-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RErVe5hyreBnmhwhZC1n3Sph7h+DHSDxln6TRIs7xFU/KvNA2zU1vESqCJYmuS/u zAejYiBEMGG9Hx7wVcpppA== /in/edgar/work/0000927016-00-003641/0000927016-00-003641.txt : 20001025 0000927016-00-003641.hdr.sgml : 20001025 ACCESSION NUMBER: 0000927016-00-003641 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20001024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCAMORE NETWORKS INC CENTRAL INDEX KEY: 0001092367 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 043410558 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27273 FILM NUMBER: 744919 BUSINESS ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 9782502900 MAIL ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSORD STATE: MA ZIP: 01824 10-K405 1 0001.txt FORM 10-K 405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K (Mark One) [_]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2000 OR [X]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-27273 SYCAMORE NETWORKS, INC. (Exact name of registrant as specified in its charter) Delaware 04-3410558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Apollo Drive Chelmsford, Massachusetts 01824 (Address of principal executive office) ------------ Registrant's telephone number, including area code: (978) 250-2900 Securities registerd pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE (Title of class) ------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 29, 2000 there were 272,765,327 shares outstanding of the registrant's common stock, $0.001 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $16,575,600,000. ------------ DOCUMENTS INCORPORATED BY REFERENCE PART III--Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on December 14, 2000 are incorporated by reference into Part III (Items 10, 11, 12 and 13) to this Form 10-K. ================================================================================ FACTORS THAT MAY AFFECT FUTURE RESULTS Our prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and risks. Our future results may differ materially from our historical results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. Readers should pay particular attention to the considerations described in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and the Results of Operations--Factors that May Affect Future Results." Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission. PART I ITEM 1. 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. Our recent acquisition of Sirocco Systems, Inc. expanded our product portfolio to include optical networking products designed for the emerging optical edge market. Industry Background Increase in Data Traffic on the Public Network Over the past decade, the volume of high speed data traffic across the public network has grown significantly, reflecting the increasing use of the network for Internet access, electronic mail communications, electronic commerce, remote access by telecommuters and other network data transmission services. To meet the growth in the demand for high speed data services, service providers are investing significantly to upgrade the public network infrastructure, which was originally built for voice traffic. Service providers are laying fiber optic cable and installing transmission equipment which transforms the fiber from available capacity to usable bandwidth by lighting the fiber. Recent investments in building and enhancing the transmission capability of the public network have been spread across SONET/SDH equipment, dense wave division multiplexing equipment, known as DWDM, and optical networking equipment. Existing Public Network Transmission Infrastructure Despite these investments, service providers are still unable to quickly respond to the bandwidth demands of their customers. 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; 2 . 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 intelligence. As a result, moving data through the network involves the following complex processes that add cost and make scaling difficult: . Traffic enters the network as an electrical signal and is converted by the SONET/SDH equipment into an optical signal for transmission across the network; . At each network transit point, the optical data traveling across the network is terminated at a SONET/SDH network terminal; . The optical data is then converted into an electrical signal and examined to see which portions of the data are to be extracted from the network at that transit point; and . The data is then converted back to an optical signal by the SONET/SDH equipment for transport to the next network transit point, where the process is repeated. Limitations of the Existing Public Network Transmission Infrastructure The SONET/SDH network architecture was originally designed to transport voice traffic rather than for today's high speed data services. Unlike voice traffic, which is generally characterized by slow growth and stable demand, data traffic is characterized by rapid growth and unpredictable demand. Data networks must be capable of being deployed cost-effectively and expanded quickly. The SONET/SDH network architecture, however, is not sufficiently flexible to meet these requirements. Generally, the process of expanding the capacity of a SONET/SDH network is time-consuming and requires significant capital investment by the service provider. 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 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. 3 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-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. Provides the Ability to Deploy an Integrated Optical Networking Solution From the Edge of the Public Network Through the Core. Our transport, switching and management product portfolio is designed to enable service providers to extend the scaling and service provisioning benefits of intelligent optical networking throughout the network with an integrated solution from the edge to the core. Our use of a common software architecture and management system across our entire product portfolio will simplify service creation, provisioning and management for service providers, thereby enabling them to improve their time to market for new services. Strategy Our objective is to be the leading provider of intelligent optical networking products. Key elements of our strategy include the following: 4 Offer End-to-End Optical Network Solutions To Customers. We 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 SN 16000 optical switch is designed to 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. 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 are designed to enable service providers to use their existing optical network infrastructure to deliver high speed end-to-end services to meet the bandwidth 5 intensive needs of data applications. Our products are designed to 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 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. Sycamore's intelligent optical networking products incorporate the following features: Intelligent Optical Networking Software. Our 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 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 are designed to 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. 6 Sycamore's Intelligent Optical Networking Products SN 3000. The SN 3000 is an optical access switch that is being designed to perform aggregation, grooming and switching functions, primarily in the metro layer of optical networks. The SN 3000 will be a highly redundant system designed for central office applications. Its compact design is intended to provide extremely high port density and efficient space utilization. Featuring an integrated optical subsystem for DWDM trunking and wavelength cross-connect, SN 3000 platforms will gather traffic from existing SONET/SDH rings or directly from subscribers and support a full complement of service interfaces. SN 4000. The SN 4000 is an optical edge switch that is being designed for use in the metro optical networks. A single SN 4000 is intended to support up to 12 OC-192 ports (capable of transmitting 9.953 gigabits of information per second) or 48 OC-48 ports (capable of transmitting 2.488 gigabits of information per second), which can be interconnected as needed. The SN 4000 will provide regional aggregation and switching, gather traffic from SN 3000- based metro networks and existing SONET add/drop multiplexers and cross- connects. 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 transport product that provides high speed services over fiber optic wavelengths for access, interoffice, regional and backbone networks. The SN 8000 provides 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. SN 10000. The SN 10000 is an intelligent optical transport product that will be used to provide high speed services over fiber optic wavelengths in high capacity long distance and ultra long distance backbone networks. The SN 10000 is being designed to provide a complete stand-alone networking solution and to be capable of being configured in point-to-point, linear, ring or mesh applications. 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 all of our product offerings, as well as other third-party optical networking products. 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 on all of our product offerings and the SilvxManager software runs on a centralized management station. 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. During fiscal years 2000 and 1999, shipments of products to one customer, Williams Communications, Inc. accounted for 92% and 100% of our revenues, respectively. Our other customers include: 360networks inc., Enron Broadband Services, Global NAPS, Inc., LDComm Networks, Utfors AB and Storm Communications. 7 Sales and Marketing We sell our products through a combination of a direct sales force and global distribution network. As of July 31, 2000, after giving effect to our acquisition of Sirocco, our sales and marketing organization consisted of 153 employees, of which: . 90 are located in our headquarters in Chelmsford, Massachusetts; . 44 are located in a total of 6 sales and support offices around the United States; and . 19 were located in 6 sales offices in Germany, Korea, United Kingdom, Japan, France and Switzerland. 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. 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. Research and Development Our future success depends on our ability to increase the performance of our products, to develop and introduce new products and product enhancements and to effectively respond to our customers' changing needs. Our research and development team is primarily responsible for, and is currently working on, these objectives. We believe that we can enhance our technologies to improve the scalability, performance and reliability of our intelligent optical networking products. We have made, and will continue to make, a substantial investment in research and development. Research and development expenses were $54.6 million, $14.0 million and $0.5 million, respectively, for the years ended July 31, 2000, and 1999 and the period from inception (February 17, 1998) through July 31, 1998. To help meet the challenge of rapidly increasing network traffic demands, we plan to continue to develop and enhance our intelligent optical networking products. We also plan to enhance our network management software to enable our customers' to deliver revenue generating services using our intelligent optical networking products. We have assembled a team of skilled hardware, software and optical engineers with extensive experience. As of July 31, 2000, including our acquisition of Sirocco, we had 338 employees involved in research and development. 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 Nortel Networks, Cisco Systems, Lucent Technologies and Ciena Corporation, and private and public 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. 8 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 numerous 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, 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. 9 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 outsourced entirely. We have a 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 cancelable 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 also have a contract with Jabil Circuit, Inc. for comprehensive manufacturing services for certain products that are under development. 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 purchase products from our other manufacturers on a purchase order basis. Employees As of July 31, 2000, after giving effect to our acquisition of Sirocco, we had a total of 687 employees of which: . 338 were in research and development, . 153 were in sales and marketing, . 53 were in customer service and support, . 66 were in manufacturing, and . 77 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. ITEM 2. PROPERTIES We recently moved our headquarters to a new location in Chelmsford, Massachusetts, consisting of approximately 79,000 square feet under a lease that expires in 2010. We also lease three other facilities in Chelmsford, Massachusetts, consisting of approximately 231,000 square feet in aggregate used primarily for research and development, customer support and manufacturing activities under leases that expire through 2004 and one other facility in Wallingford, Connecticut, consisting of approximately 30,000 square feet used primarily for research and development. We also lease sales office space in 11 locations worldwide. 10 ITEM 3. 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 of any ordinary course lawsuits and claims will not have a material adverse effect on the results of our operations or our financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock Our common stock has been traded on the Nasdaq National Market under the symbol "SCMR" since October 22, 1999. The following table sets forth, for the periods indicated, the high and low closing sale prices as reported on the Nasdaq National Market for Sycamore common stock, as adjusted for all stock splits.
