
repurchased............ (101,250) (101) (202) -- (303)
Net loss attributable to
common stockholders.... -- -- -- (5,573,833) (5,573,833)
---------- ------- ---------- ------------ -----------
Balance at December 31,
1999................... 29,055,279 29,055 520,039 (5,834,272) (5,285,178)
---------- ------- ---------- ------------ -----------
Issuance of common stock
and stock options
(unaudited)............ 1,451,000 1,451 1,253,574 -- 1,255,025
Net loss attributable to
common stockholders
(unaudited)............ -- -- -- (5,490,952) (5,490,952)
---------- ------- ---------- ------------ -----------
Balance at March 31,
2000 (unaudited)....... 30,506,279 $30,506 $1,773,613 $(11,325,224) $(9,521,105)
========== ======= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company
Sirocco Systems, Inc. (the "Company") was incorporated in Delaware on July
7, 1998. The Company was established to develop, market and sell state-of-the-
art communications optical networking equipment. Since inception, the Company
has concentrated its efforts on developing prototype designs. The Company is
considered a development stage company, as defined in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises" because its principal operations have not yet commenced.
As of March 31, 2000, the Company has an accumulated deficit of $11,325,224
(unaudited) since inception. The Company has funded its operating losses
through the issuance of debt and equity securities. The Company has raised
additional capital in 2000 (Note 9) and management believes that these
proceeds, when combined with existing cash on hand at December 31, 1999, will
be adequate to fund the Company's cash requirements through at least January
1, 2001. During 2000, in the event the Company is unsuccessful in achieving
either its planned revenue generation or operating cash flows, management
believes it could utilize its existing available line of credit and reduce
costs and expenses sufficiently to fund operations for the balance of 2000. In
the event the Company is unsuccessful in achieving the above, the Company's
financial position, results of operations and cash flows could be adversely
impacted.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Unaudited Interim Financial Data
The financial information as of March 31, 2000, for the three-month periods
ended March 31, 1999 and 2000, and for the period from inception (July 7,
1998) through March 31, 2000 is unaudited. In the opinion of management, the
interim financial information includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results to be expected for any
future period.
Net Loss Per Share
Net loss per share has been computed by dividing the net loss attributable
to common stockholders by the weighted average common shares outstanding. No
effect has been given to the exercise of common stock options, stock warrants
and redeemable convertible preferred stock, since the effect would be
antidilutive for all reporting periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities as of the purchase date of three months or less to be cash
equivalents. The Company invests excess cash primarily in a money market fund
at a major financial institution, which is subject to minimal credit and
market risk. At December 31, 1999 and March 31, 2000 (unaudited), the Company
held marketable securities of $500,000 invested in a certificate of deposit
that matures in 2001.
F-28
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. The Company
periodically reviews the carrying value of its fixed assets to assess
recoverability based upon expectations of non-discounted cash flows from
operations. Leasehold improvements are amortized over the shorter of the useful
life of the improvement or the lease term.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Equipment............................................................ 3 years
Software............................................................. 3 years
Furniture............................................................ 7 years
</TABLE>
Stock Compensation
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its stock
option plan and stock awards. Under APB 25, compensation expense is recognized
to the extent that the fair market value of the underlying stock on the date of
grant exceeds the exercise price of the employee stock option or stock award.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company will continue to account for its stock
option plans in accordance with the provisions of APB 25.
Research and Development Activities
Research and development costs are expensed as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Comprehensive Income (Loss)
Comprehensive income is defined as the changes in equity other than
transactions resulting from investments by owners and distributions to owners.
The Company's comprehensive loss for 1998 and 1999, and for three-month periods
ended March 31, 1999 (unaudited) and 2000 (unaudited), is the same as its
reported net loss.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion
F-29
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and
among other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 25, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on the Company's financial position or results of operations.
