<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-30630
PROSPECTUS
10,200,000 Shares
[LOGO OF SYCAMORE NETWORK]
COMMON STOCK
----------------
Sycamore Networks, Inc. is offering 8,428,401 shares and the selling
stockholders are offering 1,771,599 shares.
----------------
Our common stock is listed on the Nasdaq National Market under the symbol
"SCMR." On March 13, 2000, the last reported sale price of the common stock
was $150 17/64 per share.
----------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
----------------
PRICE $150 1/4 A SHARE
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<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Sycamore Stockholders
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per
Share.... $150.25 $5.26 $144.99 $144.99
Total..... $1,532,550,000 $53,652,000 $1,222,033,861 $256,864,139
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Sycamore Networks has granted the underwriters the right to purchase up to an
additional 1,530,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
March 17, 2000.
----------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
J.P. MORGAN & CO.
DAIN RAUSCHER WESSELS
ROBERTSON STEPHENS
THOMAS WEISEL PARTNERS LLC
March 14, 2000
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 16
Use of Proceeds..................... 17
Price Range of Common Stock......... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial
Data............................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
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Page
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Business............................ 29
Management.......................... 39
Certain Transactions................ 48
Principal and Selling Stockholders.. 49
Description of Capital Stock........ 51
Shares Eligible for Future Sale..... 53
Underwriters........................ 56
Legal Matters....................... 58
Experts............................. 58
Where You Can Find More
Information........................ 58
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is contained in this prospectus. We and the selling stockholders are
offering to sell shares of common stock and seeking offers to buy shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of the common stock.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and the
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
SYCAMORE NETWORKS, INC.
We develop and market products that transport voice and data traffic over
wavelengths of light. Our products are designed to enable our customers to
quickly and cost effectively create usable network capacity over existing fiber
and thereby to create new high speed data services. Our target customers are
new and established providers of local voice and data transport services, long
distance carriers, Internet service providers, cable operators, foreign
telephone companies and carriers who provide services to other carriers, all of
which we refer to as service providers. These companies may provide such high
speed data services as access to the Internet, high speed data connections
between company sites, video conferencing and remote access to corporate
databases. We believe that the existing public network is unable to meet the
demand for high speed data transport services that are driving network growth.
As data traffic on the public network continues to grow at rates that surpass
available network capacity, we believe that service providers will require new
solutions to relieve network congestion and create new data services.
We call our products intelligent optical networking products because they
are designed to transmit and manage data directly on wavelengths of light, for
transmission over fiber optic cable. This will improve the efficiency of the
network, because data can be moved across the network and managed entirely in
the optical medium. In contrast, the existing public network is based on a
transmission technology, known as SONET/SDH, which requires optical signals
travelling across the network to be converted into electrical signals at each
network transit point, and then re-converted into optical signals for transport
to the next transit point. The multiple conversions required in a SONET/SDH
network increase network complexity and cost. Our products are based on a
common software architecture that we believe has a number of significant
benefits, including accelerating our release of new products and enabling our
customers to upgrade their networks without significant new capital equipment
or retraining.
Prior to May 1999, we were a development stage company principally engaged
in research and development. We began shipping our SN 6000 Intelligent Optical
Transport product in May 1999, our SN 8000 Intelligent Optical Node in August
1999 and our SilvxManager Network Management System in November 1999. Our SN
16000 Intelligent Optical Switch is currently in the test stage. Substantially
all of our revenues to date have been from sales of these products to one
customer, Williams Communications. We have incurred significant losses since
our inception, and as of January 29, 2000 we had an accumulated deficit of
$27.5 million.
Our products are designed to address the current and future needs of service
providers by offering an end-to-end optical networking solution that provides
the following benefits:
. Improves Network Flexibility and Scalability. Our software-based
equipment is designed to allow service providers to improve the
flexibility of, and the ability to expand, their networks without the
long lead times and large initial capital investment presently required
for a network buildout.
. Enables Rapid Service Delivery. Our products are designed to shorten the
time it takes for service providers to increase bandwidth and provide
services.
. Facilitates Introduction of New Data Services and Creation of New
Revenue Opportunities for Service Providers. The software-based
intelligence of our products allows us to rapidly introduce new features
into our products, which can in turn be offered as new services by
service providers to their customers.
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. Protects Existing Investments. Our products are designed to enable
service providers to increase the functionality and improve the
performance of their networks without sacrificing their existing
infrastructure investments in SONET/SDH equipment.
We market our products through a direct sales force and are currently
developing relationships with selected original equipment manufacturers and
other marketing partners, both domestically and internationally. In addition,
we work collaboratively with our customers and prospective customers to help
them identify and create new high speed data services that they can offer to
their customers. We believe that this assistance is an integral aspect of our
sales and marketing efforts.
We are a Delaware corporation. Our principal executive offices are located
at 10 Elizabeth Drive, Chelmsford, Massachusetts 01824 and our telephone number
is (978) 250-2900. Our World Wide Web site address is www.sycamorenet.com. The
information in the Web site is not incorporated by reference into this
prospectus.
Sycamore Networks, SN 6000, SN 8000, SilvxSource, SilvxManager, SN 16000,
SilvxONMS and SILVX are our trademarks. This prospectus also contains
trademarks of other companies.
THE OFFERING
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<C> <S>
Common stock offered by Sycamore Networks........... 8,428,401 shares
Common stock offered by the selling stockholders.... 1,771,599 shares
Common stock to be outstanding after this offering.. 244,523,253 shares
Use of proceeds..................................... We intend to use the net
proceeds from this
offering for general
corporate purposes,
principally working
capital and capital
expenditures. See "Use of
Proceeds."
Nasdaq National Market symbol....................... "SCMR"
</TABLE>
The above information is based upon the number of shares of common stock
outstanding as of January 29, 2000, giving effect to a 3-for-1 stock split
effected on February 11, 2000, and excludes 17,849,484 shares of common stock
issuable upon exercise of outstanding options at an average exercise price of
$19.37 per share and 43,292,112 shares of common stock reserved for future
issuance under our stock plans as of January 29, 2000.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
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<CAPTION>
Period from Inception Six Months Ended
(February 17, 1998) Year Ended ---------------------------------
through July 31, 1998 July 31, 1999 January 30, 1999 January 29, 2000
--------------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 11,330 $ -- $ 48,559
Total operating
expenses............... 793 22,893 4,243 34,679
Loss from operations.... (793) (20,049) (4,482) (11,856)
Net loss................ (693) (19,490) (4,289) (7,351)
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (.01) $ (.17) $ (.05) $ (.04)
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
(unaudited)............ 56,268 114,435 87,655 172,244
</TABLE>
Weighted average shares used in computing pro forma basic and diluted net
loss per share shown above exclude unvested shares of common stock subject to
repurchase rights, which totaled 15,768,000 and 36,261,000 for the period from
inception (February 17, 1998) through July 31, 1998 and year ended July 31,
1999, respectively; and 29,952,000 and 53,218,000 for the six months ended
January 30, 1999 and January 29, 2000, respectively.
The as adjusted column in the consolidated balance sheet data below gives
effect to the sale by us of 8,428,401 shares of common stock in this offering
at the public offering price of $150.25, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us.
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<CAPTION>
As of January 29,
2000
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Actual As Adjusted
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<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities........... $288,576 $1,509,585
Working capital............................................ 292,043 1,513,052
Total assets............................................... 344,678 1,565,687
Total stockholders' equity................................. 307,180 1,528,189
</TABLE>
Except as set forth in the consolidated financial statements or as otherwise
indicated, all information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option; and
. reflects a 3-for-1 stock split of the common stock effected on February
11, 2000.
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should consider carefully the risks described below before you
decide to buy our common stock.
Risks Related to Our Business
We Expect That Substantially All Of Our Revenues Will Be Generated From A
Limited Number Of Customers, And Our Revenues Will Not Grow If We Do Not
Successfully Sell Products To These Customers
We currently have a limited number of customers, one of whom, Williams
Communications, accounts for substantially all of our revenues to date.
Williams is not contractually committed to purchase any minimum quantities of
products from us. We expect that in the foreseeable future substantially all
of our revenues will continue to depend on sales of our intelligent optical
networking products to Williams and a limited number of potential new
customers. The rate at which our current and prospective customers purchase
products from us will depend, in part, on their success in selling
communications services based on these products to their own customers. Any
failure of current or prospective customers to purchase products from us for
any reason, including any determination not to install our products in their
networks or downturn in their business, would seriously harm our financial
condition or results of our operations.
We Have Been In Business For A Short Period Of Time And Your Basis For
Evaluating Us Is Limited
We were founded in February 1998. We began shipping our SN 6000 Intelligent
Optical Transport product in May 1999, our SN 8000 Intelligent Optical Network
Node in August 1999 and our SilvxManager Network Management System in November
1999. We have limited meaningful historical financial data upon which to base
projected revenues and planned operating expenses and upon which investors may
evaluate us and our prospects. In addition, our operating expenses are largely
based on anticipated revenue trends, and a high percentage of our expenses are
and will continue to be fixed. You should consider the risks and difficulties
frequently encountered by companies like ours in a new and rapidly evolving
market. Our ability to sell products, and the level of success, if any, we
achieve, depends, among other things, on the level of demand for intelligent
optical networking products, which is a new and rapidly evolving market.
Our Failure To Increase Our Revenues Would Prevent Us From Achieving And
Maintaining Profitability
We have incurred significant losses since inception and expect to continue
to incur losses in the future. As of January 29, 2000, we had an accumulated
deficit of $27.5 million. We have not achieved profitability on a quarterly or
annual basis and anticipate that we will continue to incur net losses. We
cannot assure you that our revenues will grow or that we will generate
sufficient revenues to achieve or sustain profitability. We have large fixed
expenses and we expect to continue to incur significant and increasing sales
and marketing, product development, administrative and other expenses. As a
result, we will need to generate significantly higher revenues to achieve and
maintain profitability.
We Are Entirely Dependent On Our Line Of Intelligent Optical Networking
Products And Our Future Revenue Depends On Their Commercial Success
Our future growth depends on the commercial success of our line of
intelligent optical networking products. To date, our SN 6000 Intelligent
Optical Transport product, SN 8000 Intelligent Optical Network Node and our
SilvxManager Network Management System are the only products that have been
shipped to customers. Our newest product is the SN 16000 Intelligent Optical
Switch. This product is currently in the test stage. We intend to develop and
introduce new products and enhancements to existing products in the future. We
cannot assure you that we will be successful in completing the development or
introduction of these products. Failure of our current or planned products to
operate as expected could delay or prevent their adoption. If our target
customers do not adopt, purchase and successfully deploy our current and
planned products, our revenues will not grow significantly.
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Because Our Products Are Complex And Are Deployed In Complex Environments,
They May Have Errors Or Defects That We Find Only After Full Deployment, Which
Could Seriously Harm Our Business
Our 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. Our 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 we are unable to fix errors or
other problems that may be identified in full deployment, we could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
The Long And Variable Sales Cycles For Our Products May Cause Revenues And
Operating Results To Vary Significantly From Quarter To Quarter
A customer's decision to purchase our intelligent optical networking
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. As a result, our sales
cycle is likely to be lengthy. Throughout the sales cycle, we spend
considerable time and expense educating and providing information to
prospective customers about the use and features of our products. Even after
making a decision to purchase, we believe that our 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, we
may receive purchase orders for significant dollar amounts on an irregular and
unpredictable basis. Because of our limited operating history and the nature
of our business, we cannot predict these sales and deployment cycles. The long
sales cycles, as well as our expectation that customers will tend to
sporadically place large orders with short lead times, may cause our revenues
and results of operations to vary significantly and unexpectedly from quarter
to quarter.
We May Not Be Successful If Our Customer Base Does Not Grow
Our future success will depend on our attracting additional customers. The
growth of our customer base could be adversely affected by:
. customer unwillingness to implement our new optical networking
architecture;
. any delays or difficulties that we may incur in completing the
development and introduction of our planned products or product
enhancements;
. new product introductions by our competitors;
. any failure of our products to perform as expected; or
. any difficulty we may incur in meeting customers' delivery requirements.
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The Intelligent Optical Networking Market Is New And Our Business Will
Suffer If It Does Not Develop As We Expect
The market for intelligent optical networking products is new. We cannot
assure you that a viable market for our products will develop or be
sustainable. If this market does not develop, or develops more slowly than we
expect, our business, results of operations and financial condition would be
seriously harmed.
If We Do Not Respond Rapidly To Technological Changes, Our 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. We may be unable to
respond quickly or effectively to these developments. We may experience
design, manufacturing, marketing and other difficulties that could delay or
prevent our 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 our existing or future
products obsolete.
In developing our products, we have made, and will continue to make,
assumptions about the standards that may be adopted by our customers and
competitors. If the standards adopted are different from those which we have
chosen to support, market acceptance of our products may be significantly
reduced or delayed and our business will be seriously harmed. In addition, the
introduction of products incorporating new technologies and the emergence of
new industry standards could render our existing products obsolete.