High Low ------- ------ First Quarter (since October 22, 1999)........................ $ 71.67 $12.67 Second Quarter (through January 29, 2000)..................... 105.38 73.13 Third Quarter (through April 29, 2000)........................ 189.94 51.00 Fourth Quarter (through July 31, 2000)........................ 150.06 62.63
As of July 31, 2000, there were approximately 847 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. ITEM 6. 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 report. The statement of operations data for the years ended July 31, 2000 and 1999, and the period from inception (February 17, 1998) 11 through July 31, 1998 and the balance sheet data as of July 31, 2000, 1999 and 1998 are derived from our audited financial statements which are included elsewhere in this report. The historical results are not necessarily indicative of results to be expected for any future period.
Period from Inception Year Ended Year Ended (February 17, 1998) July 31, July 31, through 2000 1999 July 31, 1998 ---------- ---------- ------------------- (in thousands, except per share data) Consolidated Statement of Operations Data: Revenue............................. $ 198,137 $ 11,330 $ -- Cost of revenue (exclusive of the non-cash stock compensation expense of $1,246, $101 and $0, respectively)...................... 104,986 8,486 -- ---------- -------- ------ Gross profit...................... 93,151 2,844 -- Operating expenses: Research and development.......... 54,581 13,955 497 Sales and marketing............... 30,074 4,064 92 General and administrative........ 6,724 1,405 199 Amortization of stock compensation..................... 12,287 3,469 5 ---------- -------- ------ Total operating expenses........ 103,666 22,893 793 ---------- -------- ------ Loss from operations................ (10,515) (20,049) (793) Interest income, net................ 41,178 559 100 ---------- -------- ------ Income (loss) before income taxes... 30,663 (19,490) (693) ---------- -------- ------ Income tax expense.................. 10,264 -- -- ---------- -------- ------ Net income (loss)................... $ 20,399 $(19,490) $ (693) ========== ======== ====== Basic net income (loss) per share... $ 0.13 $ (2.09) $(0.18) Diluted net income (loss) per share.............................. $ 0.10 $ (2.09) $(0.18) Shares used in per-share calculation--basic................. 152,500 9,324 3,753 Shares used in per-share calculation--diluted............... 210,877 9,324 3,753 As of As of July 31, July 31, As of 2000 1999 July 31, 1998 ---------- ---------- ------------------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities.............. $1,510,101 $ 28,989 $4,279 Working capital..................... 1,142,578 40,450 4,341 Total assets........................ 1,677,661 57,912 5,081 Long term debt, less current portion............................ -- 4,054 -- Redeemable convertible preferred stock.............................. -- 55,771 5,621 Total stockholders' equity (deficit).......................... $1,575,353 $(13,623) $ (678)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes thereto included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including the risks discussed in "Risk Factors" and elsewhere herein. 12 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 in February 1998 through May 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 Node in August 1999, our SilvxManager Network Management System in November 1999 and our SN 16000 Intelligent Optical Switch in June 2000. We achieved our first quarter of profitability in the quarter ended April 29, 2000. As of July 31, 2000, we had retained earnings of $216,000. In order to maintain profitability, we will need to generate significantly higher revenue as we expect to continue to incur significant research and development, sales and marketing and general and administrative expenses as our business and operations continue to grow. 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 or 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 at the time of revenue recognition. Warranty periods are generally three years from installation date. Our manufacturing expenses consist of amounts paid to third party manufacturers, 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. 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 both domestically and 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. 13 In connection with the granting of certain stock options and the issuance of certain restricted shares during the period from inception through July 31, 1998, and the fiscal years ended July 31, 1999 and 2000, with exercise or sales prices which were deemed to be below fair market value, we recorded deferred stock compensation expense of approximately $184,000, $25.2 million and $31.7 million, respectively. 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. Sirocco Acquisition On September 7, 2000, we acquired Sirocco Systems, Inc. in a transaction accounted for as a pooling of interests. An aggregate of approximately 28.4 million shares of Sycamore common stock were either exchanged for all outstanding shares of Sirocco or reserved for common stock issuable under outstanding Sirocco stock options assumed by us in the transaction. Results of Operations Fiscal Years ended July 31, 2000 and 1999 Revenue Revenue increased $186.8 million or 1,649% to $198.1 million for fiscal 2000 compared to $11.3 million for fiscal 1999. The increase in revenue is primarily due to increased sales of our products and the broadening of our product offerings including the SN8000 and SN16000. One customer accounted for 92% and 100% of our revenue for fiscal 2000 and 1999, respectively. Cost of Revenue Cost of revenue increased $96.5 million to $105.0 million for fiscal 2000 compared to $8.5 million for fiscal 1999. The increase in cost of revenue is primarily related to increased revenue since we began shipping products in May 1999, as well as headcount increases in our manufacturing overhead and customer service organizations, warranty and other period costs. Gross profit as a percentage of revenue were 47% and 25% for fiscal 2000 and 1999, respectively. The increase in gross profit in fiscal 2000 to fiscal 1999 was largely attributable to higher volume of product shipments. Research and Development Expenses Research and development expenses increased $40.6 million to $54.6 million for fiscal 2000 compared to $14.0 million for fiscal 1999. The increase in expenses was primarily due to increased costs associated with a significant increase in personnel and personnel-related expenses, increases in non- recurring engineering costs and increases in prototype expenses for the design and development of new products as well as enhancements to existing products. Research and development is essential to our future success, and we expect the dollar amounts of research and development expenses will increase in future periods to support the continued development of our intelligent optical transport and optical switching products as well as new or complementary technologies. Sales and Marketing Expenses Sales and marketing expenses increased $26.0 million to $30.1 million for fiscal 2000 compared to $4.1 million for fiscal 1999. The increase in expenses reflect the hiring of additional sales and marketing personnel, sales based commissions, additional office space both domestically and internationally and marketing program costs, including web development, trade shows and new 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. 14 General and Administrative Expenses General and administrative expenses increased $5.3 million to $6.7 million for fiscal 2000 compared to $1.4 million for fiscal 1999. The increase in expenses reflect the hiring of additional general and administrative personnel and expenses necessary to support increased levels of business activities. 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 related expenses to support Sycmore's operations. Amortization of Stock Compensation Amortization of stock compensation expense was $12.3 million for fiscal 2000, an increase of $8.8 million from $3.5 million for fiscal 1999. Amounts for fiscal 2000 and 1999 include $1.4 million and $2.1 million of compensation expense associated with the grant of options to purchase common stock to non- employees, respectively. Amortization of stock compensation expense primarily resulted from the granting of stock options and restricted shares with exercise or sale prices which were deemed to be below fair market value. Amortization of stock compensation relating to these grants is expected to affect our reported results of operations through the first quarter of fiscal 2005. Interest Income, Net Interest income, net increased $40.6 million to $41.2 million for fiscal 2000 compared to $559,000 for fiscal 1999. The increase in interest income primarily reflects the earned income from the invested proceeds of our two public offerings within fiscal year 2000. Provision for Income Taxes We provided for income taxes at 33% of income before income taxes during fiscal 2000. The provision for fiscal 2000 differed from the expected federal statutory rate of 35% primarily due to non-deductible stock compensation and the utilization of net operating carryforwards and tax credits. During fiscal 2000, we reduced our valuation allowance related to deferred tax assets by $6.6 million as the realization of such assets became probable. We did not provide for income taxes in fiscal 1999 primarily due to the loss from operations and the uncertainty of the realization of deferred tax assets. Year ended July 31, 1999 and the period from inception (February 17, 1998) through July 31, 1998 (fiscal 1998) Revenue 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 fiscal 1999, one customer accounted for all of our revenue. Cost of Revenue Cost of revenue 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 revenue as a percentage of revenue in fiscal 1999 were high 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 $14.0 million for fiscal 1999 and $497,000 for fiscal 1998 and represented 61% and 63% of total operating expenses for fiscal 1999 and 1998, 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. 15 Sales and Marketing Expenses Sales and marketing expenses were $4.1 million for fiscal 1999 and $92,000 for fiscal 1998 and represented 18% and 12% of total operating expenses in fiscal 1999 and 1998, 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. General and Administrative Expenses General and administrative expenses were $1.4 million for fiscal 1999 and $199,000 for fiscal 1998 and represented 6% and 25% of total operating expenses in fiscal 1999 and 1998, respectively. The increase in expenses reflects the hiring of additional general and administrative personnel and expenses necessary to support and scale our operations. 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 future periods. Amortization of Stock Compensation Amortization of stock compensation expense was $1.4 million and $5,000 for fiscal 1999 and fiscal 1998, 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 $559,000 and $100,000 for fiscal 1999 and fiscal 1998, respectively. Interest income consists of interest earned on our cash balances and marketable securities and interest expense associated with our equipment note payable. The increase in interest income reflects higher invested balances in fiscal 1999, offset by interest payments on our equipment note payable in fiscal 1999. 