3. Fixed Assets
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Equipment............................. $ 72,995 $1,048,935 $1,517,498
Furniture............................. 11,076 71,315 325,320
Software.............................. 23,019 333,019 826,353
Leasehold improvements................ -- 100,508 366,405
-------- ---------- ----------
107,090 1,553,777 3,035,576
Less accumulated depreciation......... (3,479) (149,649) (328,573)
-------- ---------- ----------
$103,611 $1,404,128 $2,707,003
-------- ---------- ----------
</TABLE>
Depreciation expense for the period from inception (July 7, 1998) through
December 31, 1998, for the year ended December 31, 1999 and for the three month
periods ended March 31, 1999 and 2000 was $3,479, $146,170, $10,319 (unaudited)
and $178,924 (unaudited), respectively.
4. Line of Credit
In May 1999, the Company entered into a $500,000 revolving line of credit
financing agreement for equipment purchases. The line of credit allows for
drawdowns through June 2000 for equipment purchases, then converts into a term
loan payable in equal monthly installments through May 2003. Interest is
computed based on the average daily balance outstanding, at a per annum rate of
0.5% above the prime rate. All assets of the Company have been pledged as
collateral and the agreement contains covenants and restrictions relating to
asset protection, financial condition, dividends, investments, and certain
other matters including the covenant that the Company will not effect a
business combination without consent.
In January 2000, the Company refinanced its line of credit and increased the
amount available under the credit facility to $7.5 million, of which $2.5
million is available for equipment purchases and $5.0 million is available as a
working capital line. In connection with this refinancing, the Company also
issued the lenders warrants to purchase 189,702 shares of the Company's Series
D Preferred Stock, at a price per share of $3.69. The warrants are fully
exercisable upon date of issuance and expire in January 2010. At December 31,
1999 and March 31, 2000, $500,000 and $1,029,237 (unaudited) was outstanding
under the line of credit, respectively, and the stated interest rates were 9.0%
and 10.0% (unaudited), respectively.
5. Preferred Stock
In August 1998, the Company's Board of Directors authorized 60,000 shares of
Series A redeemable preferred stock with a par value of $0.01 ("Series A
Preferred Stock"). The Company issued 60,000 shares of Series A Preferred Stock
at $9.99 per share and 2,025,000 shares of Common Stock at $0.0003 per share
for gross proceeds of $600,000.
F-30
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company's Board of Directors authorized 85,000 shares
of Series B redeemable preferred stock with a par value of $0.01 ("Series B
Preferred Stock"). The Company issued 85,000 shares of Series B Preferred Stock
at $14.99 per share and 2,868,750 shares of Common Stock at $0.0003 per share
for gross proceeds of $1,275,000.
In April 1999, the Company's Board of Directors authorized 2,775,000 shares
of Series C redeemable preferred stock with a par value of $0.01 ("Series C
Preferred Stock"). The Company issued 2,654,548 shares of Series C Preferred
Stock at $2.19 per share and 8,959,100 shares of Common Stock at $0.003 per
share for gross proceeds of $5,840,006.
In October 1999, the Company's Board of Directors authorized 5,609,757
shares of convertible preferred stock with a par value of $0.01, ("Series D
Preferred Stock"). The Company issued 4,878,049 shares of Series D Preferred
Stock at $3.69 per share for gross proceeds of $18,000,000.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A, B, C and D Preferred Stock shall first receive, prior and
in preference to any distribution of any of the assets of the Company to the
holders of the Common Stock, an amount equal to $9.99, $14.99, $2.19 and $3.69
per share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, plus any declared but unpaid
dividends, respectively. A merger, consolidation or sale of the Company is
considered a liquidation event entitling the holders of the preferred stock to
the liquidation preference described above, however, the majority of preferred
stockholders may elect to not treat such events as a liquidation event. All
holders of Preferred Stock shall not be entitled to vote, but shall be entitled
to notice of any such stockholders' meeting in accordance with the by-laws of
the Company as if such holders were holders of the Common Stock.