In addition, in order to introduce products incorporating new technologies
and new industry standards, we must be able to gain access to the latest
technologies of our customers, our suppliers and other network vendors. Any
failure to gain access to the latest technologies could impair the
competitiveness of our products.
Customer Requirements Are Likely To Evolve, And We Will Not Retain
Customers or Attract New Customers If We Do Not Anticipate And Meet Specific
Customer Requirements
Our current and prospective customers may require product features and
capabilities that our current products do not have. To achieve market
acceptance for our products, we must effectively and timely anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Our failure to develop products or offer services that
satisfy customer requirements would seriously harm our ability to increase
demand for our products.
We intend 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. We
may experience design, manufacturing, marketing and other difficulties that
could delay or prevent the development, introduction or marketing of new
products and enhancements. The introduction of new or enhanced products also
requires that we 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.
Our inability to effectively manage this transition would cause us to lose
current and prospective customers.
Our Market Is Highly Competitive, And Our Failure To Compete Successfully
Would Limit Our Ability to Increase Our 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 our products address. Many of our
current and potential competitors have significantly greater selling and
marketing, technical, manufacturing, financial, and other resources, including
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vendor-sponsored financing programs. Moreover, our competitors may foresee the
course of market developments more accurately and could in the future develop
new technologies that compete with our products or even render our products
obsolete. Due to the rapidly evolving markets in which we compete, additional
competitors with significant market presence and financial resources may enter
those markets, thereby further intensifying competition.
In order to compete effectively, we 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, we believe that a knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers
to develop new services for their customers, and an ability to provide vendor-
sponsored financing, are important competitive factors in our market. We have
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 our competitors who are able to provide more extensive
financing programs.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations and
reduced gross margins, any one of which could materially and adversely affect
our business, results of operations and financial condition.
We Are Likely To Face Difficulties In Obtaining And Retaining Customers If
We Do Not Expand Our Sales Organization And Our Customer Service And Support
Operations
Our products and services require a sophisticated sales effort targeted at
a limited number of key individuals within our prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. We are in the process of building our direct sales force and plan
to hire additional qualified sales personnel and consulting engineers.
Competition for these individuals is intense, and we might not be able to hire
and train the kind and number of sales personnel and consulting engineers
required for us to be successful. In addition, we believe that our future
success is dependent upon our ability to establish successful relationships
with a variety of distribution partners. If we are unable to expand our direct
sales operations, or expand our indirect sales channel, we may not be able to
increase market awareness or sales of our products, which may prevent us from
achieving and maintaining profitability.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers. The support of our
products requires highly trained customer service and support personnel.
Hiring customer service and support personnel is very competitive in our
industry because there are a limited number of people available with the
necessary technical skills and understanding of our market. Once we hire them,
they may require extensive training in our intelligent optical networking
products. If we are unable to expand our customer service and support
organization and train our personnel rapidly, we may not be able to increase
sales of our products.
We Depend Upon Contract Manufacturers And Any Disruption In These
Relationships May Cause Us To Fail To Meet The Demands Of Our Customers And
Damage Our Customer Relationships
We do not have internal manufacturing capabilities. We rely on a small
number of contract manufacturers to manufacture our products in accordance
with our specifications, and to fill orders on a timely basis. We
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recently executed a supply contract with Celestica Corporation, which provides
comprehensive manufacturing services, including assembly, test, control and
shipment to our customers, and procures material on our behalf. We may not be
able to effectively manage our relationship with Celestica, and Celestica may
not meet our future requirements for timely delivery. Each of our contract
manufacturers also builds products for other companies, and we cannot assure
you that they will always have sufficient quantities of inventory available to
fill orders placed by our customers, or that they will allocate their internal
resources to fill these orders on a timely basis. Except for our contract with
Celestica, we do not have any on-going supply contracts with these
manufacturers. At present, we purchase products from these 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 our products. If we are required or
choose to change contract manufacturers, we may lose revenue and damage our
customer relationships.
We Rely On Single Sources For Supply Of Certain Components And Our Business
May Be Seriously Harmed If Our Supply Of Any Of These Components And Other
Components Is Disrupted
We currently purchase 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. We purchase each of these components on a purchase order basis and
have no long-term contracts for these components. Although we believe that
there are alternative sources for each of these components, in the event of a
disruption in supply, we may not be able to develop an alternate source in a
timely manner or at favorable prices. Such a failure could hurt our ability to
deliver our products to our customers and negatively affect our operating
margins. In addition, our reliance on our suppliers exposes us 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 our products, a
shortage or decrease in supply would seriously impact future sales and
revenue.
The Unpredictability Of Our Quarterly Results May Adversely Affect The
Trading Price Of Our Common Stock
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. The primary factors
that may affect us include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of our products;
. the length and variability of the sales cycle for our products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by our competitors and
ourselves;
. changes in our pricing policies or the pricing policies of our
competitors;
. our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. our ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels
for our 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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We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution
channels. We also plan to expand our general and administrative capabilities
to address the increased reporting and other administrative demands which will
result from the increasing size of our business. Our operating expenses are
largely based on anticipated organizational growth and revenue trends and a
high percentage of our 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 our
operating results from quarter to quarter and could result in substantial
operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. You should not rely on our results or growth for one quarter as
any indication of our future performance. It is likely that in some future
quarters, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our common stock could
decrease.
If Our Products Do Not Interoperate With Our Customers' Networks,
Installations Will Be Delayed Or Cancelled And Could Result In Substantial
Product Returns, Which Could Seriously Harm Our Business
Many of our customers will require that our products be specifically
designed to interface with their existing networks, each of which may have
different specifications and utilize multiple protocol standards. Our
customers' networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. Our products must
interoperate with all of the products within these networks as well as future
products in order to meet our customers' requirements. The requirement that we
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 our
products. If we find errors in the existing software used in our customers'
networks, we would have to modify our products to fix or overcome these errors
so that our products will interoperate and scale with the existing software
and hardware. If our products do not interoperate with those of our customers'
networks, installations could be delayed, orders for our products could be
cancelled or our products could be returned. This would also seriously harm
our reputation, all of which could seriously harm our business and prospects.
Undetected Software Or Hardware Errors And Problems Arising From Use Of Our
Products In Conjunction With Other Vendors' Products Could Result In Delays or
Loss of Market Acceptance of Our Products
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. We expect that
errors will be found from time to time in new or enhanced products after we
begin commercial shipments. In addition, service providers typically use our
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 us to incur significant warranty, support and repair
costs, divert the attention of our engineering personnel from our 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 our products and would likely have a material adverse effect on
our business, results of operations and financial condition. Defects,
integration issues or other performance problems in our products could result
in financial or other damages to our customers or could damage market
acceptance for our products. Our customers could also seek damages for losses
from us. A product liability claim brought against us, even if unsuccessful,
would likely be time consuming and costly.
Our Failure To Establish And Maintain Key Customer Relationships May Result
In Delays In Introducing New Products Or Cause Customers To Forego Purchasing
Our Products
Our future success will also depend upon our 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
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needs of our customers. Our failure to establish and maintain these customer
relationships may adversely affect our ability to develop new products and
product enhancements. In addition, we may experience delays in releasing new
products and product enhancements in the future. Material delays in
introducing new products and enhancements or our inability to introduce
competitive new products may cause customers to forego purchases of our
products and purchase those of our competitors, which could seriously harm our
business.
Our Failure To Continually Improve Our Internal Controls And Systems, And
Hire Needed Personnel, Could Impair Our Future Growth
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have grown our headcount
substantially. For example, at July 31, 1999, we had a total of 148 employees
and at January 29, 2000, we had a total of 277 employees. In addition, we plan
to continue to hire a significant number of employees this fiscal year. Our
growth has placed, and our anticipated growth will continue to place, a
significant strain on our management systems and resources. Our ability to
successfully offer our products and implement our business plan in a rapidly
evolving market requires an effective planning and management process. We
expect that we will need to continue to improve our financial, managerial and
manufacturing controls and reporting systems, and will need to continue to
expand, train and manage our work force worldwide. We may not be able to
implement adequate control systems in an efficient and timely manner.
Competition for highly skilled personnel is intense, especially in the New
England area. Any failure to attract, assimilate or retain qualified personnel
to fulfill our current or future needs could impair our growth.
We Depend On Our Key Personnel To Manage Our Business Effectively In A
Rapidly Changing Market And If We Are Unable To Retain Our Key Employees, Our
Ability To Compete Could Be Harmed
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel,
who have critical industry experience and relationships that we rely on to
implement our business plan. None of our officers or key employees is bound by
an employment agreement for any specific term. We do not have "key person"
life insurance policies covering any of our employees. The loss of the
services of any of our key employees could delay the development and
introduction of, and negatively impact our ability to sell, our products.
If We Become Subject To Unfair Hiring Claims, We Could Incur Substantial
Costs In Defending Ourselves
Companies in our industry, whose employees accept positions with
competitors, frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive claims of this
kind or other claims relating to our employees in the future as we seek to
hire qualified personnel or that those claims will not result in material
litigation. We could incur substantial costs in defending ourselves or our
employees against such claims, regardless of their merits. In addition,
defending ourselves or our employees from such claims could divert the
attention of our management away from our operations.
Our Ability To Compete Could Be Jeopardized If We Are Unable To Protect Our
Intellectual Property Rights From Third-Party Challenges
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. If competitors are
able to use our technology, our ability to compete effectively could be
harmed.
12
<PAGE>
If Necessary Licenses Of Third-Party Technology Are Not Available To Us Or
Are Very Expensive, Our Products Could Become Obsolete
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third party licenses will be available to us 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 us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could seriously harm the competitiveness of our
products.
We Could Become Subject To Litigation Regarding Intellectual Property
Rights, Which Could Seriously Harm Our Business And Require Us To Incur
Significant Costs
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have not
been involved in any intellectual property litigation, we may be a party to
litigation in the future to protect our intellectual property or as a result
of an allegation that we infringe others' intellectual property. Any parties
asserting that our products infringe upon their proprietary rights would force
us to defend ourselves and possibly our customers or manufacturers against the
alleged infringement. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
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
us to do one or more of the following:
. stop selling, incorporating or using our 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 we are forced to take any of the foregoing actions, our business may be
seriously harmed.
We May Face Risks Associated With Our International Expansion That Could
Impair Our Ability To Grow Our Revenues Abroad
We intend to continue to expand our 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. We may not
be able to develop international market demand for our products.
We have limited experience in marketing, distributing and supporting our
products internationally and to do so, we expect that we will need to develop
versions of our 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.
13
<PAGE>
We Face A Number Of Unknown Risks Associated With Year 2000 Problems That
Could Result In Claims Against Us Or Impair The Use Of Our Products By Our
Customers
The year 2000 computer issue creates a variety of risks for us. The year
2000 computer problem refers to the potential for system and processing
failures of date-related data as a result of computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date
represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The risks involve:
. potential warranty or other claims by our customers;
. errors in systems we use to run our business;
. errors in systems used by our suppliers;
. errors in systems used by our customers; and
. potential reduced spending by other companies on intelligent optical
network products as a result of significant spending on year 2000
remediation.
We have designed our products for use in the year 2000 and beyond and
believe they are year 2000 compliant. To date we are not aware of any problems
related to these products as a result of the transition to January 1, 2000.
However, our products are generally integrated into larger networks involving
sophisticated hardware and software products supplied by other vendors. Each
of our customers' networks involves different combinations of third party
products. We cannot evaluate whether all of their products are year 2000
compliant. We may face claims based on year 2000 problems in other companies'
products or based on issues arising from the integration of multiple products
within the overall network. Although no year 2000 claims have been made
against us, we may in the future be required to defend our products in legal
proceedings which could be expensive regardless of the merits of these claims.
If our suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult
to determine which party's products have caused the problem. These failures
could interrupt our operations and damage our relationships with our
customers. To date we have not received any notification from these third
parties of any year 2000 problem or disruption that they are experiencing.
However, due to the general uncertainty inherent in the year 2000 problem
resulting from the readiness of third-party suppliers and vendors, we are
unable to assure you that the consequences of their year 2000 failures will
not materially affect us. The success to date of our year 2000 efforts and the
efforts of our third party suppliers and vendors cannot guarantee that year
2000 problems will not materially harm our business and our financial results.
Our current and prospective customers' purchasing plans could be affected
by year 2000 issues if they need to expend significant resources to fix their
existing systems to become year 2000 compliant. This situation may reduce
funds available to purchase our products.