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 $59 million and through borrowings on long-term debt agreements for the purchase of capital equipment. In fiscal 2000, we completed two public offerings, for which we sold 30.9 million shares of common stock and generated net proceeds of approximately $1.5 billion. We primarily invest excess funds in investment grade short-term money market funds, commercial paper, government and non-government marketable securities. As of July 31, 2000 we had $1.5 billion in cash, cash equivalents and marketable securities. Cash provided by operating activities was $52.8 million for fiscal 2000, compared to the cash used of $27.6 million and $0.6 million in fiscal 1999 and 1998, respectively. The increase in cash provided by operating activities in fiscal 2000 compared to fiscal 1999 reflects net income and increased accrued expenses, deferred revenue and accounts payable, partially offset by increased inventory purchases and accounts receivable. Cash used in investing activities was $1.1 billion, $10.0 million and $3.7 million for the years ended July 31, 2000, 1999 and fiscal 1998, respectively. The increase in net cash used in investing activities in fiscal 2000 reflects net investment of our public offerings proceeds into marketable securities and increased purchases of property and equipment, primarily for computers and test equipment for our development and manufacturing activities. Cash provided by financing activities was $1.5 billion, $58.4 million and $5.5 million for the years ended July 31, 2000, 1999 and fiscal 1998, respectively. The increase in cash provided by financing activities in fiscal 2000 is primarily due to net proceeds raised through our public offerings and the exercise of stock options. 16 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 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 Computer Systems Compliance To date, the results of our year 2000 readiness plan indicate that our assessment, improvement and testing program succeeded in providing us with a smooth transition to the year 2000. We have not experienced any significant year 2000 disruptions with our products, our internal information technology systems or our major vendors. Based on our experience to date, we do not anticipate incurring material expenses or experiencing any material operational disruption related to the year 2000 transition. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133). This accounting standard, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, requires that all derivatives be recognized as either assets or liabilities at estimated fair value. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133. This accounting standard amended the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The adoption of SFAS No. 133, as amended, is not expected to have a material effect on the Company's financial position or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in our fourth quarter of fiscal year 2001. The effects of applying this guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not believe that adoption of SAB 101 will have a material impact on the Company's financial position or results of operations. Factors That May Affect Future Results Factors Related to Our Business We Expect That Substantially All Of Our Revenue Will Continue To Be Generated From A Limited Number Of Customers, And Our Revenue Will Not Grow If We Do Not Successfully Sell Products To These Customers 17 We currently have a limited number of customers, one of whom, Williams Communications, accounts for substantially all of our revenue 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 revenue will continue to depend on sales of our intelligent optical networking products to Williams and a limited number of current and prospective 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 and the rate at which these customers expend capital and deploy their network. 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, downturn in capital expenditure or downturn in their business, would seriously harm our financial condition or results of our operations. Our Limited Operating History Makes Forecasting Difficult We were founded in February 1998. We shipped our SN 6000 Intelligent Optical Transport product in May 1999, our SN 8000 Intelligent Optical Node in August 1999, our SilvxManager Network Management System in November 1999 and our SN 16000 Intelligent Optical Switch in June 2000. We have limited meaningful historical financial data from 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. If we do not achieve our expected revenue, our operating results will be below our expectations and the expectations of our investors and market analysts which could cause the price of our common stock to decline. Our Failure To Increase Our Revenue Would Prevent Us From Maintaining Profitability We have a history of losses and in the quarter ended July 31, 2000, we achieved profitability for the first time on an operating income basis. We cannot assure you that our revenue will grow or that we will generate sufficient revenue to 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. Although our revenue has grown in recent quarters, we cannot be certain that our revenue growth will continue or increase in the future or that we will realize sufficient revenue to sustain profitability on an annual or quarterly basis. 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, Silvx Manager Network Management System and SN 16000 Intelligent Optical Switch are the only products that have been shipped to customers. 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 revenue will not grow significantly. 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 18 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 revenue 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 Revenue 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 typically 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 revenue 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; . customer ability to devote capital to build their networks; . 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. 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. 19 If We Do Not Respond Rapidly To Technological Changes, Our Products Could Become Obsolete The market for intelligent optical networking products is likely to continue 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 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; 20 . 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. Any reduction in our current and prospective customer's capital expenditures could result in greater customer demand for vendor- sponsored financing. 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 maintaining profitability. We are currently expanding our 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 have limited 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 have 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 also have a contract with Jabil Circuit, Inc. for comprehensive manufacturing services for certain products that are under development. We may not be able to effectively manage our relationship with our manufacturers, and these manufacturers 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 21 resources to fill these orders on a timely basis. In addition, our contract with Celestica is cancelable without cause on one year's advance notice. Except for our contracts with Celestica and Jabil, we do not have any on-going supply contracts with our manufacturers. At present, we purchase products from these other manufacturers on a purchase order basis. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming and could result in a significant interruption in the supply of 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 revenue 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; . the rate at which our current and prospective customers fund their network build-out; . 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. 22 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 23 sophisticated 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 July 31, 2000, after giving effect to our acquisition of Sirocco, we had a total of 687 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. 24 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 Revenue 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. 25 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. In September 2000, we completed our acquisition of Sirocco Systems, Inc. We may also evaluate other potential transactions and transaction prospects. In the event of any purchases, we could: . issue stock that would dilute our current stockholders' percentage ownership; . incur debt; . assume liabilities; . incur amortization expenses related to goodwill and other intangible assets; or . incur large and immediate write-offs. Our operation of any acquired business and our achieving the benefits of any acquisition, including our acquisition of Sirocco, 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 . problems with integrating employees and potential loss of key employees, particularly those of the purchased organizations. We cannot assure you that we will be able to achieve the benefits of any such acquisition or successfully integrate any acquired businesses, products, technologies or personnel and any failure to do so could disrupt our business and seriously harm our financial condition. Factors Related to the Securities Market 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; . significant changes or slowdowns in the funding and spending patterns of our current and prospective customers; . 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; . failure by us to meet our product milestones; . acquisitions, distribution partnerships, joint ventures or capital commitments; . changes in financial estimates by securities analysts; . sales of our 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. 26 In addition, the stock market in general, and the Nasdaq National Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class- action litigation has often been instituted against such companies. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources. There May Be Sales Of A Substantial Amount Of Our Common Stock That Could Cause Our Stock Price To Fall As of July 31, 2000, options to purchase a total of 27,258,764 shares of our common stock were outstanding, which options are subject to vesting schedules. In addition, in connection with our acquisition of Sirocco, a total of 28,378,690 shares of our common stock were issued to Sirocco stockholders or are issuable upon the exercise of Sirocco options we assumed. A number of these shares are freely tradeable. Sales of a substantial number of shares of our common stock 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. Insiders Have Substantial Control Over Sycamore And Could Limit Your Ability To Influence The Outcome Of Key Transactions, Including Changes of Control As of September 29, 2000, the executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 49.4% of our outstanding common stock. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about our market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity We maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of securities including: commercial paper, certificates of deposit, money market funds and government and non-government debt securities. These available for sale securities are subject to interest rate risk and may fall in value if market interest rates increase. If market interest rates increase immediately and uniformly by 10 percent from levels at July 31, 2000, the fair value of the portfolio would decline by approximately $4.8 million. We have the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. Exchange Rate Sensitivity We operate primarily in the United States, and all sales to date have been made in US dollars. Accordingly, there has not been any material exposure to foreign currency rate fluctuations. 27 ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants.......................................... 29 Consolidated Balance Sheets as of July 31, 2000 and 1999................... 30 Consolidated Statements of Operations for the years ended July 31, 2000, 1999 and for the period from inception (February 17, 1998) through July 31, 1998............................................................. 31 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended July 31, 2000, 1999 and for the period from inception (February 17, 1998) through July 31, 1998............................................... 32 Consolidated Statements of Cash Flows for the years ended July 31, 2000, 1999 and for the period from inception (February 17, 1998) through July 31, 1998............................................................. 33 Notes to Consolidated Financial Statements................................. 34
28 Report of Independent Accountants To the Stockholders and the Board of Directors of Sycamore Networks, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) on page 48 present fairly, in all material respects, the financial position of Sycamore Networks, Inc. and its subsidiaries at July 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2000 and for the period from inception (February 17, 1998) to July 31, 1998 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts August 22, 2000 (except for the information presented in Note 11 for which the date is September 7, 2000) 29 SYCAMORE NETWORKS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
July 31, July 31, 2000 1999 ---------- -------- ASSETS Current assets: Cash and cash equivalents.............................. $ 422,963 $ 21,969 Marketable securities.................................. 710,398 7,020 Accounts receivable.................................... 43,407 11,410 Inventories............................................ 39,739 6,608 Prepaids and other current assets...................... 25,049 5,153 ---------- -------- Total current assets..................................... 1,241,556 52,160 Property and equipment, net.............................. 40,435 5,288 Marketable securities.................................... 376,740 -- Other assets............................................. 18,930 464 ---------- -------- Total assets............................................. $1,677,661 $ 57,912 ========== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of notes payable....................... $ -- $ 1,097 Accounts payable....................................... 47,389 5,750 Accrued compensation................................... 6,850 1,334 Accrued expenses....................................... 7,123 1,751 Deferred revenue....................................... 29,708 472 Other current liabilities.............................. 7,908 1,306 ---------- -------- Total current liabilities................................ 98,978 11,710 Long-term liabilities.................................... 3,330 4,054 Commitments and contingencies (Note 5) Redeemable convertible preferred stock................... -- 55,771 Stockholders' equity (deficit): Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding at July 31, 2000.................................................... -- -- Common stock, $.001 par value; 1,500,000,000 and 91,000,000 shares authorized at July 31, 2000 and July 31, 1999, respectively; 244,937,971 and 69,819,336 shares issued and outstanding at July 31, 2000 and July 31, 1999, respectively........ 245 69 Additional paid-in capital............................... 1,614,834 30,780 Retained earnings (deficit).............................. 216 (20,183) Notes receivable......................................... (262) (360) Deferred compensation.................................... (44,714) (23,929) Accumulated other comprehensive income................... 5,034 -- ---------- -------- Total stockholders' equity (deficit)..................... 1,575,353 (13,623) ---------- -------- Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)...................... $1,677,661 $ 57,912 ========== ========
The accompanying notes are an integral part of the consolidated financial statements. 30 SYCAMORE NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Period from Inception Year Ended Year Ended (February 17, 1998) July 31, July 31, through 2000 1999 July 31, 1998 ---------- ---------- ------------------- Revenue............................. $198,137 $ 11,330 $ -- Cost of revenue (exclusive of the non-cash stock compensation expense of $1,246, $101 and $0)............ 104,986 8,486 -- -------- -------- ------ Gross profit........................ 93,151 2,844 -- Operating expenses: Research and development (exclusive of the non-cash stock compensation expense of $4,206, $736 and $5).... 54,581 13,955 497 Sales and marketing (exclusive of the non-cash stock compensation expense of $4,366, $346 and $0).... 30,074 4,064 92 General and administrative (exclusive of the non-cash stock compensation expense of $2,469, $2,286 and $0)..................... 6,724 1,405 199 Amortization of stock compensation.. 12,287 3,469 5 -------- -------- ------ Total operating expenses........ 103,666 22,893 793 -------- -------- ------ Loss from operations................ (10,515) (20,049) (793) Interest income, net................ 41,178 559 100 -------- -------- ------ Income (loss) before income taxes... 30,663 (19,490) (693) Income tax expense.................. 10,264 -- -- -------- -------- ------ Net income (loss)................... $ 20,399 $(19,490) $ (693) ======== ======== ====== Basic net income (loss) per share... $ 0.13 $ (2.09) $(0.18) Diluted net income (loss) per share.............................. $ 0.10 $ (2.09) $(0.18) Shares used in per-share calculation--basic............... 152,500 9,324 3,753 Shares used in per-share calculation--diluted............. 210,877 9,324 3,753
The accompanying notes are an integral part of the consolidated financial statements. 31 SYCAMORE NETWORKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
Accumulated Other Total Common Stock Additional Retained Deferred Compre- Stockholders' Compre- --------------- paid-in Earnings Notes Compen- hensive Equity hensive Shares Amount Capital (Deficit) Receivable sation Income (Deficit) Income ------- ------ ---------- --------- ---------- -------- ----------- ------------- ------- 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.. 69,189 69 30,780 (20,183) (360) (23,929) -- (13,623) -- ------- --- --------- ------- ---- ------- ----- --------- ------ Exercise of stock options................ 2,595 3 5,375 -- -- -- -- 5,378 -- Issuance of common stock, net............. 30,854 31 1,482,680 -- -- -- -- 1,482,711 -- Conversion of preferred stock into common stock.................. 141,850 142 55,629 -- -- -- -- 55,771 -- Deferred compensation expense associated with equity awards.......... -- -- 31,701 -- -- (31,701) -- -- -- Issuance of equity awards in exchange for services............... -- -- 1,372 -- -- -- -- 1,372 -- Amortization of deferred compensation........... -- -- -- -- -- 10,916 -- 10,916 -- Issuance of common stock in exchange for notes receivable............. -- -- -- -- (100) -- -- (100) -- Repayment of notes receivable............. -- -- -- -- 198 -- -- 198 -- Purchase and retirement of treasury shares..... (180) -- (28) -- -- -- -- (28) -- Tax benefit from employee stock plans... -- -- 7,325 -- -- -- -- 7,325 -- Unrealized gain on marketable securities, net of tax of $2,480... -- -- -- -- -- -- 5,034 5,034 5,034 Net income.............. -- -- -- 20,399 -- -- -- 20,399 20,399 ------ Comprehensive income.... -- -- -- -- -- -- -- -- 25,433 ------- --- --------- ------- ---- ------- ----- --------- ====== Balance, July 31, 2000.. 244,938 245 1,614,834 216 (262) (44,714) 5,034 1,575,353 ======= === ========= ======= ==== ======= ===== =========
The accompanying notes are an integral part of the consolidated financial statements. 32 SYCAMORE NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from Inception Year Ended Year Ended (February 17, 1998) July 31, July 31, through 2000 1999 July 31, 1998 ----------- ---------- ------------------- Cash flows from operating activities: Net income (loss)................ $ 20,399 $(19,490) $ (693) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.... 6,102 948 27 Amortization of stock compensation.................... 12,287 3,469 5 Deferred income taxes............ (2,050) -- -- Tax benefit from employee stock plans........................... 7,325 -- -- Changes in operating assets and liabilities: Accounts receivable.............. (31,997) (11,410) -- Inventories...................... (33,131) (6,608) -- Prepaids and other current assets.......................... (14,516) (4,953) (75) Deferred revenue................. 29,236 472 -- Accounts payable................. 41,640 5,708 42 Accrued expenses and other liabilities..................... 17,490 4,295 96 ----------- -------- ------ Net cash provided by (used in) operating activities.............. 52,785 (27,569) (598) ----------- -------- ------ Cash flows from investing activities: Purchases of property and equipment....................... (41,249) (5,736) (528) Purchases of marketable securities...................... (1,378,008) (10,115) (3,082) Maturities of marketable securities...................... 302,924 6,177 -- Increase in other assets......... (18,466) (362) (102) ----------- -------- ------ Net cash used in investing activities........................ (1,134,799) (10,036) (3,712) ----------- -------- ------ Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net...................... -- 50,150 5,496 Proceeds from issuance of common stock, net...................... 1,487,961 3,076 11 Payments received for notes receivable...................... 198 -- -- Proceeds from notes payable...... -- 5,184 -- Payments on notes payable........ (5,151) (33) -- ----------- -------- ------ Net cash provided by financing activities........................ 1,483,008 58,377 5,507 ----------- -------- ------ Net increase in cash and cash equivalents....................... 400,994 20,772 1,197 Cash and cash equivalents, beginning of period............... 21,969 1,197 -- ----------- -------- ------ Cash and cash equivalents, end of period............................ $ 422,963 $ 21,969 $1,197 =========== ======== ====== Supplemental cash flow information: Cash paid for interest........... $ 139 $ 170 $ -- Cash paid for income taxes....... 3,764 -- -- Supplementary non cash activity: Preferred stock note receivable.. -- -- 125 Issuance of common stock in exchange for notes receivable... 100 360 -- Conversion of preferred stock into common stock............... 55,771 -- --