Beginning on June 30, 2003, each issued and outstanding share of Series A,
Series B and Series C Preferred Stock shall be entitled to receive cumulative
preferential dividends, payable in cash or common stock at the option of the
holder, at the annual rate of $1.20 per share of Series A Preferred Stock,
$1.80 per share of Series B Preferred Stock and $0.264 per share of Series C
Preferred Stock, payable quarterly, in arrears, on each of March 31, June 30,
September 30 and December 31. Such dividends shall be cumulative so that if
such dividends in respect of any previous or current dividend period, at the
aforesaid rate, shall not have been declared and paid, or declared and a sum
sufficient for the payment thereof set apart, the deficiency shall first be
paid before any dividend or other distribution shall be paid on or declared and
set apart from any other shares of its capital stock. Each issued and
outstanding share of Series D Preferred Stock shall be entitled to receive
annual preferential dividends of $0.30, payable when, if and as declared by the
Board of Directors. Dividends on the Series D Preferred Stock are not
cumulative. The annual dividend rate per share applicable to the Preferred
Stock shall be equitably adjusted whenever there shall occur a stock split,
combination, stock dividend, reclassification or other similar event affecting
the Preferred Stock. No dividends shall be paid on the Common Stock unless and
until the full dividend for the relevant period shall have been paid, or set
aside for payment, on the Preferred Stock.
Series A, B, and C Mandatorily Redeemable Preferred Stock
Unless otherwise requested by the holders of a majority of the Series A
Preferred Stock, the Company shall redeem the Series A Preferred Stock then
outstanding on the earlier of (i) August 7, 2003 (the "First Series A
Redemption Date"), August 7, 2004 (the "Second Series A Redemption Date"), and
August 7, 2005 (the "Third Series A Redemption Date"), each on demand of the
holders of a majority of the Series A Preferred Stock then outstanding; (ii)
the date there is a change in control of the Company through merger,
consolidation or acquisition of the Company (the "Acquisition Redemption
Date"); or (iii) the date 10 days after the closing of a firm commitment
underwritten public offering of the Company yielding aggregate net proceeds to
the Company of at least $10,000,000 at a price per share of Common Stock of at
least $3.00, (the "IPO Redemption Date"). On the Acquisition Redemption Date or
IPO Redemption Date, the Company shall
F-31
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
redeem from each holder of Series A Preferred Stock, the total shares of Series
A Preferred Stock held by such holder at a price per share equal to $9.99 plus
any declared or accrued, but unpaid, dividends. With respect to the First
Series A Redemption Date, the Company shall redeem one-third of the shares,
with respect to the Second Series A Redemption Date, the Company shall redeem
one-half of the remaining shares and with respect to the Third Series A
Redemption Date, the Company shall redeem all remaining shares, each at a price
of $9.99 per share, plus any declared or accrued, but unpaid, dividends.
Unless otherwise requested by the holders of a majority of the Series B
Preferred Stock, the Company shall redeem the Series B Preferred Stock then
outstanding on the earlier of (i) January 8, 2004 (the "First Series B
Redemption Date"), January 8, 2005 (the "Second Series B Redemption Date"), and
January 8, 2006 (the "Third Series B Redemption Date"), each on demand of the
holders of a majority of the Series B Preferred Stock then outstanding; (ii)
the Acquisition Redemption Date; or (iii) the IPO Redemption Date. On the
applicable Series B Redemption Date, the Company shall redeem from each holder
of Series B Preferred Stock, the shares of Series B Preferred Stock held by
such holder at a price per share equal to $14.99 plus any declared or accrued,
but unpaid, dividends. With respect to the First Series B Redemption Date, the
Company shall redeem one-third of the shares, with respect to the Second Series
B Redemption Date, the Company shall redeem one-half of the remaining shares
and with respect to the Third Series B Redemption Date, the Company shall
redeem all remaining shares, each at a price of $14.99 per share, plus any
declared or accrued, but unpaid, dividends.
Unless otherwise requested by the holders of a majority of the Series C
Preferred Stock then outstanding, the Company shall redeem the Series C
Preferred Stock then outstanding on the earlier of (i) April 14, 2004 (the
"First Series C Redemption Date"), April 14, 2005 (the "Second Series C
Redemption Date"), and April 14, 2006 (the "Third Series C Redemption Date"),
each on demand of the holders of a majority of the Series C Preferred Stock
then outstanding; (ii) the Acquisition Redemption Date; or (iii) the IPO
Redemption Date. On the applicable Series C Redemption Date, the Company shall
redeem from each holder of Series C Preferred Stock, the shares of Series C
Preferred Stock held by such holder at a price per share equal to $2.19 plus
any declared or accrued, but unpaid, dividends. With respect to the First
Series C Redemption Date, the Company shall redeem one-third of the shares,
with respect to the Second Series C Redemption Date, the Company shall redeem
one-half of the remaining shares and with respect to the Third Series C
Redemption Date, the Company shall redeem all remaining shares, each at a price
of $2.19 per share, plus any declared or accrued, but unpaid, dividends.