Any Acquisitions We Make Could Disrupt Our Business And Seriously Harm Our
Financial Condition
As part of our ongoing business development strategy, we consider
acquisitions and strategic investments in complementary companies, products or
technologies. We are currently evaluating potential transactions and
transaction prospects, but do not currently have any agreements or commitments
with respect to any acquisition or investment. In the event of any purchases,
we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
14
<PAGE>
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
Our 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 our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future and any failure to do so could disrupt our business and seriously harm
our financial condition.
Risks Related To The Securities Markets And This Offering
Our Stock Price May Be Volatile
An active public market for our common stock may not be sustained. The
market for technology stocks has been extremely volatile. The following
factors could cause the market price of our common stock to fluctuate
significantly:
. our loss of a major customer;
. the addition or departure of key personnel;
. variations in our quarterly operating results;
. announcements by us or our competitors of significant contracts, new
products or product enhancements;
. acquisitions, distribution partnerships, joint ventures or capital
commitments;
. changes in financial estimates by securities analysts;
. our sales of common stock or other securities in the future;
. changes in market valuations of broadband access technology companies;
. changes in market valuations of networking and telecommunications
companies; and
. fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market
and technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices and
multiples are substantially above historical levels. These trading prices and
multiples may not be sustained. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless
of our actual operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities
15
<PAGE>
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 Our Common Stock That Could
Cause Our Stock Price To Fall
Our common stock began trading on the Nasdaq National Market on October 22,
1999. To date there have been a limited number of shares trading in the public
market. This offering will result in additional shares of our common stock
being available on the open market. In addition, certain of our current
stockholders hold a substantial number of shares which are currently subject
to lock-up agreements or other restrictions limiting such stockholders ability
to sell such shares. These stockholders may be able to sell such shares in the
public market in the near future. In addition, as of January 29, 2000, options
to purchase a total of 17,849,484 shares of common stock were outstanding,
which options are subject to vesting schedules. Sales of a substantial number
of shares of our common stock in this offering and thereafter could cause our
stock price to fall. In addition, the sale of shares by our stockholders could
impair our ability to raise capital through the sale of additional stock. See
"Shares Eligible For Future Sales."
Management May Apply The Proceeds Of This Offering To Uses That Do Not
Increase Our Profits Or Market Value
Our management will have considerable discretion in the application of the
net proceeds from this offering and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
Insiders Have Substantial Control Over Sycamore And Could Limit Your
Ability To Influence The Outcome Of Key Transactions, Including Changes of
Control
The executive officers, directors and entities affiliated with them will,
in the aggregate, beneficially own approximately 79.6% of our outstanding
common stock following the completion of this offering assuming full exercise
of the over-allotment option. These stockholders, if acting together, would be
able to influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
Provisions Of Our Charter Documents And Delaware Law May Have Anti-Takeover
Effects That Could Prevent A Change Of Control
Provisions of our amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will" and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of
operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in
these risk factors and elsewhere in this prospectus could have a material
adverse effect on our business, results of operations and financial position.
16
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 8,428,401 shares of
common stock offered by us at an assumed public offering price of $150.25 per
share will be approximately $1.2 billion after deducting estimated offering
expenses of $1.0 million and the underwriting discounts and commissions
payable by us. We will not receive any of the proceeds from the sale of the
shares being sold by the selling stockholders. See "Principal and Selling
Stockholders."
The principal purposes of this offering are to obtain additional working
capital, create a larger public float for our common stock, facilitate our
future access to public capital markets and allow for the orderly liquidation
of a portion of the investments made by certain of our stockholders.
We expect to use the net proceeds from the sale of shares of common stock
offered by us for general corporate purposes, including for working capital
and capital expenditures, and to expand our sales and marketing operations,
broaden our customer support capabilities, develop new distribution channels
and fund research and development. We may use a portion of the net proceeds to
acquire or make investments in businesses, products or technologies that we
believe will complement our current or future business. While we are currently
evaluating potential transactions and transaction prospects, we do not
currently have agreements or commitments with respect to any acquisition or
investment. We will retain broad discretion in the allocation of the net
proceeds of this offering. Pending such uses, we plan to invest the net
proceeds in investment grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "SCMR" since October 22, 1999. Prior to that time, there was no public
market for the common stock. The following table sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the Nasdaq National Market.
<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 March 13, 2000).......................... 189.94 95.50
</TABLE>
On March 13, 2000, the reported last sale price on the Nasdaq National
Market for our common stock was $150.27. As of January 29, 2000, there were
approximately 563 stockholders of record.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the board of directors and will be dependent upon our
financial condition, results of operations, capital requirements, general
business condition and such other factors as the board of directors may deem
relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of January 29, 2000.
The as adjusted information reflects the issuance and sale of the 8,428,401
shares of common stock offered by us in this offering at the public offering
price of $150.25 per share and the application of the estimated net proceeds
we expect to receive from this offering. The outstanding share information
excludes (1) 17,849,484 shares of common stock issuable upon exercise of
outstanding options as of January 29, 2000, (2) 39,722,112 shares of common
stock reserved for future issuance under our 1999 Stock Incentive Plan as of
January 29, 2000, (3) 2,250,000 shares of common stock reserved for future
issuance under our 1999 Employee Stock Purchase Plan as of January 29, 2000
and (4) 1,320,000 shares of common stock reserved for future issuance under
our 1999 Non-Employee Director Option Plan as of January 29, 2000. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial data
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of January 29, 2000
------------------------------------
Actual As Adjusted
--------------- -------------------
(in thousands, except share data)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, no shares issued and
outstanding............................... $ -- $ --
--------------- -----------------
Common stock, $.001 par value;
1,500,000,000 shares authorized,
236,094,852 shares issued and outstanding,
actual; 244,523,253 shares issued and
outstanding, as adjusted ................. 236 245
Additional paid-in capital................. 384,821 1,605,821
Accumulated deficit........................ (27,534) (27,534)
Notes receivable........................... (460) (460)
Deferred compensation...................... (49,852) (49,852)
Accumulated other comprehensive loss....... (31) (31)
--------------- -----------------
Total stockholders' equity............... 307,180 1,528,189
--------------- -----------------
Total capitalization................... $ 307,180 $ 1,528,189
=============== =================
</TABLE>
18
<PAGE>
DILUTION
Our net tangible book value at January 29, 2000 was approximately $307.2
million, or $1.30 per share of common stock. Net tangible book value per share
represents our tangible net worth (tangible assets less total liabilities)
divided by the 236,094,852 shares of common stock outstanding. After giving
effect to the issuance and sale of the shares of common stock offered by us in
this offering (at the public offering price of $150.25 per share) and the
receipt and application of the net proceeds from the sale of these shares, our
net tangible book value at January 29, 2000 would be $1.5 billion, or $6.25
per share. This represents an immediate increase in the net tangible book
value to existing stockholders of $4.95 per share and an immediate dilution to
new investors of $144.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $150.25
Net tangible book value per share at January 29, 2000.......... $1.30
Increase in net tangible book value per share attributable to
new investors................................................. 4.95
-----
Net tangible book value per share after this offering............ 6.25
-------
Dilution per share to new investors.............................. $144.00
=======
</TABLE>
The table above assumes no exercise of the underwriters' over-allotment
option. See "Underwriters." The foregoing table also assumes no options have
been or are exercised after January 29, 2000. As of January 29, 2000, there
were outstanding options to purchase 14,373,147 shares of common stock at a
weighted average exercise price of $3.63 per share under our 1998 Stock
Incentive Plan, outstanding options to purchase 3,386,337 shares of common
stock at a weighted average exercise price of $86.58 per share under our 1999
Stock Incentive Plan and outstanding options to purchase 90,000 shares of
common stock at a weighted average exercise price of $3.00 per share under our
1999 Non-Employee Director Option Plan. To the extent any of these options are
exercised, there will be further dilution to new investors. To the extent all
of such outstanding options had been exercised as of January 29, 2000, net
tangible book value per share after this offering would be $7.14 and total
dilution per share to new investors would be $143.11.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and other financial data included elsewhere in this prospectus.
The 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
balance sheet data as of 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 prospectus. The consolidated
statement of operations data for the six-month periods ended January 30, 1999
and January 29, 2000, and the consolidated balance sheet data as of January
29, 2000 are unaudited. In the opinion of management, all necessary
adjustments (consisting only of normal recurring adjustments) have been
included to present fairly 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.
<TABLE>
<CAPTION>
Period from
Inception
(February 17, Six Months Ended
1998) Year -----------------------
through Ended January 30, January 29,
July 31, 1998 July 31, 1999 1999 2000
------------- ------------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues................... $ -- $ 11,330 $ -- $48,559
Cost of revenues........... -- 8,486 239 25,736
------ -------- ------- -------
Gross profit (loss)...... -- 2,844 (239) 22,823
Operating expenses:
Research and
development............. 497 13,955 3,238 18,019
Sales and marketing...... 92 4,064 422 8,395
General and
administrative.......... 199 1,405 373 1,910
Amortization of stock
compensation............ 5 3,469 210 6,355
------ -------- ------- -------
Total operating
expenses.............. 793 22,893 4,243 34,679
------ -------- ------- -------
Loss from operations....... (793) (20,049) (4,482) (11,856)
Interest income, net....... 100 559 193 4,505
------ -------- ------- -------
Net loss................... $ (693) $(19,490) $(4,289) $(7,351)
====== ======== ======= =======
Basic and diluted net loss
per share................. $ (.18) $ (2.09) $ (.47) $ (.07)
Weighted average shares
used in computing basic
and diluted net loss per
share..................... 3,753 9,324 9,160 107,555
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (.01) $ (.17) $ (.05) $ (.04)
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
(unaudited)............... 56,268 114,435 87,655 172,244
</TABLE>
<TABLE>
<CAPTION>
As of
As of As of January 29,
July 31, 1998 July 31, 1999 2000
------------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities........................... $4,279 $28,989 $288,576
Working capital....................... 4,341 40,450 292,043
Total assets.......................... 5,081 57,912 344,678
Long term debt, less current portion.. -- 4,054 --
Total stockholders' equity (deficit).. (678) (13,623) 307,180
</TABLE>
- --------
See note 2 to the notes to the consolidated financial statements for a
description of the computation of basic and diluted net loss per share, pro
forma basic and diluted net loss per share and the number of shares used to
compute basic and diluted net loss per share and pro forma basic and diluted
net loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
We develop and market products that transport voice and data traffic over
wavelengths of light. Our products enable service providers to quickly and
cost effectively provide bandwidth and create new high-speed data services.
From our inception on February 17, 1998 through May 1, 1999, our operating
activities consisted primarily of research and development, product design,
development and testing. During this period, we also staffed and trained our
administrative, marketing and sales personnel and began sales and marketing
activities. We began shipping our SN 6000 Intelligent Optical Transport
product in May 1999, our SN 8000 Intelligent Optical Network Node in August
1999 and our SilvxManager Network Management System in November 1999. To date
all of our product revenues have been derived from these products. Since our
inception, we have incurred significant losses, and as of January 29, 2000, we
had an accumulated deficit of $27.5 million. We have not achieved
profitability on a quarterly or an annual basis.
Our SN 16000 Intelligent Optical Switch product is currently in the test
stage. While we are developing and plan to introduce new products and
enhancements, we cannot assure you that we will be successful in these
efforts.
We have a lengthy sales cycle for our products and, accordingly, we expect
to incur sales and other expenses before we realize the related revenue. We
expect to continue to incur significant sales and marketing, research and
development and general and administrative expenses and, as a result, we will
need to generate significant revenues to achieve and maintain profitability.
Our 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. We record a
warranty liability for parts and labor on our products. Warranty periods are
generally three years from installation date. Estimated warranty costs are
recorded at the time of revenue recognition.
Our manufacturing expenses consist of amounts paid to third party
manufacturers, manufacturing start-up expenses, manufacturing personnel and
related costs and our customer support group. We outsource our manufacturing
and assembly requirements. Accordingly, a significant portion of our
manufacturing expenses consists of payments to a third-party contract
manufacturer. Manufacturing and engineering documentation controls are
performed at our facility in Chelmsford, Massachusetts. We believe that our
gross margins will be affected primarily by the following factors:
. demand for our products;
. new product introductions both by us and by our competitors;
. changes in our pricing policies and those of our 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 our products. To date, we have
expensed our research and development costs as they were incurred. Several
components of our research and development effort require significant
expenditures, the timing of which can cause significant quarterly variability
in our expenses. We incur significant expenses in connection with the purchase
of testing equipment for our products. We believe that research and
development is critical to our strategic product development objectives and
intend to enhance our technology to meet the changing requirements of our
customers. As a result, we expect our research and development expenses to
increase in absolute dollars in the future.