The accompanying notes are an integral part of the consolidated financial statements. 33 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and Europe. 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'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. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to be consistent with current year presentation. 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). The fair value of marketable securities was determined based on quoted market prices at the reporting date for those instruments. As of July 31, 1999, the fair value of marketable securities, which were comprised of commercial paper and certificate of deposits, approximated amortized cost. As of July 31, 2000, marketable securities consisted of (in thousands):
Fair Amortized Market Unrealized Cost Value Gain/(Loss) ---------- ---------- ----------- Certificate of deposits....................... $ 109,220 $ 108,980 $ (240) Commercial paper.............................. 651,839 650,517 (1,322) Common stock.................................. 2,500 11,322 8,822 Government securities......................... 316,065 316,319 254 ---------- ---------- ------- Total......................................... $1,079,624 $1,087,138 $ 7,514 ========== ========== =======
The Company also has certain investments in non-publicly traded companies for the promotion of business and strategic objectives. These investments are included in "Other Assets" in the Company's balance sheet and are generally carried at cost. The Company monitors these investments for impairment and makes appropriate reductions in carrying values, if necessary. 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 or 34 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 at the time of revenue recognition. Warranty periods are generally three years from installation date. 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: Computer and telecommunications equipment.................. 2 to 3 years Computer software........... 2 to 3 years Furniture and office equipment.................. 5 years Leasehold improvements...... Shorter of lease term or useful life of asset
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 revenue for a product bear to the total of current and anticipated future gross revenue 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. 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 revenue and expenses during the reporting period. Actual results could differ from these estimates. 35 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 years ended July 31, 2000 and 1999, one customer accounted for 92% and 100% of the Company's revenue, respectively. The Company generally 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 revenue and profits. Other Comprehensive Income (Loss) The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). The comprehensive net loss for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999 does not differ from the reported net loss. Net Income (Loss) Per Share and Pro Forma Income (Loss) Per Share Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period less unvested restricted stock. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Common equivalent shares are composed of unvested shares of restricted common stock and the incremental common shares issuable upon the exercise of stock options and unvested restricted common shares. Pro forma net income (loss) per share for the years ended July 31, 2000 and 1999 and the period from inception (February 17, 1998) through July 31, 1998 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. All share and per share data presented reflects two three-for-one stock splits effected in August 1999 and February 2000. 36 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted income (loss) per share:
Period from Inception (February 17, 1998) Year Ended Year Ended through July 31, 2000 July 31, 1999 July 31, 1998 ------------- ------------- --------------------- (in thousands, except per share data) Numerator: Net income (loss)............ $ 20,399 $(19,490) $ (693) Denominator Historical: Weighted-average shares of common stock outstanding.. 201,716 45,585 19,521 Weighted-average shares subject to repurchase..... (49,216) (36,261) (15,768) -------- --------- -------- Shares used in per-share calculation--basic.......... 152,500 9,324 3,753 ======== ========= ======== Weighted-average shares of common stock outstanding.. 201,716 9,324 3,753 Weighted common stock equivalents............... 9,161 -- -- -------- --------- -------- Shares used in per-share calculation--diluted........ 210,877 9,324 3,753 ======== ========= ======== Net income (loss) per share: Basic..................... $ 0.13 $ (2.09) $ (0.18) ======== ========= ======== Diluted................... $ 0.10 $ (2.09) $ (0.18) ======== ========= ======== Denominator Pro Forma: Historical weighted-average shares of common stock outstanding--Basic........ 152,500 9,324 3,753 Weighted average number of shares assumed upon conversion of redeemable convertible preferred stock..................... 32,344 105,111 52,515 -------- --------- -------- Shares used in per-share calculation--pro forma basic....................... 184,844 114,435 56,268 ======== ========= ======== Weighted common stock equivalents............... 58,377 -- -- -------- --------- -------- Shares used in per-share calculation--pro forma diluted..................... 243,221 114,435 56,268 ======== ========= ======== Net income (loss) per share: Pro forma basic........... $ 0.11 $ (0.17) $ (0.01) ======== ========= ======== Pro forma diluted......... $ 0.08 $ (0.17) $ (0.01) ======== ========= ========
Options to purchase 4,616,000 and 5,058,900 shares of common stock at average exercise prices of $79.15 and $0.45 have not been included in the computation of diluted net income (loss) per share for the years ended July 31, 2000 and 1999, 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," and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"). 37 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Segment Information The Company has determined that it conducts its operations in one business segment. For all periods presented, substantially all revenue has been derived within the United States. Long lived assets are principally located in the United States. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133). This accounting standard, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, requires that all derivatives be recognized as either assets or liabilities at estimated fair value. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133. This accounting standard amended the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The adoption of SFAS No. 133, as amended, is not expected to have a material effect on the Company's financial position or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in the Company's fourth quarter of fiscal year 2001. The effects of applying this guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not believe that adoption of SAB 101 will have a material impact on the Company's financial position or results of operations. 3. Inventory Inventory consisted of the following at July 31, 2000 and 1999 (in thousands):
2000 1999 ------- ------ Raw materials................................................. $14,340 $2,164 Work in process............................................... 3,685 3,026 Finished goods................................................ 21,714 1,418 ------- ------ $39,739 $6,608 ======= ======
4. Property and Equipment Property and equipment consisted of the following at July 31, 2000 and 1999 (in thousands):
2000 1999 ------- ------ Computer software and equipment............................. $44,445 $5,433 Furniture and office equipment.............................. 1,075 221 Leasehold improvements...................................... 1,992 609 ------- ------ 47,512 6,263 Less accumulated depreciation and amortization.............. (7,077) (975) ------- ------ $40,435 $5,288 ======= ======
Depreciation and amortization expense was $6.1 million, $0.9 million and $27,000 for the years ended July 31, 2000 and 1999, and the period from inception (February 17, 1998) through July 31, 1998, respectively. 38 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Commitments and Contingencies: Capital and Operating Leases Rent expense under operating leases was $1.6 million, $266,000 and $27,500 for the years ended July 31, 2000 and 1999, and the period from inception (February 17, 1998) through July 31, 1998, respectively. At July 31, 2000 future minimum lease payments under all non-cancelable operating leases are as follows, in thousands: 2001................................................................ $ 2,488 2002................................................................ 2,357 2003................................................................ 2,207 2004................................................................ 2,199 2005................................................................ 1,333 2006................................................................ 1,161 2007................................................................ 967 ------- Total future minimum lease payments................................. $12,712 =======
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 and April 1999, the Company entered into equipment loan agreements with a bank. Under the loan agreements, the Company could borrow up to $6 million at an interest rate of prime plus 0.5%, for the purpose of acquisition of equipment. In October 1999, the Company paid off all outstanding debt from the proceeds of the initial public offering. 6. Income Tax Substantially all of the income before income taxes as shown in the Consolidated Statement of Operations for the year ended July 31, 2000 is derived in the United States. The provision (benefit) for income taxes consists of the following (in thousands):
July 31, 2000 ------- Current: Federal.................................................. $12,375 State.................................................... 2,419 ------- 14,794 Deferred: Federal.................................................. $(3,405) State.................................................... (1,125) ------- (4,530) ------- Total provision for income taxes................................... $10,264 =======
39 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation between the statutory federal income tax rate and the Company's effective tax rate is as follows:
July 31, 2000 -------- Statutory federal income tax rate................................... 35.0% State taxes, net of federal benefit................................. 4.4 Non-deductible stock compensation................................... 14.0 Utilization of net operating loss and credit carryfowards........... (21.7) Research and development tax credits................................ (1.0) Other............................................................... 2.8 ----- 33.5% =====