Series D Convertible Preferred Stock
Each issued and outstanding share of Series D Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance and without the payment of any additional consideration therefor, into
that number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $3.69 by the Conversion Price in effect at the time of
conversion. The "Conversion Price" at which shares of Common Stock shall be
deliverable upon conversion of Series D Preferred Stock was initially $3.69 per
share. As a result of subsequent stock splits, the Conversion Price is $2.46
per share.
All outstanding shares of Series D Preferred Stock shall automatically
convert into shares of Common Stock at the Conversion Price applicable to such
shares upon the closing of an underwritten, firm commitment public offering
pursuant to an effective registration statement in which the price to the
public is at least $7.28 per share and the aggregate gross proceeds are not
less than $20 million.
6. Stockholders' Deficit
Common Stock
In August 1998, the Company's Board of Directors authorized 18,562,500
shares of common stock with a par value of $0.001 per share. In August 1998, in
conjunction with the issuance of the Series A Preferred Stock, the Company
issued 2,025,000 shares of common stock to the Series A Preferred Stock
investor.
F-32
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company's Board of Directors increased the authorized
shares of common stock to 21,937,500 shares. In conjunction with the issuance
of the Series B Preferred Stock, the Company issued 2,868,750 shares of common
stock to Series B Preferred Stock investors.
In April 1999, the Company's Board of Directors increased the authorized
shares of common stock to 34,171,875 shares. In conjunction with the issuance
of the Series C Preferred Stock, the Company issued 8,959,100 shares of common
stock to Series C Preferred Stock investors.
In December 1999, the Company's Board of Directors increased the authorized
shares of common stock to 46,749,011 shares.
Stock Splits
In 1999, the Company executed various stock splits of its common stock. The
par value of common stock was changed from $0.01 per share to $0.001 per share.
In March 2000, the Company executed a 3-for-2 stock split of its common stock.
All common stock shares, common stock options, and related prices per share
have been adjusted in the financial statements and footnotes to reflect the
effects of these splits of the Company's Common Stock.
1998 Stock Plan
The Company's Board of Directors adopted the 1998 Stock Plan (the "Plan") in
August 1998. The Plan permits the granting of stock, incentive stock options
and non-qualified stock options to employees, directors, officers and
consultants of the Company not to exceed in the aggregate 18,337,500 shares of
Common Stock. The Common Stock purchased is generally restricted as it is
subject to repurchase in the event an employee ceases to be employed by the
Company, or a consultant ceases to perform services for the Company. In these
events, the Company may repurchase all or any part of the unvested shares at
their original purchase price. This repurchase option expires ratably over 5
years. In general, stock purchased and options granted under the Plan vest
ratably over a five year period and expire no later than ten years from the
date of grant. In addition, certain shares of common stock purchased and
options granted automatically accelerate upon a change in control.
During 1999 and 1998 under the Plan, employees purchased 11,885,140 and
2,885,625 shares of restricted Common Stock, and nonemployees purchased 397,914
and 135,000 shares of restricted Common Stock, respectively, at prices ranging
from $0.001 to $0.25 per share, subject to a vesting schedule. At December 31,
1999, 1,466,193 shares of the total restricted stock shares purchased by
employees and nonemployees are vested. For the year ended December 31, 1999 and
the period ended December 31, 1998, the weighted average fair value of
restricted common stock on date of issuance was $0.08 and nil, respectively. In
addition, during 1999, the Company granted options to purchase 281,250 shares
of common stock to its employees. During 1999, the Company repurchased 101,250
shares of common stock, which are held in treasury. At December 31, 1999 and
1998 there were 2,542,571 and 13,516,875 shares available under the Plan,
respectively.