21
<PAGE>
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. We expect that
sales and marketing expenses will increase in absolute dollars in the future
as we increase our direct sales efforts, expand our 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. We expect that general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs related to the
growth of our business and our 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 six
months ended January 29, 2000, which were deemed to be below fair market
value, we recorded deferred stock compensation expense of approximately
$184,000 and $25.2 million and $31.2 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 our 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
Six Months Ended January 29, 2000 and January 30, 1999
Revenues
We began shipping the SN 6000 in May 1999, the SN 8000 in August 1999 and
SilvxManager in November 1999. Revenues for the six months ended January 29,
2000 were $48.6 million (none for the corresponding period in fiscal 1999).
For the six months ended January 29, 2000, one customer, Williams
Communications, accounted for substantially all of our revenues.
Cost of Revenues
Cost of revenues was $25.7 million for the six months ended January 29,
2000 compared to $239,000 for the six months ended January 30, 1999. Cost of
revenues includes material costs, costs of manufacturing overhead, the cost of
the customer service organization and other period costs.
Research and Development Expenses
Research and development expenses increased $14.8 million to $18.0 million
for the six months ended January 29, 2000 compared to $3.2 million for the
same period in fiscal 1999. The increase in expenses was primarily due to
increased costs associated with a significant increase in personnel and
personnel-related expenses, an increase in non-recurring engineering costs and
an increase in prototype expenses for the design and development of new
products as well as enhancements to existing products. Research and
development is essential to our future success and we expect that the dollar
amounts of research and development expenses will increase in future periods.
Sales and Marketing Expenses
Sales and marketing expenses increased $8.0 million to $8.4 million for the
six months ended January 29, 2000 compared to $422,000 for the same period in
fiscal 1999. The increase in expenses reflects the hiring of additional sales
and marketing personnel, sales based commissions and marketing program costs,
including web development, trade shows and product launch activities. We
intend to continue to expand our domestic and international sales force and
marketing efforts, and as a result, expect that the dollar amounts of sales
and marketing expenses will increase in future periods.
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General and Administrative Expenses
General and administrative expenses increased $1.5 million to $1.9 million
for the six months ended January 29, 2000 compared to $373,000 for the same
period in fiscal 1999. The increase in expenses reflects the hiring of
additional general and administrative personnel and expenses necessary to
support increased levels of business activities. We expect that the dollar
amounts of general and administrative expenses will increase in future periods
as a result of expansion of business activity and the reporting and other
requirements of being a publicly traded company.
Amortization of Stock Compensation
Amortization of stock compensation expense was $5.3 million and $210,000
for the six months ended January 29, 2000 and January 30, 1999, respectively.
Amortization of stock compensation expense in both periods resulted from the
granting of stock options and restricted shares with the exercise or sales
prices below the deemed fair value of our common stock on the date of grant.
Additionally, for the six months ended January 29, 2000, we incurred $1.1
million of compensation expense associated with the grant of options to non-
employees and consultants. Amortization of stock compensation is expected to
impact our reported results of operations through the first quarter of fiscal
2005.
Interest Income, Net
Interest income, net was $4.5 million and $193,000 for the six months ended
January 29, 2000 and January 30, 1999, respectively. The increase in interest
income reflects higher invested balances and interest earnings on the proceeds
of our initial public offering, offset by interest payments on the notes
payable.
Net Operating Losses and Tax Credit Carryforwards
As of January 29, 2000, we had approximately $17.0 million of state and
federal net operating loss carryforwards for tax reporting purposes available
to offset future taxable income. Such net operating loss carryforwards begin
to expire in 2005 and 2020, respectively, to the extent that they are not
utilized. We have not recognized any benefit from the future use of loss
carryforwards for these periods, or for any other periods, since inception.
Management's evaluation of all the available evidence in assessing
realizability of the tax benefits of such loss carryforwards indicates that
the underlying assumptions of future profitable operations contain risks that
do not provide sufficient assurance to recognize the tax benefits currently.
The net operating loss carryforwards could be limited in future years if there
is a significant change in our ownership. We will re-evaluate our ability to
utilize the net operating loss carryforwards on a quarterly basis.
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Period from inception (February 17, 1998) through July 31, 1998 (fiscal 1998)
and the year ended July 31, 1999
Revenues
We 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 our revenue.
Cost of Revenues
Cost of revenues was $8.5 million, or 75% of revenue, for the year ended
July 31, 1999. We 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 our future success and we expect 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. We intend to continue to expand our 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 our 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 our common stock on the date of grant. Additionally, in fiscal 1999,
we incurred $2.1 million of compensation expense associated with the grant of
options to non-employees and members of our 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 our cash
balances and marketable securities and interest expense associated
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with our equipment note payable. The increase in interest income reflects
higher invested balances in 1999, offset by interest payments on our equipment
note payable in 1999.
Quarterly Results of Operations
The following table presents our operating results for the quarters ended
July 31, 1999, October 30, 1999 and January 29, 2000, which are the only
quarters for which we have recognized revenue, together with the percentage of
revenues of certain items in our 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, have been included to present
fairly the unaudited quarterly results when read in conjunction with our
audited financial statements and the related notes appearing elsewhere in this
prospectus. These operating results are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
July 31, October 30, January 29,
1999 1999 2000
------------ ------------ ----------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues....................... $11,330 100% $19,510 100% $ 29,049 100%
Cost of revenues............... 7,313 65 10,340 53 15,396 53
------- --- ------- --- -------- ----
Gross profit................. 4,017 35 9,170 47 13,653 47
------- --- ------- --- -------- ----
Operating expenses:
Research and development....... 7,383 65 7,844 40 10,175 35
Sales and marketing............ 2,466 22 3,445 18 4,950 17
General and administrative..... 653 6 751 4 1,159 4
Amortization of stock
compensation.................. 2,667 23 3,289 17 3,066 11
------- --- ------- --- -------- ----
Total operating expenses..... 13,169 116 15,329 79 19,350 67
------- --- ------- --- -------- ----
Loss from operations........... (9,152) (81) (6,159) (32) (5,697) (20)
Interest income, net........... 71 1 442 3 4,063 14
------- --- ------- --- -------- ----
Net loss....................... $(9,081) (80)% $(5,717) (29)% $ (1,634) (6)%
======= === ======= === ======== ====
</TABLE>
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. The primary factors
that may affect us include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of our products;
. the length and variability of the sales cycle for our products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by our competitors and
ourselves;
. changes in our pricing policies or the pricing policies of our
competitors;
. our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. our ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels
for our products;
. the timing and level of prototype expenses;
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. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution
channels. We also plan to expand our general and administrative capabilities
to address the increased reporting and other administrative demands which will
result from increasing the size of our business. Our operating expenses are
largely based on anticipated organizational growth and revenue trends and a
high percentage of our 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 our
operating results from quarter to quarter and could result in substantial
operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. You should not rely on our results or growth for one quarter as
any indication of our future performance. It is likely that in some future
quarters, our operating results may be below the expectations of public market
analysts and investors. In this event, the price of our common stock will
probably decrease.
Liquidity and Capital Resources
Prior to our initial public offering, which we completed in October 1999,
we financed our operations primarily through private sales of our capital
stock totaling approximately $58.7 million and through borrowings on long-term
debt agreements for the purchase of capital equipment. In our initial public
offering, we sold 22,425,000 shares of common stock at a price to the public
of $12.67 per share. The net proceeds of our initial public offering, after
deducting underwriting discounts and other offering expenses, were
approximately $263.0 million. As of January 29, 2000 we had $288.6 million in
cash, cash equivalents and marketable securities. We invest excess funds in
short-term money market funds, commercial paper and government and non-
government debt securities.
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 six months ended
January 29, 2000, the cash provided by operating activities was $10.3 million,
an increase of $37.9 million as compared to $27.6 million cash used in fiscal
1999. The increase in cash generated from operating activities reflects
decreased net losses and increased accrued expenses and accounts payable,
offset by increased inventory purchases.
Cash used in investing activities was $3.7 million in fiscal 1998, $10.0
million for the year ended July 31, 1999 and $155.2 million in the six months
ended January 29, 2000. The increase in net cash used in investing activities
reflects increased purchases of property and equipment, primarily for
computers and test equipment for our development and manufacturing activities,
and increased net purchases of marketable securities.
Cash provided by financing activities was $5.5 million in fiscal 1998,
$58.4 million for the year ended July 31, 1999 and $260.9 million in the six
months ended January 29, 2000. The increase in cash provided by financing
activities reflects the proceeds from the issuance of preferred and common
stock, including our initial public offering in October, 1999 offset by
payments of debt obligations.
In December 1998, we 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.
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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 we may provide or commit to extend credit or
credit support to our customers as we consider appropriate in the course of
our business, considering our limited resources. This financing may include
extending credit to customers or guaranteeing the indebtedness of customers to
third parties. Depending upon market conditions, we may seek to factor these
arrangements to financial institutions and investors to free up our capital
and reduce the amount of our commitments for such arrangements. Our ability to
provide customer financing is limited and depends upon a number of factors,
including our capital structure and level of our available credit and our
ability to factor commitments. Any extension of financing to our customers
will limit the capital that we have available for other uses.
Although we believe that our current cash balances, together with the
anticipated proceeds of this offering, will be sufficient to fund our
operations for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or
at all.
Year 2000 Readiness Disclosure
State of Readiness of Our Products
We have designed our products for use in the year 2000 and beyond and we
believe our products are year 2000 compliant. To date we have not experienced,
and are not aware of, any problems related to these products as a result of
the transition to January 1, 2000. However, our products are generally
integrated into larger networks involving sophisticated hardware and software
products supplied by other vendors. Each of our customers' networks involves
different combinations of third party products. We cannot evaluate whether all
of these third-party vendor products are year 2000 compliant. We may face
warranty and other claims based on year 2000 problems in other companies'
products or based on issues arising from the integration of multiple products
within the customer's overall network. Although no such claims have been made
against us, we may in the future be required to defend our products in legal
proceedings which could be expensive regardless of the merits of such claims.
State of Readiness of Our Internal Systems
Our business may be affected by year 2000 issues related to non-complaint
internal systems developed by us or by third-party vendors. The failure of our
internal systems to be year 2000 compliant could temporarily prevent us from
processing orders, issuing invoices and developing products and could require
us to devote significant resources to correct such problems. We are not
currently aware of any year 2000 problem relating to any of our material
internal systems. Our internal operations and business are also dependent upon
the computer-controlled systems of third parties such as our manufacturers,
suppliers, customers and other service providers. Our material third-party
vendors have stated that they are, or expect to be, year 2000 complaint in a
timely manner. While we have not received any notification from any such
vendor of any year 2000 problems or disruptions, we cannot independently
verify the year 2000 compliance of our third party vendors. We believe that
absent a systemic failure outside of our control, such as a prolonged loss of
electrical or telephone service, year 2000 problems of third parties such as
manufacturers, suppliers, customers and service providers will not have a
material impact on our operations. Due to the uncertainty as to the year 2000
readiness of our manufacturers, suppliers, customers and other service
providers, we are unable to assure you that the consequences of their year
2000 failures will not materially affect us. The success to date of our year
2000 efforts and the efforts of our material third party vendors cannot
guarantee that there will not be a material adverse effect on our business,
results of operations or financial condition should a year 2000 problem
manifest or become apparent in the future.
Risks
If our manufacturers, suppliers, vendors, partners, customers and service
providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, our normal business activities
or
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operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers. While we are
not aware of any year 2000 problems suffered to date by any of our
manufacturers, suppliers, vendors, partners, customers or service providers,
due to the general uncertainty inherent in the year 2000 problem, we are
unable to determine at this time whether year 2000 failures they experience
could harm our business, results of operations or financial condition. Our
customers' purchasing plans could be affected by year 2000 issues if they need
to expend significant resources to fix their existing internal systems to
become year 2000 compliant. This situation may reduce funds available to
purchase our products.
In addition, in the event that a significant number of our customers
experience year 2000-related problems, whether or not due to our products,
demand for technical support and assistance may increase substantially. In
such case, our cost for providing technical support may rise and the quality
of such technical support and our ability to manage incoming requests may be
impaired.
To date, we have not incurred material expense associated with our efforts
to become year 2000 compliant and do not anticipate that any future costs in
connection with our year 2000 remediation efforts will be material. We have
developed contingency plans to be implemented if our efforts to identify and
correct year 2000 problems affecting our internal systems are not effective.
Our implementation of any contingency plan could have an adverse effect on our
business, results of operations or financial condition.
Market Risk
We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments, primarily
U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
We operate primarily in the United States, and all sales have been made in
US dollars. Accordingly, there has not been any material exposure to foreign
currency rate fluctuations.
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. We 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 our financial condition or results of
operations.
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BUSINESS
Overview
We develop and market 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. We believe 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, we
believe that service providers require new solutions to relieve network
congestion and create new data services. Our intelligent optical networking
products are designed to allow service providers to deploy, manage and
optimize the performance of their fiber optic networks. Our products are based
on a common software architecture that we believe will accelerate our release
of new products and enable our customers to upgrade with minimal network
impact and operator training. We have designed our 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. According to Ryan, Hankin & Kent, a leading market research and
consulting firm, public network bandwidth will have to increase by over 2000%
between 1998 and 2002 to satisfy expected Internet and other data traffic
requirements.