The Company did not provide for taxes in fiscal 1999 and 1998 as there was no taxable income. The significant components of the deferred tax assets and liabilities as of July 31, 2000 and 1999 are as follows (in thousands):
2000 1999 ------ ------ Assets: Inventory.................................................. $1,560 $ -- Non deductible accruals.................................... 2,251 -- Stock compensation......................................... 787 -- Net operating loss and credit carryforwards................ 729 6,678 Other...................................................... 283 161 ------ ------ Total deferred tax assets................................ 5,610 6,839 Liabilities: Depreciation............................................... (1,080) (196) Other...................................................... (2,480) -- ------ ------ Total deferred tax liabilities............................. (3,560) (196) Net deferred tax asset..................................... 2,050 6,643 Valuation allowance........................................ -- (6,643) ------ ------ $2,050 $ -- ====== ======
During the year ended July 31, 2000, the Company reversed its valuation allowance related to its 1999 deferred tax asset of $6.6 million, as the realization of such assets became probable. The Company has available state net operating loss carryforwards of approximately $19.3 million expiring in 2004 and 2005. The income tax provision does not reflect the tax savings resulting from deductions associated with the Company's stock option plans. 7. Redeemable Preferred Stock The Company's Board authorized 15,792,201 shares of Series A, Series B, Series C and Series D convertible preferred stock at $.01 par value. Issuances were as follows: In February 1998, the Company authorized 6,380,000 shares of Series A preferred stock. 40 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 approximately 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 share of redeemable convertible preferred stock converted into 141,849,675 shares of common stock at the time of our initial public offering, and has been retired. 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. 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. Dividend and Voting Rights When and if declared by the Company's Board, dividends on Series A, Series B, Series C and Series D are payable in cash in preference and prior to any payment of any dividend on common shares. The holders are entitled to the per share amount of dividends or distributions declared for common stock, multiplied by the number of shares of common stock into which the preferred stock is convertible. The holders are entitled to vote on all matters and are entitled to the number of votes equal to the number of common shares into which the Series A, Series B, Series C and Series D, are convertible as of the date of record. Liquidation Preference In the event of any liquidation, dissolution, or winding up of the Company, the holders of Series A, Series B, Series C and Series D are entitled to receive, prior and in preference to any payment or distribution of any assets or surplus funds of the Company to holders of the common shares, an amount for each share of Series A, Series B, Series C and Series D held, equal to $.91, $3.50, $8.00 and $21.67, respectively, plus any declared and unpaid dividends. The liquidation preferences are subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. 41 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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):
Series A Series B Series C Series D Total ------------- -------------- -------------- -------------- -------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------- ------ ------- ------ ------- ------ ------- 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 ----- ------ ----- ------- ----- ------- --- ------- ------ -------
8. Stockholders' Equity Common Stock The Company is authorized to issue up to 1.5 billion shares of its common stock. 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 legally 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. In October 1999, the Company 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 March 2000, the Company completed a follow-on public offering of 10,200,000 shares of common stock at $150.25 per share. Of the 10,200,000 shares offered, 8,428,401 shares were sold by the Company and 1,771,599 shares were sold by existing stockholders of the Company. The net proceeds of this offering, to the Company, after deducting underwriting discounts and other expenses, were approximately $1.2 billion. The Company effected the following stock splits: 3-for-1 in August 1999 and 3-for-1 in February 2000. All common shares, common share options and per share amounts in the accompanying financial statements have been adjusted to reflect the stock splits. 42 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock Incentive Plans The Company has two main stock incentive plans: the 1998 Stock Incentive Plan (the "1998 Plan") and the 1999 Stock Incentive Plan (the "1999 Plan"). A total of 79,695,000 shares of common stock have been reserved for issuance under the 1998 and 1999 Plans. Shares not yet issued under the 1998 Stock Incentive Plan are available under the 1999 plan. Both Plans provide 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 and 1999 Plans are eligible to elect immediate exercise of all such options. However, shares obtained by employees who elect to 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, 2000, there were 14,509,767 shares related to immediate option exercises subject to repurchase by the Company at prices ranging from $0.01 to $12.67. 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 July 31, 2000, there were 53,781,562 reserved for future issuance. 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, 2000 and 1999 was 51,597,936, of which 27,998,032 and 42,296,436 were subject to repurchase at their original issuance prices, respectively, ranging from $0.001 to $0.11. 1999 Employee Stock Purchase Plan In August 1999, the Board approved the Employee Stock Purchase Plan. A total of 2,250,000 shares of common stock have been reserved for issuance under this plan. Eligible employees may purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period. Participation is limited to 10% of an employee's eligible compensation not to exceed amounts allowed by the Internal Revenue Code. On August 1 of each year, commencing with August 1, 2000, the aggregate number of common shares available for purchase during the life of the Employee Stock Purchase Plan shall automatically be increased by the number of common shares necessary to cause the number of common shares available for purchase to be 2,250,000. As of July 31, 2000, 101,021 shares of common stock had been issued for proceeds of $1.1 million and approximately 2,149,000 shares are available for future issuance. 43 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Each director will be automatically granted an option to purchase 30,000 shares immediately following each annual meeting of stockholders. The Company granted 270,000 options with a vesting period of three years, as of July 31, 2000. Deferred Stock Compensation In connection with the grant of certain stock options and restricted shares to employees during the years ended July 31, 2000 and 1999 and the period from inception (February 17, 1998) to July 31, 1998, the Company recorded deferred stock compensation of $31,701,000, $25,159,000 and $184,000, 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' deficit and is being amortized over the vesting periods of the related options. During the years ended July 31, 2000 and 1999 and the period from inception (February 17, 1998) to July 31, 1998, the Company recorded compensation expense relating to these options and restricted shares totaling $10,916,000, $1,409,000 and $5,000, respectively. Non-Employee Stock Compensation During the year ended July 31, 2000, the Company granted 208,000 shares of common stock awards which were fully vested by July 31, 2000 to non-employees and recognized compensation expense of $1,372,000. 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. The fair value of each stock option was estimated using the Black-Scholes option-pricing model with the following assumptions for July 31, 2000 and 1999, respectively: a weighted-average risk free interest rates of 5.2% and 6.5%, a weighted-average expected option life of 4 and 3 years, no dividend yield and a 85% and 60% volatility. 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 income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):
Period from Inception Year Ended Year Ended (February 17, 1998) to July 31, 2000 July 31, 1999 July 31, 1998 ------------- ------------- ---------------------- As reported Net income (loss)......... $ 20,399 $(19,490) $ (693) Basic net income (loss) per share................ $ 0.13 $ (2.09) $(0.18) Diluted net income (loss) per share................ $ 0.10 $ (2.09) $(0.18) Pro forma Net loss.................. $(62,342) $(21,314) $ (807) Basic and diluted net loss per share................ $ (0.41) $ (2.29) $(0.22) Shares used in basic and diluted.................... 152,500 9,324 3,753
44 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of these stock awards at the date of grant was estimated using the Black-Scholes model with the following assumptions:
Period from Inception Year Ended Year Ended (February 17, 1998) July 31, 2000 July 31, 1999 to July 31, 1998 ------------- ------------- --------------------- Risk free interest rate...... 6.5% 4.5% 5.4% Dividend yield............... 0% 0% 0% Expected volatility.......... 85% 0% 0% Expected life................ 5 years 5 years 4 years
The weighted average grant date fair value of stock awards granted during the years ended July 31, 2000 and 1999 and the period from inception (February 17, 1998) to July 31, 1998 was $38.86, $0.35 and $0.05 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:
Number of Weighted Average Shares Exercise Price ----------- ---------------- Outstanding at July 31, 1998...................... -- -- Options granted................................... 23,280,300 $ 0.16 Options exercised................................. (18,221,400) 0.22 ----------- ------ Outstanding at July 31, 1999...................... 5,058,900 $ 0.45 =========== ====== Options granted................................... 24,936,401 54.20 Options exercised................................. (2,494,538) 1.72 Options cancelled................................. (241,999) 66.13 ----------- ------ Outstanding at July 31, 2000...................... 27,258,764 $48.92 =========== ======
The weighted average exercise price for options granted at fair value were $97.97 and $0 for 2000 and 1999, respectively. The weighted average fair value for options granted at fair value were $69.55 and $0 for 2000 and 1999, respectively. The weighted average exercise price for options granted below fair value were $3.03 and $0.22 for 2000 and 1999, respectively. The weighted average fair value of options granted below fair value were $4.81 and $0.35 for 2000 and 1999, respectively. The following table summarizes information about stock options outstanding at July 31, 2000:
Vested Options Options Outstanding Exercisable ----------------------------------- ----------------------- Weighted Average Weighted Weighted Number of Remaining Average Average Range of Shares Contract Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ----------------- ----------- --------- -------- ----------- -------- $ 0.04 - $ 1.67 5,873,356 8.96 $ 0.86 293,725 $ 0.69 2.00 - 5.00 5,474,571 9.12 3.21 17,550 2.76 5.83 - 77.98 5,923,649 9.47 35.21 33,700 28.04 80.00 - 106.33 5,530,938 9.56 90.52 65,031 88.94 109.38 - 189.94 4,456,250 9.67 135.01 250 135.01 ---------- ---- ------- $ 0.04 - $189.94 27,258,764 9.34 $48.92 410,256 $48.92
45 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stockholder Notes Receivable At July 31, 2000 and July 31, 1999, the Company held notes receivable in the amount of $262,000 and $360,000, 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 had the right to purchase shares (based upon set criteria in the contract) of the Company's common stock in the Company's IPO of shares at the IPO price. The customer purchased 600,000 shares at $12.67 per share in October 1999. Preferred Stock 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. 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. 10. Selected Quarterly Financial Data (Unaudited)
October 30, January 29, April 29, July 31, Consolidated Statement of 1999 2000 2000 2000 Operations Data: ----------- ----------- --------- -------- Revenue............................ $19,510 $29,049 $59,183 $90,395 Gross profit(1).................... 9,170 13,653 27,816 42,512 ------- ------- ------- ------- Net income (loss).................. $(5,717) $(1,634) $ 9,420 $18,330 ======= ======= ======= ======= Basic net income (loss) per share.. $ (0.19) $ (0.01) $ 0.05 $ 0.09 ======= ======= ======= ======= Diluted net income (loss) per share............................. $ (0.19) $ (0.01) $ 0.04 $ 0.07 ======= ======= ======= ======= (1) Exclusive of the non-cash stock compensation expense of........... $ 261 $ 328 $ 329 $ 328 October 29, January 30, May 1, July 31, Consolidated Statement of 1998 1999 1999 1999 Operations Data: ----------- ----------- --------- -------- Revenue............................ $ -- $ -- $ -- $11,330 Gross profit (loss)(1)............. (24) (215) (934) 4,017 ------- ------- ------- ------- Net loss........................... $(1,184) $(3,105) $(6,120) $(9,081) ======= ======= ======= ======= Basic net loss per share........... $ (0.13) $ (0.33) $ (0.65) $ (0.97) ======= ======= ======= ======= Diluted net loss per share......... $ (0.13) $ (0.33) $ (0.65) $ (0.97) ======= ======= ======= ======= (1) Exclusive of the non-cash stock compensation expense of........... $ 8 $ 13 $ 24 $ 56
46 SYCAMORE NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Subsequent Events On September 7, 2000, the Company acquired Sirocco Systems, Inc. in a transaction accounted for as a pooling-of-interests. An aggregate of approximately 28.4 million shares of Sycamore common stock were either exchanged for all outstanding shares of Sirocco or reserved for common stock issuable under outstanding Sirocco stock options assumed by the Company in the transaction. Sirocco develops optical networking equipment for telecommunications carriers. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the heading "Executive Officers of the Registrant" in Part I hereof and set forth under the caption "Election of Directors" appearing in the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on December 14, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2000, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information appearing at the end of Part I and the forth under the caption "Compensation and Other Information Concerning Directors and Officers" in the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on December 14, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2000, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" appearing in the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on December 14, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2000, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" appearing in the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on December 14, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2000, is incorporated herein by reference. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1.Financial Statements The financial statements listed in the accompanying Index to Consolidated Financial Statements on page 28 are filed as part of this report. 2.Exhibits
Number Exhibit Description --------- ------------------- ******2.1 Agreement and Plan of Merger, dated as of June 5, 2000, by and among Sycamore Networks, Inc., Tropical Acquisition Corporation and Sirocco Systems, Inc. *3.1 Amended and Restated Certificate of Incorporation of the Company *3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company *3.3 Amended and Restated By-Laws of the Company *4.1 Specimen common stock certificate *4.2 See Exhibits 3.1, 3.2, and 3.3 for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company *4.3 Second Amended and Restated Investor Rights Agreement dated February 26, 1999, as amended by Amendment No. 1 dated as of July 23, 1999 ***4.4 Amendment No. 2 dated as of August 5, 1999 to the Second Amended and Restated Investor Rights Agreement dated February 26, 1999 ***4.5 Amendment No. 3 dated as of September 20, 1999 to the Second Amended and Restated Investor Rights Agreement dated February 26, 1999 ***4.6 Amendment No. 4 dated as of February 11, 2000 to the Second Amended and Restated Investor Rights Agreement dated February 26, 1999 *10.1 1998 Stock Incentive Plan, as amended *10.2 1999 Non-Employee Directors' Option Plan *+10.3 Purchase and License Agreement between Sycamore Networks, Inc. and Williams Communications, Inc. dated March 5, 1999 ***+10.4 Addendum to Purchase and License Agreement between Sycamore Networks, Inc. and Williams Communications, Inc. dated November 21, 1999 ***+10.5 Manufacturing Services Agreement between Sycamore Networks, Inc. and Celestica Corporation dated February 9, 2000 *10.7 1999 Stock Incentive Plan **10.9 Form of Indemnification Agreement between Sycamore, the Directors of Sycamore Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17, 1999 **10.10 Form of Change in Control Agreement between Sycamore Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17, 1999
49
Number Exhibit Description - --------- ------------------- **10.11 Promissory Note and Pledge Agreement dated October 20, 1999 between Sycamore Networks, Inc. and Kevin Oye, Vice President of Business Development ****10.14 Lease Agreement between Sycamore Networks, Inc. and Farley White Associates, LLC dated March 23, 2000 10.15 Sirocco Systems, Inc. 1998 Stock Plan *****99.2 Escrow Agreement dated as of September 7, 2000 by and among Sycamore Networks, Inc., the Stockholder Representative named therein and the Escrow Agent named therein 23.1 Consent of PricewaterhouseCoopers LLP 24.1 Power of Attorney (see signature page) 27.1 Financial Data Schedule (Filed electronically)
* Incorporated by reference to Sycamore Networks, Inc.'s Registration Statement on Form S-1 (Registration Statement No. 333-84635). ** Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999 filed with the Commission on December 13, 1999. *** Incorporated by reference to Sycamore Networks Inc.'s Registration Statement on Form S-1 (Registration Statement No. 333-30630). **** Incorporated by reference to Sycamore Networks Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2000 filed with the Commission on June 12, 2000. ***** Incorporated by reference to Sycamore Networks, Inc.'s Registration Statement on Form S-4 (Registration Statement No. 333-40146). ****** Incorporated by reference to Sycamore Networks, Inc.'s Current Report on Form 8-K filed with the Commission on June 12, 2000. + Confidential treatment granted for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission. (b) Reports The Company filed a Current Report on Form 8-K on June 12, 2000 relating to the signing by the Company of an Agreement and Plan of Merger dated as of June 5, 2000 by and among the Company, Sirocco Systems, Inc. and Tropical Acquisition Corporation. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chelmsford, Commonwealth of Massachusetts, on this 24th day of October, 2000. SYCAMORE NETWORKS, INC. By: ________________________________ Daniel E. Smith President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of Sycamore Networks, Inc. hereby severally constitute Gururaj Deshpande, Daniel E. Smith and Frances M. Jewels, and each of them individually, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K filed herewith and any and all subsequent amendments to said Report, and generally to do all such things in our names and behalf in our capacities as officers and directors to enable Sycamore Networks, Inc. to comply with all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by said attorneys, or any of them, to said Report and any and all amendments thereto. Pursuant to the requirements of the Securities Act, this Annual Report on Form 10-K has been signed below by the following persons in the capacities indicated on this 24th day of October, 2000. /s/ Gururaj Deshpande Chairman of the Board of Directors - ------------------------- Gururaj Deshpande /s/ Daniel E. Smith President, Chief Executive Officer and Director - ------------------------- Daniel E. Smith /s/ Frances M. Jewels Chief Financial Officer, Vice President, Finance - ------------------------- and Administration, Secretary and Treasurer Frances M. Jewels /s/ Timothy Barrows Director - ------------------------- Timothy Barrows /s/ Paul J. Ferri Director - ------------------------- Paul J. Ferri /s/ John W. Gerdelman Director - ------------------------- John W. Gerdelman 51 EX-10.15 2 0002.txt 1998 STOCK PLAN FNR SYSTEMS, INC. 1998 STOCK PLAN August 5, 1998 SECTION 1. Purpose. - --------- ------- The purpose of the 1998 Stock Plan (the "Plan") is to secure for FNR Systems, Inc., (the "Company"), its parent (if any) and any subsidiaries of the Company (collectively the "Related Corporations") the benefits arising from capital stock ownership by those employees, directors, officers and consultants of the Company and any Related Corporations who will be responsible for the Company's future growth and continued success. The Plan will provide a means whereby (a) employees of the Company and any Related Corporations may purchase stock in the Company pursuant to options which qualify as "incentive stock options" ("Incentive Stock Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), (b) directors, employees and consultants of the Company and any Related Corporations may purchase stock in the Company pursuant to options granted hereunder which do not qualify as Incentive Stock Options ("Non-Qualified Option" or "Non-Qualified Options"); (c) directors, employees and consultants of the Company and any Related Corporations may be awarded stock in the Company ("Awards"); (d) directors, employees and consultants of the Company and any Related Corporations may receive stock appreciation rights ("SARs"); and (e) directors, employees and consultants of the Company and any Related Corporations may make direct purchases of stock in the Company ("Purchases"). Both Incentive Stock Options