A summary of stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding at January 1, 1999............................ -- $--
Granted................................................... 281,250 0.25
-------
Outstanding at December 31, 1999 (0 shares exercisable)... 281,250 0.25
-------
Weighted average fair value of options granted during
1999..................................................... -- 2.28
</TABLE>
F-33
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes additional information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Range of Number Number
Exercise Outstanding at Weighted Average Weighted Average Outstanding at Weighted Average
Prices December 31, 1999 Remaining Life Exercise Price December 31, 1999 Exercise Price
-------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00-$0.25 281,250 9.85 $0.25 -- --
</TABLE>
If compensation expense had been recognized based on the fair value of
options at their grant date, in accordance with SFAS 123, the net loss for the
year ended December 31, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Net loss attributable to common stockholders:
As reported...................................... $(256,888) $(5,573,833)
Pro forma........................................ (256,888) (5,580,033)
Basic and diluted net loss per share attributable
to common stockholders:
As reported...................................... $ (0.07) $ (0.24)
Pro forma........................................ (0.07) (0.24)
</TABLE>
The fair value of each option grant and restricted stock award is estimated
on the date of issuance using the minimum value Black-Scholes pricing model
with the following weighted-average assumptions: dividend yield of 0%,
expected volatility of 0%, weighted average risk-free interest rate of 6.1%
and expected lives of 5 years.
Deferred compensation of approximately $1,560,000 and $12,293,000
(unaudited), has been attributed to those restricted common stock purchased
and common stock options granted to employees as of December 31, 1999 and
March 31, 2000 (unaudited), with a purchase price, in the case of restricted
common stock purchased, or an exercise price, in the case of common stock
options granted, below estimated fair value. Stock compensation expense is
recognized over the five year vesting period and totaled $50,000 and $251,000
(unaudited), for the year ended December 31, 1999 and the three-month period
ended March 31, 2000, respectively.
As of December 31, 1999, the Company has issued 532,914 shares of
restricted common stock to consultants, subject to a vesting schedule,
generally 1 to 3 years. The Company records compensation expense on such stock
awards at fair value as the stock restriction period lapses, which generally
follows the period service is performed. For the year ended December 31, 1999
and the three-month period ended March 31, 2000, such expense was $129,000 and
$281,000 (unaudited), respectively.
7. Income Taxes
The Company's gross deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Gross deferred tax assets:
Carryforwards:
Net operating losses.......................... $ 108,000 $ 2,082,000
Research and development credits.............. 21,000 483,000
Other........................................... 3,000 34,000
--------- -----------
132,000 2,599,000
--------- -----------
Gross deferred tax liability:
Depreciation.................................... (8,000) (22,000)
--------- -----------
Less: valuation allowance......................... (124,000) (2,577,000)
--------- -----------
$ -- $ --
--------- -----------
</TABLE>
F-34
<PAGE>
SIROCCO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has provided a valuation allowance for the full amount of the
deferred tax assets in excess of the deferred tax liability since management
has not determined the realization of these future benefits to be more likely
than not.
At December 31, 1999, the Company had approximately $5,465,000 of federal
net operating loss carryforwards that begin to expire in the year 2013,
approximately $5,465,000 of state net operating loss carryforwards that begin
to expire in the year 2002, federal research and development tax credit
carryforwards of approximately $430,000 that begin to expire in the year 2018,
and state research and development tax credit carryforwards of approximately
$53,000 that begin to expire in the year 2002.
The amount of the net operating loss and research and development tax credit
carryforwards that may be utilized annually to offset future taxable income and
tax liability may be limited as a result of certain ownership changes pursuant
to Section 382 of the Internal Revenue Code.
8. Commitments and Contingencies
The Company leases space in two facilities under operating leases. Aggregate
future minimum lease payments under non-cancellable operating leases are as
follows:
<TABLE>
<S> <C>
2000.............................................................. $ 496,147
2001.............................................................. 599,895
2002.............................................................. 469,791
2003.............................................................. 477,248
2004.............................................................. 477,248
----------
Total........................................................... $2,520,329
==========
</TABLE>
Rent expense under non-cancellable operating leases for 1999 and 1998 was
approximately $106,773 and $10,250, respectively.