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. According to Ryan, Hankin & Kent, more than $26 billion
was invested globally in 1999 in building and enhancing the transmission
capability of the public network. This investment was 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. We believe 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.
The technology of a SONET/SDH architecture typically requires a linear or
ring-based network topology. The following diagram illustrates the process of
transmitting data across a typical SONET/SDH architecture:
[Illustration showing a linear SONET/SDH network. The drawing of the network
contains a fiber optic cable with SONET/SDH transmission equipment and DWDM
equipment attached. The network shows the conversion of traffic from the
optical domain to the electrical domain and back to the optical domain as data
travels across the network.]
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.
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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.
The Sycamore Solution
We develop and market software-based intelligent optical networking
products that enable service providers to quickly and cost-effectively provide
bandwidth and create new high speed data services. Our 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. We believe 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. Our 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 our solution include the following:
Improves Network Flexibility and Scalability. Our 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 our 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. Our products are designed to shorten the time it takes for service
providers to increase bandwidth and provide services, thereby enabling our
customers to introduce network services on a rapid basis in response to their
customers' demand. We believe 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 our products are software-based,
we are able to rapidly introduce new features into our products, which can in
turn be offered by service providers to their customers as new services or
service enhancements. We believe that these added features will provide
revenue opportunities for our customers and will enable them to differentiate
their network services from those of their competitors. We have 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 our
network management system, service providers will be able to offer value-added
services such as customer network management to their customers.
Protects Existing Investments. Our products are designed to enable our
customers to increase the functionality and improve the performance of their
networks without sacrificing their infrastructure investments in SONET/SDH
equipment. Our products are designed to facilitate a gradual migration from
existing electro-
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optical SONET/SDH networks to all-optical networks. Service providers will be
able to introduce our 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 our
intelligent optical network products. Furthermore, the common software
architecture, which will serve as the basis for our future products, is
intended to ensure the continued interoperability and manageability of our
products as our product line evolves.
Strategy
Our objective is to be the leading provider of intelligent optical
networking products. Key elements of our strategy include the following:
Offer End-to-End Optical Network Solutions To Customers. We intend to
develop and offer a full range of intelligent optical networking products to
our customers. Our commercially available products help service providers
improve the utilization of fiber optic capacity that has already been deployed
in the network. Our 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, we intend to differentiate ourselves from
our 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. We work collaboratively with our customers to help them identify and
create new high speed data services. Our 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
our customers to create new services, we help generate additional revenue
opportunities for our customers and drive additional demand for our products.
Utilize Software-Based Product Architecture. Our 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. We believe that this architecture will
accelerate the release of new products and enable our customers to upgrade
with minimal network impact and operator training.
Incorporate Commercially Available Optical Hardware Components. We use
commercially available optical hardware components in our products wherever
feasible. We believe that by using these third-party components, we benefit
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 our use of these components, we
believe that we can more quickly bring to market a broad-based product line at
a lower cost than if we had utilized proprietary components.
Outsource Manufacturing. We outsource the manufacturing of our products to
reduce our cost structure and to maintain our focus on the development of
value-added software. We believe that most optical networking companies have
manufactured their own products in order to implement specialized
manufacturing techniques historically required for optical componentry.
However, we believe 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 our products without
sacrificing quality or performance.
Focus On Just-In-Time Implementation. Our 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. Our software-
based product architecture is designed to help us achieve this goal. Our
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.
32
<PAGE>
Capitalize On Extensive Industry Experience. We have significant
management, engineering and sales experience in the networking and optics
industries and long-standing relationships with key personnel in our target
customer base. We believe that our experience and relationships will be
important in enabling us to develop products to meet our customers' needs and
to penetrate our target market.
Products and Technology
Product Architecture
Our 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. Our products will enable service providers to offer high
speed services over wavelengths directly from the optical network.
Our 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.
We believe 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. Our 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, we expect 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. Our entire product line shares a
common software base. This software foundation allows us to minimize product
development time by leveraging our software architecture across multiple
product lines. Our 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.
SONET/SDH Functionality. Our products are designed to provide the optical
interfaces and management and restoration capabilities traditionally offered
on SONET/SDH equipment. By supporting these capabilities
33
<PAGE>
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. We integrate commercially
available DWDM optical technology into our products, providing a comprehensive
solution for our customers' multiplexing needs.
Network Management. Our 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, our network management products constitute a
distributed solution designed to provide end-to-end management of the
intelligent optical network. Our 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 our current and planned products:
<TABLE>
<CAPTION>
Product Application Service* Status
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
SN 6000 Intelligent OC-48/STM-16 Wave Service (Long Commercially
Optical Distance) available
Transport
Product
- -------------------------------------------------------------------------------------
SN 8000 Intelligent OC-48/STM-16 Wave Service Commercially
Optical available
Network ------------------------------------------------------
Node OC-12/STM-4 Wave Service In test stage
------------------------------------------------------
OC-3/STM-1 Wave Service In test stage
------------------------------------------------------
Gigabit Ethernet/Fiber Channel In development
Wave Service
------------------------------------------------------
OC-192/STM-64 Wave Service In development
- -------------------------------------------------------------------------------------
SilvxSource SN 6000/8000 Provides local management of wave Commercially
Management services available
Software
--------------------------------------------------------------------------
SN 16000 Provides local management of wave In test stage
Management services
Software
- -------------------------------------------------------------------------------------
SilvxManager Network Provides end-to-end management of Commercially
Management wave services available
System (Software)
- -------------------------------------------------------------------------------------
SN 16000 Intelligent Provides wave-based switching and In test stage
Optical Switch routing in a meshed network
environment
</TABLE>
- --------
* 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.
34
<PAGE>
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 and the SN 16000) 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 and the SN 8000, as well as other third-party optical networking
products. This product is currently in the test stage.
Customers
Our 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 January 29, 2000, substantially all of our revenues to
date have been from shipments of product to one customer, Williams
Communications, Inc. We have also shipped our products to several other
customers, including Millenium Optical Networks, Louis Dreyfus Communications
and Enron Broadband Services.
Sales and Marketing
We sell our products through a direct sales force. In addition, we are
currently establishing relationships with selected OEMs and other marketing
partners, both domestically and internationally, in order to serve particular
markets and provide our customers with opportunities to purchase our products
in combination with related services and products. As of January 29, 2000, our
sales and marketing organization consisted of 60 employees, of which:
. 32 were located in our headquarters in Chelmsford, Massachusetts;
. 25 were located in a total of 7 sales and support offices around the
United States;
. 2 were located in Germany; and
. 1 was located in Korea.
Our marketing objectives include building market awareness and acceptance
of Sycamore and our products as well as generating qualified customer leads.
We send out direct mail and attend trade shows, and provide information about
our company and our products on our Web site. We also conduct public relations
activities, including interviews and demonstrations for industry analysts. In
addition, our senior executives have significant industry contacts as a result
of their prior experience.
We 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.
Our professional services team works collaboratively with our customers and
prospective customers to help them identify and create new high speed data
services that they can offer to their customers. We believe that this
assistance is an integral aspect of our sales and marketing efforts which will
help drive additional demand for our products.
35
<PAGE>
Research and Development
We have assembled a team of highly skilled engineers with significant
telecommunications industry experience. Our engineers have expertise in
optics, hardware and software. As of January 29, 2000, we had 135 employees
responsible for product development, quality assurance and documentation. Our
development group's priority includes the release of new products which will
facilitate the deployment of optical networks. We are focused on enhancing the
scalability, performance and reliability of our intelligent optical network
products.
We have made, and will continue to make, a substantial investment in
research and development. Research and development expenses were $18.0 million
for the six months ended January 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 we have developed, and expect to continue to develop, most new
products and enhancements to existing products internally, we have 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. We expect competition to persist and intensify in the future.
Our 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 our target market. Many of our competitors have significantly
greater financial resources than us and are able to devote greater resources
to the development, promotion, sale and support of their products. In
addition, many of our competitors have more extensive customer bases and
broader customer relationships than us, including relationships with our
potential customers.
In order to compete effectively, we 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, we believe that a knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers
to develop new services for their customers, and an ability to provide vendor-
sponsored financing are important competitive factors in our market. We have
limited ability to provide vendor-sponsored financing and this may influence
the purchasing decision of prospective customers, who may decide to purchase
products from one of our competitors who offers such financing.
Proprietary Rights and Licensing
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently have several
patent applications pending in the United States and we cannot be certain that
patents will be granted based on these or any other applications. We seek to
protect our source code for our software,
36
<PAGE>
documentation and other written materials under trade secret and copyright
laws. We license our software pursuant to signed or shrinkwrap license
agreements, which impose certain restrictions on the licensee's ability to
utilize the software. Finally, we seek to limit disclosure of our intellectual
property by requiring employees, consultants and any third party with access
to our proprietary information to execute confidentiality agreements with us
and by restricting access to our source code. Due to rapid technological
change, we believe that factors such as the technological and creative skills
of our personnel, new product developments and enhancements to existing
products are more important than the various legal protections of our
technology to establishing and maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our 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
our 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 our
business, operating results and financial condition. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar technology. Any failure
by us to meaningfully protect our proprietary rights could have a material
adverse effect on our business, operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our 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 us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all. A successful claim of intellectual property infringement against
us and our failure or inability to license the infringed technology or develop
or license technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating results.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. If
we cannot maintain licenses to this third-party software, distribution of our
products could be delayed until equivalent software could be developed or
licensed and integrated into our products, which could materially adversely
affect our business, operating results and financial condition.
Manufacturing
The manufacturing of our products is entirely outsourced. We recently
executed a supply contract with Celestica Corporation, which provides
comprehensive manufacturing services, including assembly, test, control and
shipment to our customers, and procures materials on our 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 we order pursuant to conforming purchase orders. We
design, specify and monitor all of the tests that are required to meet our
internal and external quality standards, which are conducted by Celestica with
test equipment owned by us. We believe that the outsourcing of our
manufacturing will enable us to conserve the working capital that would be
required to purchase inventory, will allow us to better adjust manufacturing
volumes to meet changes in demand and will better enable us to more quickly
deliver products. At present, we also purchase products from our other
manufacturers on a purchase order basis.
37
<PAGE>
Employees
As of January 29, 2000, we had a total of 277 employees of which:
. 135 were in research and development;
. 60 were in sales and marketing;
. 20 were in customer service and support;
. 24 were in manufacturing; and
. 38 were in finance and administration.
Our future success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with our employees are good.
Properties
Our 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. We also lease 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, we entered into a
lease of a facility in Chelmsford, Massachusetts, consisting of approximately
114,000 square feet, which lease expires in 2007.
Legal Proceedings
In the ordinary course of business, we become involved in various lawsuits
and claims. In addition, we have in certain instances agreed to assume the
costs of defending lawsuits brought against our current or prospective
employees by their former employers. While the outcome of these matters is not
currently determinable, we believe, after consultation with legal counsel,
that the outcome will not have a material adverse effect on the results of our
operations or our financial position.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Sycamore, and their respective ages
and positions as of January 29, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
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 Vice President, 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, Product Marketing
Anita Brearton........... 41 Vice President, Corporate Marketing
Kevin J. Oye............. 41 Vice President, Business Development
Richard A. Barry......... 33 Chief Technical Officer
Eric A. Swanson.......... 39 Chief Scientist
Timothy A. Barrows
(1)(2).................. 42 Director
Paul J. Ferri (1)(2)..... 61 Director
John W. Gerdelman(1)..... 47 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) 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 our board of directors since
our inception in February 1998. He served as our Treasurer and Secretary from
February 1998 to June 1999 and as our 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 our President, Chief Executive Officer and as
a member of our 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 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 our 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.
39
<PAGE>
Chikong Shue has served as our Vice President of Engineering since August
1998. 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 our 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 our 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 our 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 our Vice President, Product Marketing since
July 1999 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 our 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 our 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,
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 our Chief Technical Officer since July 1999
and as our Director of Architecture from our 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 Chief Scientist
since our inception in February 1998. From 1982 to February 1998, Mr. Swanson
was Associate Group Leader of the Advanced Networks Group at MIT's Lincoln
Laboratory.
40
<PAGE>
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 Ezenia, Inc.
and Applix, Inc.
John W. Gerdelman has served as a director since September 1999. Mr.
Gerdelman has been President and Chief Executive Officer of USA Net Inc. since
April 1999. 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.
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
Our 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
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. We also grant options to our
non-employee directors pursuant to our 1999 Non-Employee Director Plan, which
is described below.
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 our board of directors or our
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
our executive officers. In addition, the Compensation Committee consults with
our management regarding our benefit plans and compensation policies and
practices.