9. Subsequent Events
From January to March 2000, the Company issued an additional 437,412 shares
of Series D Convertible Preferred Stock for gross proceeds of $1,614,050. In
addition, the Company issued another 54,586 shares of Series D Convertible
Preferred Stock to third party service providers in exchange for services.
F-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach
of fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article EIGHTH of the Restated Certificate provides that a director or
officer of the Registrant (a) shall be indemnified by the Registrant against
all expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Registrant) brought against him
by virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful and (b) shall be indemnified by the Registrant against all
expenses (including attorneys' fees) and amounts paid in settlement incurred in
connection with any action by or in the right of the Registrant brought against
him by virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the Registrant, unless the
Court of Chancery of Delaware determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, unless it is determined that he 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 Registrant, and, with respect to any criminal action or
proceeding had reasonable cause to believe that his conduct was unlawful,
provided that he undertakes to repay the amount advanced if it is ultimately
determined that he is not entitled to indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Restated Certificate further provides that the
indemnification provided therein is not exclusive, and provides that in the
event that the Delaware General Corporation Law is amended to expand the
indemnification permitted to directors or officers, the Registrant must
indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if such
person had no reasonable cause to
II-1
<PAGE>
believe his conduct was unlawful; provided that, in the case of actions brought
by or in the right of the corporation, no indemnification shall be made with
respect to any matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the adjudicating
court determines that such indemnification is proper under the circumstances.
The Registrant has entered into indemnification agreements with each of its
directors and officers. These agreements may require the Registrant, among
other things, to indemnify directors and officers against certain liabilities
that may arise by reason of their status or service as directors and officers
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified.
The Registrant expects to obtain liability insurance for its officers and
directors.
Item 21. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
******2.1 Agreement and Plan of Merger, dated as of June 5, 2000, by and
among Sycamore Networks, Inc., Tropical Acquisition Corporation
and Sirocco Systems, Inc. (included as Appendix A to the proxy
statement/prospectus forming a part of this Registration
Statement)
****3.1 Amended and Restated Certificate of Incorporation of Sycamore
Networks, Inc.
****3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Sycamore Networks, Inc.
****3.3 Amended and Restated By-Laws of Sycamore Networks, Inc.
**4.1 Specimen common stock certificate
****4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and By-Laws of Sycamore Networks, Inc. defining the
rights of holders of common stock of Sycamore Networks, Inc.