The Audit Committee, which consists of Messrs. Ferri, Barrows and
Gerdelman, reviews the professional services provided by our independent
accountants, the independence of such accountants from our management, our
annual financial statements and our system of internal accounting controls.
The Audit Committee also reviews such other matters with respect to our
accounting, auditing and financial reporting practices and procedures as it
may find appropriate or may be brought to its attention.
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<PAGE>
Executive Compensation
The table below sets forth, for the fiscal year ended July 31, 1999, the
cash compensation earned by:
. our Chairman of the Board;
. our Chief Executive Officer; and
. the other most highly compensated executive officer 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 our salaried employees, and
perquisites and other benefits, securities or property which do not exceed the
lesser of $50,000 or 10% of the person's salary and bonus shown in the table.
In the table below, columns required by the regulations of the Securities and
Exchange Commission have been omitted where no information was required to be
disclosed under those columns.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- -----------------------------
Awards
----------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
($) ($) ($) Options/SARS (#) ($)
------- ------ ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Gururaj Deshpande
Chairman and Founder... 100,000 -- -- -- --
Daniel E. Smith
President and Chief
Executive Officer...... 73,077(1) -- -- -- --
Ryker Young
Vice President, Sales.. 117,788 49,998(2) -- 180,000 9,326(3)
</TABLE>
- --------
(1) Represents the total amount of compensation Mr. Smith received in fiscal
1999 for the portion of the year during which he was one of our executive
officers. Mr. Smith joined us in October 1998.
(2) Represents advance commission income.
(3) Represents reimbursement for relocation expenses.
Stock Options
The following table contains information concerning the grant of options to
purchase shares of our common stock to each of the Named Executive Officers
during the fiscal year ended July 31, 1999. Percentages are based on an
aggregate of options to purchase 23,280,300 shares granted in fiscal 1999. All
options were granted at fair market value as determined by the board of
directors on the date of grant.
42
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Number of Percent of Realizable Value
Securities Total Options at Assumed
Underlying Granted To Exercise Annual Rates of Stock
Options Employees in Price Appreciation for
Granted Fiscal Year ($/Share) Expiration Date Option Term(1)
---------- ------------- --------- --------------- ----------------------
5% 10%
---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ryker Young............. 180,000(2) .78% $.11 June 16, 2009 12,578 31,875
</TABLE>
- --------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
Sycamore's common stock over the term of the options. The potential
realizable values set forth above do not take into account applicable tax
and expense payments that may be associated with such option exercises.
Actual realizable value, if any, will be dependent on the future price of
the common stock on the actual date of exercise, which may be earlier than
the stated expiration date. The 5% and 10% assumed annualized rates of
stock price appreciation over the exercise period of the options used in
the table above are mandated by the rules of the Securities and Exchange
Commission and do not represent Sycamore's estimate or projection of the
future price of the common stock on any date. There is no representation
either express or implied that the stock price appreciation rates for the
common stock assumed for purposes of this table will actually be achieved.
(2) These options are exercisable immediately on the grant date, but unvested
shares are subject to a repurchase right in favor of Sycamore that
generally entitles us to repurchase these shares at their original
exercise price upon termination of Mr. Young's services with Sycamore.
Approximately one year from the hire date of Mr. Young, the repurchase
right lapses as to a portion of the shares subject to the option and
thereafter such right lapses as to an additional 5% of the shares subject
to the option for each full three months of employment completed by Mr.
Young.
Fiscal Year-End Option Values
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of July 31, 1999.
Aggregated Year-End Option Table
<TABLE>
<CAPTION>
Shares
Acquired Value Number of Securities Value of Unexercised
On Exercise Realized Underlying Unexercised In-The-Money Options at
Name (#) ($) Options at July 31, 1999 July 31, 1999 ($)
---- ----------- -------- ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ryker Young............. 180,000(1) 40,000(2) -- -- -- --
</TABLE>
- --------
(1) These shares are subject to a repurchase right in favor of Sycamore as
described above.
(2) Calculated on the basis of the fair market value of our common stock as of
the date of exercise, of $.33 per share, as determined by the board of
directors on such date, less the aggregate exercise price.
43
<PAGE>
Change in Control Agreements
Each of our 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 twelve 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 agreement's each executive officer agrees to abide by our
confidentiality and proprietary rights agreements and, for a period of one
year after such termination, not to solicit our employees or customers.
Limitations on Directors' Liability and Indemnification
Our amended and restated certificate of incorporation provides that our
directors and officers shall be indemnified by us 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 us. In addition, our amended and restated certificate of
incorporation provides that our directors will not be personally liable for
monetary damages to us for breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to us or our 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 our amended and restated
certificate of incorporation, we have entered into agreements to indemnify
each of our 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 judgements, fines, settlement amounts,
penalties and expenses for any action or proceeding, including, in certain
instances, actions taken by us or on or behalf, arising out of the status or
services of such persons as directors and executive officers.
The limited liability and indemnification provisions in our amended and
restated certificate of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary
duty and may reduce the likelihood of a derivative action against our
directors and executive officers, even though a derivative action, if
successful, might otherwise benefit us and our stockholders. A stockholder's
investment in us may be adversely affected to the extent we pay the costs of
settlement or damage awards under these indemnification provisions.
Benefit Plans
1998 and 1999 Stock Incentive Plans. Our 1999 Stock Incentive Plan was
adopted by our board of directors in August 1999 and approved by our
stockholders in September 1999. As of January 29, 2000,
44
<PAGE>
39,722,112 shares were available for issuance under the 1999 Plan. In
addition, there will be an annual increase 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.
Our officers, employees, directors, consultants and advisors and those of
our 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. We may grant
options at an exercise price less than, equal to or greater than the fair
market value of our 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 options must 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 our 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 us of shares of common stock, by delivery to us of a
promissory note, or by any combination of the permitted forms of payment.
Our board of directors administers the 1999 plan. Our 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 our
executive officers. Our 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 our executive officers. Subject to
any applicable limitations contained in the 1999 plan, our board of directors,
our compensation committee or any other committee or executive officer to whom
our 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 us
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
45
<PAGE>
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.
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. Our 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 our 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 our stockholders.
As of January 29, 2000, there were options to purchase 14,373,147 shares of
common stock outstanding under the 1998 Stock Incentive Plan, which plan has
terms and conditions that are substantially the same as the 1999 Plan. No
additional issuances of options will be made under the 1998 Stock Incentive
Plan.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
was adopted by our 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 our 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 our 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 January 29, 2000,
approximately 225 of our employees would have been eligible to participate in
the purchase plan.
On the first day of an offering period, we 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. The first offering period
under the purchase plan will commence on the effective date of the
registration by Sycamore of its shares under the Exchange Act, with the option
price on the first day of such offering period equivalent to 85% of the
initial public offering price. 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 offering period is expected to be of 6 months (other
than the first offering period, which will end April 30, 2000); 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
46
<PAGE>
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, we cannot now
determine the number of shares of our common stock to be purchased by any of
our current executive officers, by all of our current executive officers as a
group or by our non-executive employees as a group.
1999 Non-Employee Director Option Plan. Our 1999 Non-Employee Director
Option Plan was adopted by our 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 our 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 the 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.
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 our 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 us prior to completion of the applicable vesting
period. The term of each option is 10 years from the date of grant. Our board
of directors has discretion to establish the terms of options granted under
the plan. As of January 29, 2000, options to purchase 270,000 shares have been
granted under this plan.
401(k) Plan. On December 9, 1998, we adopted an employee savings and
retirement plan qualified under Section 401 of the Internal Revenue Code and
covering all of our 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. We may make matching or additional contributions to the 401(k) plan in
amounts to be determined annually by our board of directors. We have made no
contributions to the 401(k) plan to date.
47
<PAGE>
CERTAIN TRANSACTIONS
Preferred Stock Issuances
Since inception in February 1998, we have issued and sold shares of
redeemable convertible preferred stock to the following persons and entities
who are our executive officers, directors or principal stockholders. Upon the
closing of the 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 "Principal Stockholders."
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Investor Stock Stock Stock
- -------- --------- --------- ---------
<S> <C> <C> <C>
Gururaj Deshpande................................. 2,750,000 1,059,976 385,647
Daniel E. Smith................................... 2,475,000 953,979 347,082
Chikong Shue...................................... 300,000 115,634 42,071
John E. Dowling................................... -- 71,429 --
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, we 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 our
Series A preferred stock was $.91.
Series B Financing. On December 3, 1998 and February 11, 1999, we 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
and Matrix Partners V, L.P. The per share purchase price for our Series B
preferred stock was $3.50.
Series C Financing. On March 2, 1999, we 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 our Series C
preferred stock was $8.00.
Common Stock Issuances
During fiscal 1999, Frances M. Jewels, our Chief Financial Officer,
purchased an aggregate of 1,305,000 shares of common stock for $.11 per share
and Kurt Trampedach, our 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 us 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 us. During October 1999, Kevin Oye, our 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 our stock was
financed by a loan from us 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 our common stock. During fiscal 1999, Eric Swanson, our Chief
Scientist, purchased an aggregate of 1,912,500 shares of common stock at
prices ranging from $.04 to $.11 per share. Mr. Swanson's purchases of our
stock were financed by loans from us in an aggregate principal amount of
$180,000 which do not bear interest. These loans are due five years from the
date of purchase and are secured by shares of our common stock. 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 us and our 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 us than could be obtained from unaffiliated third parties.
48
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 29, 2000, and as adjusted to
reflect the sale of common stock offered in this prospectus, by:
. each person who is known to us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of our directors and the Named Executive Officers;
. all of our directors and executive officers as a group; and
. all stockholders who are selling shares of our common stock in this
offering.
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, we believe that each person or entity
named in the table has sole voting and investment power with respect to all
shares of our common stock shown as beneficially owned by them, subject to
applicable community of property laws. The percentage of shares of our common
stock outstanding prior to the offering is based on 236,094,852 shares of
common stock outstanding as of January 29, 2000. The percentage of shares of
our common stock outstanding after the offering, assuming full exercise of the
over-allotment option, is based on that number of shares plus the 9,958,401
shares offered hereby. 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 our common stock that are subject to options held by that
person that are currently exercisable or exercisable within 60 days of January
29, 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>
Shares of Common Stock
Beneficially Owned after the
Shares of Common Stock Offering and Assuming Full
Beneficially Owned Prior to Exercise of the Over-
the Offerings Allotment Option
-------------------------------- ---------------------------------
Shares
Shares Subject to
Percentage Being Over- Percentage
Name and Address of Number of of Offered Allotment Number of of
Beneficial Owner (1) Shares Outstanding Hereby Option Shares Outstanding
-------------------- ----------------- -------------- --------- ---------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gururaj Deshpande(2).... 48,986,007 20.7 163,200 -- 48,822,807 20.0
Daniel E. Smith(3)...... 44,109,549 18.7 163,200 -- 43,946,349 18.0
Chikong Shue(4)......... 8,691,345 3.7 589,560 -- 8,101,785 3.3
Ryker Young(5).......... 2,975,436 1.3 202,329 -- 2,773,107 1.1
Jeffry A. Kiel.......... 1,260,000 * 85,680 -- 1,174,320 *
Richard A. Barry........ 5,535,000 2.3 376,380 -- 5,158,620 2.1
Eric A. Swanson......... 2,824,500 1.2 191,250 -- 2,633,250 1.1
Timothy A.
Barrows(6)(7).......... 37,858,107 16.0 -- -- 37,858,107 15.5
Paul J. Ferri(6)........ 37,850,607 16.0 -- -- 37,850,607 15.5
John W. Gerdelman(8).... 102,000 * -- -- 102,000 *
Matrix V Management Co.,
L.L.C.(9) ............. 37,760,607 16.0 -- -- 37,760,607 15.4
Platyko Partners, L.P... 22,275,000 9.4 -- -- 22,275,000 9.1
The Gururaj Deshpande
Grantor Retained
Annuity Trust.......... 18,000,000 7.6 81,600 -- 17,918,400 7.3
All executive officers
and directors as a
group (15 persons)
(10)................... 197,383,731 83.2 1,771,599 -- 195,612,132 79.6
</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.
49
<PAGE>
(2) Includes 3,937,500 shares held by the Deshpande Irrevocable Trust and
18,000,000 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. Mr.
Deshpande is offering 81,600 shares and the Gururaj Deshpande Grantor
Retained Annuity Trust is offering 81,600 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 630,000 shares held by the Shue 1999 Trust. Chikong Shue is
offering 442,000 shares and the Shue 1999 Trust is offering 147,560
shares.
(5) Includes 180,000 shares held by the E. Ryker Young Irrevocable Trust. Mr.
Young disclaims beneficial ownership of these shares.
(6) Includes 33,984,540 shares held by Matrix Partners V, L.P. and 3,776,067
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.
(7) Includes 3,750 shares held by the K.C. Barrows Trust and 3,750 shares
held by H.E. Barrows Trust. Mr. Barrows disclaims beneficial ownership of
these shares.
(8) Includes 90,000 options that are currently exercisable.
(9) Comprised of 33,984,540 shares held by Matrix Partners V, L.P. and
3,776,067 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.
(10) Includes an aggregate of 1,084,107 options that are currently
exercisable.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our 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 January 29, 2000, there were outstanding:
. 236,094,852 shares of common stock held by approximately 563
stockholders of record; and
. options to purchase an aggregate of 17,849,484 shares of common stock.
Based upon the number of shares outstanding as of that date, and giving
effect to the issuance of the shares of common stock offered by us in this
offering, there will be 244,523,253 shares of common stock outstanding upon
the closing of this offering.
The following summary of provisions of our securities, various provisions
of our amended and restated certificate of incorporation and our amended and
restated bylaws and provisions of applicable law is not intended to be
complete and is qualified by reference to the provisions of applicable law and
to our amended and restated certificate of incorporation and amended and
restated bylaws included as exhibits to the Registration Statement of which
this prospectus is a part. See "Where You Can Find More Information."
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 us to register their shares of common stock
under the Securities Act of 1933, as amended in certain circumstances. See
"Shares Eligible for Future Sale."
Preferred Stock
Under the terms of our amended and restated certificate of incorporation,
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.
51
<PAGE>
Our 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 our 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.
Our 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.
Our 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 us. These provisions could delay
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of our outstanding voting securities. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because such person or entity, even if it acquired
a majority of our 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. Our amended and restated certificate of incorporation
requires the affirmative vote of the holders of at least 66 2/3% of the shares
of our capital stock entitled to vote to amend or repeal any of the foregoing
provisions of our amended and restated certificate of incorporation. Generally
our 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 our
capital stock issued and outstanding and entitled to vote. To amend our
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 our
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 the common stock is EquiServe Limited
Partnership.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 244,523,253
shares of common stock, assuming the issuance of 8,428,401 shares in this
offering and no exercise of outstanding options after the date hereof, and
assuming no exercise of the underwriters' over-allotment option. Of these
shares, the 22,425,000 shares sold in our initial public offering, and all of
the 10,200,000 shares sold in this offering will be, freely tradable without
restriction or further registration under the Securities Act; provided,
however, that if shares are purchased by "affiliates" as that term is defined
in Rule 144, their sales of shares would be subject to certain limitations and
restrictions that are described below. Generally, the balance of our
outstanding shares of common stock are "restricted securities" under the
Securities Act, subject to the limitations and restrictions that are described
below.
Of our outstanding shares of common stock, 130,070,824 shares will be
subject to "lock-up" agreements after this offering for the periods described
below. All of our officers and directors and the selling stockholders, who
together in the aggregate currently hold 38.5% of our common stock, have
agreed not to sell or otherwise dispose of any of their shares for the 90-day
period following this offering. In addition, certain other of our stockholders
collectively currently hold an additional 11.0% of our outstanding shares of
common stock, which shares continue to be subject to lock-up agreements
entered into at the time of our initial public offering with the underwriters
of that offering. These shares will be released from lock-up on April 18,
2000. Morgan Stanley & Co. Incorporated may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to any
of these lock-up agreements. The number of shares which become eligible for
sale at various dates are subject, in most cases, to the limitations of Rule
144.
In addition, as of January 29, 2000, options to purchase a total of
17,849,484 shares of common stock were outstanding, of which options to
purchase 8,850 shares were vested and not subject to a repurchase right in
favor of Sycamore. We filed a registration statement on Form S-8 under the
Securities Act on November 12, 1999 to register up to 58,147,659 shares of
common stock issuable under our compensatory stock plans or written
agreements. As a result, when the options are exercised and the shares
received on such exercise are vested, such shares will be freely tradeable
under the Securities Act; provided, however, that shares purchased by
"affiliates," as that term is defined in Rule 144, would be subject to
limitations and restrictions that are described below.
53
<PAGE>
Restricted Securities
We estimate that our outstanding shares of common stock that are
"restricted securities" under the Securities Act will become available for
resale in the public market as set forth in the table below:
<TABLE>
<CAPTION>
Approximate
Shares Eligible for
Relevant Dates Future Sale Comment
-------------- ------------------- -------
<S> <C> <C>
January 19, 2000 (90 Shares saleable under Rule 144 or Rule
days after effective 701. Includes some of the shares released
date of our initial on the first release date under the
public offering) (2)... 29,996,533 initial public offering lock-up that are
not also subject to lock-up in connection
with this offering
March 3, 2000 (one year Shares saleable under Rule 144. Includes
after date of original 8,985,186 the balance of the shares released on the
issue)................. first release date under the initial
public offering that are not also subject
to lock-up in connection with this
offering
April 18, 2000 (180 days Shares saleable under Rule 144 or Rule
after effective date of 701. Represents shares released on
our initial public expiration of lock-up in connection with
offering) (2).......... 26,965,355 our initial public offering that are not
also subject to lock-up in connection with
this offering
June 11, 2000 (90 days All shares subject to lock-up in
after effective date of connection with this offering are
this offering) and released. Shares saleable under Rule 144
thereafter (1)(2)...... 94,120,283 or 701
</TABLE>
- --------
(1) Certain of the shares listed in the table as not salable until 90 days
after effectiveness of this offering may become salable earlier if
released from the lock-up by Morgan Stanley & Co. Incorporated.
(2) Reflects only shares that are vested and not subject to a repurchase right
in favor of Sycamore.
Since many of these shares were purchased at prices substantially below
current market prices, we believe that a significant number of these shares
will be sold when eligible for sale.
Rule 144
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period, a number of
54
<PAGE>
such shares that does not exceed the greater of (1) one percent of the then
outstanding shares of common stock (approximately 2,445,233 shares immediately
after this offering) or (2) the average weekly trading volume in the common
stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of such sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice of
sale are satisfied. In addition, our affiliates must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of common stock which are not
restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale, and who has
beneficially owned the shares proposed to be sold for at least two years, may
resell such shares without compliance with the foregoing requirements.
In meeting the one-and two-year holding periods described above, a holder
of shares can include the holding periods of a prior owner of the shares who
was not an affiliate. The one-and two-year holding periods described above do
not begin to run until the full purchase price or other consideration is paid
by the person acquiring the shares from the issuer or an affiliate.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who before October 21, 1999 purchased shares from us
in connection with a compensatory stock plan or other written agreement, or
who purchased shares from us after that date upon the exercise of options
granted before that date, are eligible to resell such shares in reliance upon
Rule 144 beginning January 19, 2000. If such person is not an affiliate, such
sale may be made subject only to the manner of sale provisions of Rule 144. If
such a person is an affiliate, such sale may be made under Rule 144 without
compliance with its one-year minimum holding period, but subject to the other
Rule 144 restrictions.
Registration Rights
At January 29, 2000, the holders of approximately 139,664,811 shares of
common stock are entitled to rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between us
and the holders of such registrable securities, if after December 31, 2000 we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such registration
and to include shares of such common stock therein. Additionally, commencing
April 24, 2000, such holders are also entitled to demand registration rights
pursuant to which they may require us on up to two occasions to file a
registration statement under the Securities Act at our expense with respect to
shares of our common stock, and we are required to use our best efforts to
effect such registration. Further, holders may require us on up to three
occasions to file additional registration statements on Form S-3 at our
expense. All of these registration rights are subject to conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration.
55
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman
Brothers Inc., J.P. Morgan Securities Inc., Dain Rauscher Incorporated,
FleetBoston Robertson Stephens Inc., and Thomas Weisel Partners LLC, are
acting as representatives, have severally agreed to purchase, and Sycamore and
the selling stockholders have agreed to sell to them, an aggregate of
10,200,000 shares of common stock. The number of shares of common stock that
each underwriter has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated.............................. 3,870,000
Credit Suisse First Boston Corporation ........................ 1,260,000
Lehman Brothers Inc. .......................................... 1,260,000
J.P. Morgan Securities Inc. ................................... 1,260,000
Dain Rauscher Incorporated..................................... 450,000
FleetBoston Robertson Stephens Inc. ........................... 450,000
Thomas Weisel Partners LLC..................................... 450,000
A.G. Edwards & Sons, Inc. ..................................... 300,000
First Security Van Kasper...................................... 300,000
First Union Securities, Inc. .................................. 300,000
Edward D. Jones & Co., L.P. ................................... 300,000
----------
Total........................................................ 10,200,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and the selling stockholders and subject to
prior sale. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated
to take and pay for all of the shares of common stock offered hereby, other
than those covered by the over-allotment option described below, if any such
shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $3.42 a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in
excess of $.79 a share to other underwriters or to certain other dealers.
After the offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
Sycamore has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 1,530,000 additional
shares of common stock at the public offering price set forth on the cover
page hereof, less underwriting discounts and commissions. The underwriters may
exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with this offering of common stock. To the extent this
option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of
additional shares of common stock as the number set forth next to the
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $1,762,432,500, the total
underwriters' discounts and commissions would be $61,699,800, and the total
net proceeds to us would be approximately $1,442,843,560.
56
<PAGE>
Sycamore, our directors and officers and the selling stockholders have each
agreed, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the underwriters, during the period ending 90 days after the date
of this prospectus, subject to certain exceptions, not to, directly or
indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
(whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise. The foregoing
restrictions shall not apply to (1) the sale of any shares to the
underwriters, (2) transactions relating to shares of our common stock or other
securities acquired in open market transactions after the date of this
prospectus, (3) the sale or transfer of shares of common stock in connection
with the sale of Sycamore pursuant to a merger, sale of stock or otherwise,
(4) shares of common stock or options or warrants to purchase shares of common
stock issued by Sycamore to suppliers, developers, consultants or other
persons in connection with supply, development, consulting, marketing or
similar arrangements, provided that the recipients agree to be bound by the
foregoing restrictions, or (5) shares of common stock issued by Sycamore in
connection with the acquisition of any businesses, products or technologies.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock is quoted on the Nasdaq National Market under the symbol
"SCMR."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
The underwriting agreement provides that Sycamore, the selling stockholders
and the underwriters will indemnify each other against certain liabilities,
including liabilities under the Securities Act.
Due to the fact that one of the representatives of the underwriters was
organized within the last three years, we are providing you the following
information. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager of, or as a syndicate member in, numerous public offerings of
equity securities. Thomas Weisel Partners does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us pursuant
to the underwriting agreement entered into in connection with this offering.
57
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain partners and employees of Skadden, Arps, Slate, Meagher
& Flom LLP beneficially own, in aggregate, approximately 3,120 shares of our
common 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 included in this 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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock we propose to sell in this offering. This prospectus, which constitutes
part of the registration statement, does not contain all of the information
set forth in the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer you to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to
the copy of the contract or document that has been filed. The registration
statement may be inspected without charge at the principal office of the
Securities and Exchange Commission in Washington, D.C. and copies of all or
any part of which may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
more information about the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. In addition, the Securities and
Exchange Commission maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission.
Sycamore Networks is subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, and, in accordance with
the requirements of the Securities Exchange Act of 1934, files periodic
reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the Securities and
Exchange Commission referred to above.