**4.3 Second Amended and Restated Investor Rights Agreement dated
February 26, 1999, as amended by Amendment No. 1 dated as of July
23, 1999
****4.4 Amendment No. 2 dated as of August 5, 1999 to the Second Amended
and Restated Investor Rights Agreement dated February 26, 1999
****4.5 Amendment No. 3 dated as of September 20, 1999 to the Second
Amended and Restated Investor Rights Agreement dated February 26,
1999
****4.6 Amendment No. 4 dated as of February 11, 2000 to the Second
Amended and Restated Investor Rights Agreement dated February 26,
1999
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
validity of securities being registered
*8.1 Opinion of Day, Berry & Howard LLP regarding certain tax aspects
of the merger
*8.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
certain tax aspects of the merger
**10.1 1998 Stock Incentive Plan, as amended
**10.2 1999 Non-Employee Directors' Option Plan
**+10.3 Purchase and License Agreement between Sycamore Networks, Inc. and
Williams Communications, Inc. dated March 5, 1999
***+10.4 Addendum to Purchase and License Agreement between Sycamore
Networks, Inc. and Williams Communications, Inc. dated November
21, 1999
****+10.5 Manufacturing Services Agreement between Sycamore Networks, Inc.
and Celestica Corporation dated February 9, 2000
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
**10.6 Lease dated as of December 21, 1998 between BerCar II LLC, a
Massachusetts limited liability company and Sycamore Networks,
Inc. regarding 10 Elizabeth Drive, Chelmsford, MA
**10.7 1999 Stock Incentive Plan
**10.8 Lease Agreement between WA/TIB Real Estate Limited Partnership and
Sycamore Networks, Inc. effective September 20, 1999
***10.9 Form of Indemnification Agreement between Sycamore, the Directors
of Sycamore Networks, Inc. and executive officers of Sycamore
Networks, Inc. each dated November 17, 1999
***10.10 Form of Change in Control Agreement between Sycamore Networks,
Inc. and executive officers of Sycamore Networks, Inc. each dated
November 17, 1999
***10.11 Promissory Note and Pledge Agreement dated October 20, 1999
between Sycamore Networks, Inc. and Kevin Oye, Vice President of
Business Development
****10.12 Promissory Note dated February 5, 1999 between Sycamore Networks,
Inc. and Eric Swanson
****10.13 Promissory Note dated June 16, 1999 between Sycamore Networks,
Inc. and Eric Swanson
****10.14 Lease Agreement between Sycamore Networks, Inc. and New Boston
Mill Road Limited Partnership dated March 8, 2000
****10.15 Assignment of Subleases between Sycamore Networks, Inc. and
Thermedics Detection, Inc. dated March 8, 2000
*****10.16 Lease Agreement between Sycamore Networks, Inc. and Farley White
Associates, LLC dated March 23, 2000
******10.17 Amended Voting Agreement dated as of June 5, 2000, by and among
Sycamore Networks, Inc., Sirocco Systems, Inc. and the
Stockholders named therein (included as Appendix B to the proxy
statement/prospectus forming a part of this Registration
Statement)
*23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included as
part of its opinions filed as Exhibit 5.1 and Exhibit 8.2,
respectively)
23.2 Consent of PricewaterhouseCoopers LLP (Boston, Massachusetts)
23.3 Consent of PricewaterhouseCoopers LLP (Hartford, Connecticut)
*23.4 Consent of Day, Berry & Howard LLP (included as part of its
opinion filed as Exhibit 8.1)
*****24.1 Powers of Attorney (see signature page for previous filing)
99.1 Form of Proxy Card
******99.2 Form of Escrow Agreement, by and among Sycamore Networks, Inc.,
the Stockholder Representative named therein and the Escrow Agent
named therein (included as Appendix C to the proxy
statement/prospectus forming a part of this Registration
Statement)
</TABLE>
--------
* To be filed by amendment.
** Incorporated by reference to Sycamore Networks, Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-84635).
*** Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1999 filed with
the Commission on December 13, 1999.
**** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-30630)
***** Incorporated by reference to Sycamore Networks Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended April 29, 2000 filed with
the Commission on June 12, 2000.
****** Previously filed in Sycamore Networks, Inc.'s Registration Statement on
Form S-4 (Registration Statement No. 333-40146).
+ Confidential treatment granted 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.
II-3
<PAGE>
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(4) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions described in Item 20 or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Chelmsford, Massachusetts, on this 14th day of
August, 2000.
Sycamore Networks, Inc.
/s/ Daniel E. Smith
By: _________________________________
Daniel E. Smith
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities on this 14th day of August, 2000.
<TABLE>
<S> <C> <C>
/s/ Gururaj Deshpande Chairman of the Board of Directors
______________________________________
Gururaj Deshpande
/s/ Daniel E. Smith President, Chief Executive Officer and Director
______________________________________
Daniel E. Smith
/s/ Frances M. Jewels Chief Financial Officer, Vice President, Finance
______________________________________ and Administration, Secretary and Treasurer
Frances M. Jewels
/s/ Timothy Barrows Director
______________________________________
Timothy Barrows
/s/ Paul J. Ferri Director
______________________________________
Paul J. Ferri
/s/ John W. Gerdelman Director
______________________________________
John W. Gerdelman
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
******2.1 Agreement and Plan of Merger, dated as of June 5, 2000, by and
among Sycamore Networks, Inc., Tropical Acquisition Corporation and
Sirocco Systems, Inc. (included as Appendix A to the proxy
statement/prospectus forming a part of this Registration Statement)
****3.1 Amended and Restated Certificate of Incorporation of Sycamore
Networks, Inc.
****3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Sycamore Networks, Inc.
****3.3 Amended and Restated By-Laws of Sycamore Networks, Inc.
**4.1 Specimen common stock certificate
****4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and By-Laws of Sycamore Networks, Inc. defining the
rights of holders of common stock of Sycamore Networks, Inc.
**4.3 Second Amended and Restated Investor Rights Agreement dated
February 26, 1999, as amended by Amendment No. 1 dated as of July
23, 1999
****4.4 Amendment No. 2 dated as of August 5, 1999 to the Second Amended
and Restated Investor Rights Agreement dated February 26, 1999
****4.5 Amendment No. 3 dated as of September 20, 1999 to the Second
Amended and Restated Investor Rights Agreement dated February 26,
1999
****4.6 Amendment No. 4 dated as of February 11, 2000 to the Second Amended
and Restated Investor Rights Agreement dated February 26, 1999
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
validity of securities being registered
*8.1 Opinion of Day, Berry & Howard LLP regarding certain tax aspects of
the merger
*8.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
certain tax aspects of the merger
**10.1 1998 Stock Incentive Plan, as amended
**10.2 1999 Non-Employee Directors' Option Plan
**+10.3 Purchase and License Agreement between Sycamore Networks, Inc. and
Williams Communications, Inc. dated March 5, 1999
***+10.4 Addendum to Purchase and License Agreement between Sycamore
Networks, Inc. and Williams Communications, Inc. dated November 21,
1999
****+10.5 Manufacturing Services Agreement between Sycamore Networks, Inc.
and Celestica Corporation dated February 9, 2000
**10.6 Lease dated as of December 21, 1998 between BerCar II LLC, a
Massachusetts limited liability company and Sycamore Networks, Inc.
regarding 10 Elizabeth Drive, Chelmsford, MA
**10.7 1999 Stock Incentive Plan
**10.8 Lease Agreement between WA/TIB Real Estate Limited Partnership and
Sycamore Networks, Inc. effective September 20, 1999
***10.9 Form of Indemnification Agreement between Sycamore, the Directors
of Sycamore Networks, Inc. and executive officers of Sycamore
Networks, Inc. each dated November 17, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
***10.10 Form of Change in Control Agreement between Sycamore Networks,
Inc. and executive officers of Sycamore Networks, Inc. each dated
November 17, 1999
***10.11 Promissory Note and Pledge Agreement dated October 20, 1999
between Sycamore Networks, Inc. and Kevin Oye, Vice President of
Business Development
****10.12 Promissory Note dated February 5, 1999 between Sycamore Networks,
Inc. and Eric Swanson
****10.13 Promissory Note dated June 16, 1999 between Sycamore Networks,
Inc. and Eric Swanson
****10.14 Lease Agreement between Sycamore Networks, Inc. and New Boston
Mill Road Limited Partnership dated March 8, 2000
****10.15 Assignment of Subleases between Sycamore Networks, Inc. and
Thermedics Detection, Inc. dated March 8, 2000
*****10.16 Lease Agreement between Sycamore Networks, Inc. and Farley White
Associates, LLC dated March 23, 2000
******10.17 Amended Voting Agreement dated as of June 5, 2000, by and among
Sycamore Networks, Inc., Sirocco Systems, Inc. and the
Stockholders named therein (included as Appendix B to the proxy
statement/prospectus forming a part of this Registration
Statement)
*23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included as
part of its opinions filed as Exhibit 5.1 and Exhibit 8.2,
respectively)
23.2 Consent of PricewaterhouseCoopers LLP (Boston, Massachusetts)
23.3 Consent of PricewaterhouseCoopers LLP (Hartford, Connecticut)
*23.4 Consent of Day, Berry & Howard LLP (included as part of its
opinion filed as Exhibit 8.1)
******24.1 Powers of Attorney (see signature page for previous filing)
99.1 Form of Proxy Card
******99.2 Form of Escrow Agreement, by and among Sycamore Networks, Inc.,
the Stockholder Representative named therein and the Escrow Agent
named therein (included as Appendix C to the proxy
statement/prospectus forming a part of this Registration
Statement)
</TABLE>
--------
* To be filed by amendment.
** Incorporated by reference to Sycamore Networks, Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-84635).
*** Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1999 filed with
the Commission on December 13, 1999.
**** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-30630)
***** Incorporated by reference to Sycamore Networks Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended April 29, 2000 filed with
the Commission on June 12, 2000.
****** Previously filed in Sycamore Networks, Inc.'s Registration Statement on
Form S-4 (Registration Statement No. 333-40146).
+ Confidential treatment granted 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.