58
<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 January 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 six month periods ended January 30, 1999 and January 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 six month period ended January 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 six month periods ended January 30, 1999 and January 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 flows 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
principles. 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
third 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, January 29,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $1,197 $21,969 $137,943
Marketable securities......................... 3,082 7,020 150,633
Accounts receivable........................... -- 11,410 11,980
Inventories................................... -- 6,608 25,805
Prepaids and other current assets............. 200 5,153 3,180
------ ------- --------
Total current assets........................... 4,479 52,160 329,541
Property and equipment, net.................... 500 5,288 11,704
Other assets................................... 102 464 3,433
------ ------- --------
Total assets................................... $5,081 $57,912 $344,678
====== ======= ========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable.............. $ 1,097
Accounts payable.............................. $ 42 5,750 $ 28,218
Accrued compensation.......................... 30 1,403 1,760
Accrued expenses.............................. 66 1,751 4,354
Other current liabilities..................... -- 1,709 3,166
------ ------- --------
Total current liabilities...................... 138 11,710 37,498
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 shares
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 January 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 January 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 January
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 January 29, 2000.... -- 15,000 --
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued and
outstanding at January 29, 2000.............. -- -- --
Common stock, $.001 par value; 91,000,000 and
1,500,000,000 shares authorized at July 31,
1998 and 1999 and January 29, 2000,
respectively; 21,105,000, 69,819,336 and
236,094,852 shares issued and outstanding at
July 31, 1998 and 1999 and January 29, 2000,
respectively................................. 21 69 236
Additional paid-in capital.................... 173 30,780 384,821
Accumulated deficit........................... (693) (20,183) (27,534)
Notes receivable.............................. -- (360) (460)
Deferred compensation......................... (179) (23,929) (49,852)
Accumulated other comprehensive loss.......... -- -- (31)
------ ------- --------
Total stockholders' equity (deficit)........... (678) (13,623) 307,180
------ ------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)..................................... $5,081 $57,912 $344,678
====== ======= ========
</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 Six Months Ended
(February 17, 1998) -----------------------
through July 31, Year Ended January 30, January 29,
1998 July 31, 1999 1999 2000
------------------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................ $ -- $ 11,330 $ -- $ 48,559
Cost of revenues
(exclusive of the non-
cash stock compensation
expense of $0, $101,
$20 and $590, at July
31, 1998, July 31,
1999, January 30, 1999,
and January 29, 2000).. -- 8,486 239 25,736
----- -------- ------- --------
Gross profit (loss)..... -- 2,844 (239) 22,823
Operating expenses:
Research and development
(exclusive of the non-
cash stock compensation
expense of $5, $736,
$91 and $2,136, at July
31, 1998, July 31,
1999, January 30, 1999,
and January 29, 2000).. 497 13,955 3,238 18,019
Sales and marketing
(exclusive of the non-
cash stock compensation
expense of $0, $346,
$39 and $2,527, at July
31, 1998, July 31,
1999, January 30, 1999,
and January 29, 2000).. 92 4,064 422 8,395
General and
administrative
(exclusive of the non-
cash stock compensation
expense of $0, $2,286,
$60 and $1,102, at July
31, 1998, July 31,
1999, January 30, 1999,
and January 29, 2000).. 199 1,405 373 1,910
Amortization of stock
compensation........... 5 3,469 210 6,355
----- -------- ------- --------
Total operating
expenses............... 793 22,893 4,243 34,679
----- -------- ------- --------
Loss from operations.... (793) (20,049) (4,482) (11,856)
Interest income, net.... 100 559 193 4,505
----- -------- ------- --------
Net loss................ $(693) $(19,490) $(4,289) $ (7,351)
===== ======== ======= ========
Basic and diluted net
loss per share......... $(.18) $ (2.09) $ (.47) $ (.07)
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 3,753 9,324 9,160 107,555
</TABLE>
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)
<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 for
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................ 2,181 2 4,067 -- -- -- -- 4,069
Issuance of common
stock, net............. 22,425 23 262,095 -- -- -- -- 262,118
Conversion of preferred
stock into common
stock.................. 141,850 142 55,629 -- -- -- -- 55,771
Deferred compensation
expense associated with
equity awards.......... -- -- 31,201 -- -- (31,201) -- --
Issuance of equity
awards in exchange for
services............... -- -- 1,077 -- -- -- -- 1,077
Amortization of deferred
compensation........... -- -- -- -- -- 5,278 -- 5,278
Issuance of common stock
in exchange for notes
receivable............. -- -- -- -- (100) -- -- (100)
Purchase and retirement
of treasury shares..... (180) -- (28) -- -- -- -- (28)
Unrealized loss on
marketable securities.. -- -- -- -- -- -- (31) (31)
Net loss................ -- -- -- (7,351) -- -- -- (7,351)
------- ---- -------- -------- ----- -------- ---- --------
Balance, January 29,
2000 (unaudited)....... 236,095 $236 $384,821 $(27,534) $(460) $(49,852) $(31) $307,180
======= ==== ======== ======== ===== ======== ==== ========
</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 Six Months Ended
(February 17, -----------------------
1998) through Year Ended January 30, January 29,
July 31, 1998 July 31, 1999 1999 2000
------------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (693) $(19,490) $(4,289) $ (7,351)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............ 27 948 182 2,180
Amortization of stock
compensation............ 5 3,469 210 6,355
Changes in operating assets
and liabilities:
Accounts receivable...... -- (11,410) -- (570)
Inventories.............. -- (6,608) -- (19,197)
Prepaids and other
current assets.......... (75) (4,953) (29) 1,973
Accounts payable......... 42 5,708 450 22,468
Accrued expenses and
other current
liabilities............. 96 4,767 141 4,417
------ -------- ------- --------
Net cash provided by (used
in) operating activities.. (598) (27,569) (3,335) 10,275
------ -------- ------- --------
Cash flows from investing
activities:
Purchases of property and
equipment............... (528) (5,736) (1,304) (8,596)
Purchases of marketable
securities.............. (3,082) (10,115) (3,099) (150,664)
Maturities of marketable
securities.............. -- 6,177 3,078 7,020
Increase in other
assets.................. (102) (362) (105) (2,969)
------ -------- ------- --------
Net cash used in investing
activities................ (3,712) (10,036) (1,430) (155,209)
------ -------- ------- --------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock, net.... 5,496 50,150 14,795 --
Proceeds from issuance of
common stock, net....... 11 3,076 189 266,059
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 15,984 260,908
------ -------- ------- --------
Net increase in cash and
cash equivalents.......... 1,197 20,772 11,219 115,974
Cash and cash equivalents,
beginning of period....... -- 1,197 1,197 21,969
------ -------- ------- --------
Cash and cash equivalents,
end of period............. $1,197 $ 21,969 $12,416 $137,943
====== ======== ======= ========
Supplemental cash flow
information:
Cash paid for interest... -- $ 170 $ 28 $ 139
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 six months ended January 30, 1999 and January 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 January 29, 2000 and for the six months ended
January 30, 1999 and January 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 six-month period ended January 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 January 29, 2000,
marketable securities consisted of:
<TABLE>
<CAPTION>
Amortized Cost Fair Market Value Unrealized Gain/(Loss)
-------------- ----------------- ----------------------
<S> <C> <C> <C>
Certificate of
Deposits............... $ 1,999 $ 2,001 $ 2
Commericial Paper....... 118,248 118,213 (35)
U.S. Government......... 30,417 30,419 2
-------- -------- ----
Total................. $150,664 $150,633 $(31)
======== ======== ====
</TABLE>
The fair value of marketable securities was determined based on quoted
market prices at the reporting date for those instruments.
F-7
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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
Shorter of lease term or useful life
Leasehold improvements............... 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 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.
F-8
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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 Loss
The Company reports comprehensive loss in accordance with Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net 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 loss. For the six months ended January 29, 2000,
comprehensive net loss was $7,382,000.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common and common equivalent
shares outstanding during the period, if dilutive. Common equivalent shares
are composed of unvested shares of restricted common stock and the incremental
common shares issuable upon the exercise of stock options and unvested
restricted common shares. There were no dilutive common equivalent shares for
the period.
Pro forma net loss per share for the year ended July 31, 1999 and the six
months ended January 30, 1999 and January 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-9
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
Period from
Inception Six Months Ended
(February 17, 1998) -----------------------
through July 31, Year Ended January 30, January 29,
1998 July 31, 1999 1999 2000
------------------- ------------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net loss................ $ (693) $(19,490) $ (4,289) $ (7,351)
Denominator
Historical:
Weighted average common
shares outstanding..... 19,521 45,585 39,112 160,773
Weighted average common
shares outstanding
subject to repurchase.. (15,768) (36,261) (29,952) (53,218)
-------- -------- -------- --------
Denominator for basic
and diluted
calculation............ 3,753 9,324 9,160 107,555
-------- -------- -------- --------
Basic and diluted net
loss per share......... $ (.18) $ (2.09) $ (.47) $ (.07)
======== ======== ======== ========
Pro Forma:
Historical weighted
average common shares
outstanding............ 3,753 9,324 9,160 107,555
Weighted average number
of shares issued upon
conversion of
redeemable convertible
preferred stock........ 52,515 105,111 78,495 64,689
-------- -------- -------- --------
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 56,268 114,435 87,655 172,244
======== ======== ======== ========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (.01) $ (.17) $ (.05) $ (.04)
======== ======== ======== ========
</TABLE>
Options to purchase 5,058,900, 999,000 and 17,849,484 shares of common
stock at average exercise prices of $.45, $.04 and $19.37 have not been
included in the computation of diluted net loss per share, for the year ended
July 31, 1999 and for the six months ended January 30, 1999 and January 29,
2000, respectively, as their effect would have been anti-dilutive.
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.
F-10
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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.
3. Inventory:
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 31, 1999 January 29, 2000
------------- ----------------
<S> <C> <C>
Raw materials................................. $2,164 $ 5,793
Work in process............................... 3,026 5,475
Finished goods................................ 1,418 14,537
------ -------
$6,608 $25,805
====== =======
</TABLE>
4. Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1999 January 29, 2000
------------- ------------- ----------------
<S> <C> <C> <C>
Computer software and
equipment.................... $500 $5,433 $12,308
Furniture and office
equipment.................... 27 221 759
Leasehold improvements........ -- 609 1,016
---- ------ -------
527 6,263 14,083
Less accumulated depreciation
and amortization............. (27) (975) (2,379)
---- ------ -------
$500 $5,288 $11,704
==== ====== =======
</TABLE>
Depreciation and amortization expense was $27,000, $948,000 and $1,404,000
for the period from inception (February 17, 1998) through July 31, 1998, for
the year ended July 31, 1999 and for the six months ended January 29, 2000,
respectively.
5. Commitments and Contingencies:
Capital and Operating Leases
The Company's office facility is leased under a noncancelable 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-cancelable operating leases are as follows, in
thousands:
<TABLE>
<S> <C>
2000................................................................. $272
2001................................................................. 319
2002................................................................. 159
----
Total future minimum lease payments.................................. $750
====
</TABLE>
F-11
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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 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.
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.
F-12
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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.
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 January 29,
2000, 18,093,906 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
January 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 January 29, 2000 was 51,597,936, of which 42,296,436 and
33,407,575 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
F-13
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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 will end
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, 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 January 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 six months ended January 30, 1999
and January 29, 2000, the Company recorded deferred stock compensation of
$184,000, $25,159,000, $2,922,000 and $31,201,000, 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 six months ended
January 30, 1999 and January 29, 2000, the Company recorded compensation
expense relating to these options and restricted shares totaling $5,000,
$1,409,000, $210,000 and $5,278,000, 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 six
months ended January 29, 2000, the Company granted 198,000 shares of common
stock awards which were fully vested by January 29, 2000 to non-employees and
recognized compensation expense of $1,077,000. 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 six months ended January 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.
F-14
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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
(February 17, 1998) Year Ended
to July 31, 1998 July 31, 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>
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 Inception
(February 17, 1998) Year Ended
to July 31, 1998 July 31, 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>
Number of Weighted Average
Shares Exercise 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................................ 15,079,425 23.04
Options exercised.............................. (2,180,841) 1.87
Options cancelled.............................. (108,000) .33
-----------
Outstanding at January 29, 2000................ 17,849,484 $19.37
===========
</TABLE>
F-15
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
The following table summarizes information about stock options outstanding
at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------- Vested Options Exercisable
Number of Weighted Avg. Weighted Avg. -------------------------------
Range of Shares Remaining Exercise Number Weighted Avg.
Exercise Prices Outstanding Contract Life Price Exercisable Exercise 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>
The following table summarizes information about stock options outstanding
at January 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Number Vested Options Exercisable
Outstanding Weighted Average Weighted ----------------------------
Range of As of Remaining Average Number Weighted Average
Exercise Prices 1/29/00 Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.04-
0.33 2,336,697 9.36 $ 0.18 3,150 $ 0.18
0.67-
1.00 1,811,700 9.49 0.89 -- 0.89
1.33-
1.67 2,036,556 9.53 1.50 -- 1.50
2.00-
2.67 2,218,038 9.58 2.37 -- 2.37
3.00-
3.83 2,232,867 9.63 3.35 750 3.35
4.33-
5.83 1,855,182 9.70 5.22 -- 5.22
12.67 1,972,107 9.72 12.67 -- 12.67
59.02-
83.00 1,816,737 9.92 80.48 450 80.48
85.90-
103.79 1,518,600 9.94 93.24 4,500 93.24
105.38 51,000 9.91 105.38 -- 105.38
---------- -----
$ 0.04-
$105.38 17,849,484 9.64 $ 19.37 8,850 $ 19.37
</TABLE>
Stockholder Notes Receivable
At July 31, 1999 and January 29, 2000, the Company held notes receivable in
the amount of $360,000 and $460,000, 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.
F-16
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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.
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.
F-17
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
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 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.
F-18
<PAGE>
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the six months ended January 30, 1999 and January 29, 2000 is
unaudited)
8. Income Tax:
No provision for taxes has been recorded since the Company has incurred
losses since inception.
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
July 31, 1999 July 31, 1998
------------- -------------
<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 asset......................... 267 6,643
Valuation allowance............................ (267) (6,643)
----- -------
Net deferred tax asset......................... $ -- $ --
===== =======
</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 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.
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-19
<PAGE>
Inside back cover shows Sycamore logo.
<PAGE>
Back cover shows drawing of tree with written script:
One Sycamore Stands Alone.