and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation" as those terms are defined in Section 424 of the Code. Options, Awards, SARs and Purchases are referred to hereafter individually as a "Plan Benefit" and collectively as "Plan Benefits." Directors, employees and consultants of the Company and any Related Corporations are referred to herein as "Participants." SECTION 2. Administration. - --------- -------------- 2.1 Board of Directors and the Committee. The Plan will be administered ------------------------------------ by the Board of Directors of the Company whose construction and interpretation of the terms and provisions hereof shall be final and conclusive. Any director to whom a Plan Benefit is awarded shall be ineligible to vote upon his or her Plan Benefit, but Plan Benefits may be granted any such director by a vote of the remainder of the directors, except as limited below. The Board of Directors may in its sole discretion grant Options, issue shares upon exercise of such Options, grant Awards, grant SARs and approve Purchases, all as provided in the Plan. The Board of Directors shall have authority, subject to the express provisions of the Plan, to construe the Plan and its related agreements, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Option, Award, SAR and Purchase agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director shall be liable for any action or determination made in good faith. The Board of Directors may delegate any or all of its powers under the Plan to a Compensation Committee or other Committee (the "Committee") appointed by the Board of Directors consisting of at least two members of the Board of Directors. If the Company has a class of stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then members of the Committee shall at all times be: (i) "outside directors" as such term is defined in Treas. Reg. (S) 1.162-27(e)(3) (or any successor regulation); and (ii) "non-employee directors" within the meaning of Rule 16b-3 (or any successor rule) under the Exchange Act, as such terms are interpreted from time to time. If the Committee is so appointed, all references to the Board of Directors herein shall mean and relate to such Committee, unless the context otherwise requires. 2.2 Compliance with Section 162(m) of the Code. Section 162(m) of the ------------------------------------------ Code, added by the Omnibus Budget Reconciliation Act of 1993, generally limits the tax deductibility to publicly held companies of compensation in excess of $1,000,000 paid to certain "covered employees" ("Covered Employees"). If the Company is subject to Section 162(m) of the Code, it is the Company's intention to preserve the deductibility of such compensation to the extent it is reasonably practicable and to the extent it is consistent with the Company's compensation objectives. For purposes of this Plan, Covered Employees of the Company shall be those employees of the Company described in Section 162(m)(3) of the Code. SECTION 3. Eligibility. - --------- ----------- 3.1 Incentive Stock Options. Participants who are employees shall be ----------------------- eligible to receive Incentive Stock Options pursuant to the Plan; provided that no person shall be granted any Incentive Stock Option under the Plan who, at the time such Option is granted, owns, directly or indirectly, Common Stock of the Company possessing more than l0% of the total combined voting power of all classes of stock of the Company or of its Related Corporations, unless the requirements of Section 6.6(b) hereof are satisfied. In determining whether this 10% threshold has been reached, the stock attribution rules of Section 424(d) of the Code shall apply. Directors who are not regular employees are not eligible to receive Incentive Stock Options. 3.2 Non-Qualified Options, Awards, SARs and Purchases. Non-Qualified ------------------------------------------------- Options, Awards, SARs and authorizations to make Purchases may be granted to any Participant. 3.3 Generally. The Board of Directors may take into consideration a --------- Participant's individual circumstances in determining whether to grant an Incentive Stock Option, a Non-Qualified Option, an Award or an SAR or to approve a Purchase. Granting of any Option, Award or SAR or approval of any Purchase for any individual shall neither entitle that individual to, nor disqualify that individual from, participation in any other grant of Plan Benefits. SECTION 4. Stock Subject to Plan. - --------- --------------------- Subject to adjustment as provided in Sections 10 and 11 hereof, the stock to be offered under the Plan shall consist of shares of the Company's Common Stock, par value $.01 per share, and the maximum number of shares of stock which will be reserved for issuance, and in respect of which Plan Benefits may be granted pursuant to the provisions of the Plan, shall not exceed in the aggregate Four Hundred Twenty Thousand (420,000) shares. Such shares may be authorized and unissued shares or may be treasury shares. If an Option or SAR granted hereunder shall expire or terminate for any reason without having been exercised in full, or if the Company shall reacquire any unvested shares issued pursuant to Awards or Purchases, the unpurchased shares subject thereto and any unvested shares so reacquired shall again be available for subsequent grants of Plan Benefits under the Plan. Stock issued pursuant to the Plan may be subject to such restrictions on transfer, repurchase rights or other restrictions as shall be determined by the Board of Directors. SECTION 5. Granting of Options, Awards and SARs and Approvals of Purchases. - --------- --------------------------------------------------------------- Options, Awards and SARs may be granted and Purchases may be approved under the Plan at any time after August 5, 1998 and prior to August 5, 2008. The date of grant of an Option, Award or SAR or approval of a Purchase under the Plan will be the date specified by the Board of Directors at the time the Board of Directors grants such Option, Award or SAR or approves such Purchase; provided, however, that such date shall not be prior to the date on which the Board of Directors takes such action. The Board of Directors shall have the right, with the consent of a Participant, to convert an Incentive Stock Option granted under the Plan to a Non-Qualified Option pursuant to Section 6.7. Plan Benefits may be granted alone or in addition to other grants under the Plan SECTION 6. Special Provisions Applicable to Options and SARs. - --------- ------------------------------------------------- 6.1 Purchase Price and Shares Subject to Options and SARs. ----------------------------------------------------- (a) The purchase price per share of stock deliverable upon the exercise of an Option shall be determined by the Board of Directors, provided, however, -------- ------- that (i) in the case of an Incentive Stock Option, the exercise price shall not be less than l00% of the fair market value of such stock on the day the option is granted (except as modified in Section 6.6(b) hereof), and (ii) in the case of a Non-Qualified Option, the exercise price shall not be less than 50% of the fair market value of such stock on the day such Option is granted. (b) Options granted under the Plan may provide for the payment of the exercise price by delivery of (i) cash or a check payable to the order of the Company in an amount equal to the exercise price of such Options, (ii) shares of Common Stock of the Company owned by the Participant having a fair market value equal in amount to the exercise price of the Options being exercised, or (iii) any combination of (i) and (ii). The fair market value of any shares of the Company's Common Stock which may be delivered upon exercise of an Option shall be determined by the Board of Directors. The Board of Directors may also permit Participants, either on a selective or aggregate basis, to simultaneously exercise Options and sell the shares of Common Stock thereby acquired, pursuant to a brokerage or similar arrangement, approved in advance by the Board of Directors, and to use the proceeds from such sale as payment of the purchase price of such shares. (c) If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted (the "Determination Date") and shall mean (i) the average (on the Determination Date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if such Common Stock is then traded on a national securities exchange; (ii) the last reported sale price (on the Determination Date) of the Common Stock on the Nasdaq Stock Market if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on the Determination Date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq Stock Market. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Board of Directors after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. (d) If the Company is subject to Section 162(m) of the Code, the maximum number of shares with respect to which Options or SARs may be granted to any employee, including any cancellations or repricings which may occur, shall be limited to 7,000 shares in any calendar year. 6.2 Duration of Options and SARs. Subject to Section 6.6(b) hereof, each ---------------------------- Option and SAR and all rights thereunder shall be expressed to expire on such date as the Board of Directors may determine, but in no event later than ten years from the day on which the Option or SAR is granted and shall be subject to earlier termination as provided herein. 6.3 Exercise of Options and SARs. ---------------------------- (a) Subject to Section 6.6(b) hereof, each Option and SAR granted under the Plan shall be exercisable at such time or times and during such period as shall be set forth in the instrument evidencing such Option or SAR. To the extent that an Option or SAR is not exercised by a Participant when it becomes initially exercisable, it shall not expire but shall be carried forward and shall be exercisable, on a cumulative basis, until the expiration of the exercise period. No partial exercise may be for less than ten (l0) full shares of Common Stock (or its equivalent). (b) The Board of Directors shall have the right to accelerate the date of exercise of any installments of any Option or SAR; provided that the Board of Directors shall not accelerate the exercise date of any installment of any Option granted to a Participant as an Incentive Stock Option (and not previously converted into a Non-Qualified Option pursuant to Section 6.7) if such acceleration would violate the annual vesting limitation contained in Section 422(d)(1) of the Code, which provides generally that the aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options granted to any Participant are exercisable for the first time by such Participant during any calendar year (under all plans of the Company and any Related Corporations) shall not exceed $100,000. 6.4 Nontransferability of Options and SARs. -------------------------------------- No Option or SAR granted under the Plan shall be assignable or transferable by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution or, with respect to Non-Qualified Options and SARs, pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the rules promulgated thereunder or unless the Participant's non-qualified stock option agreement granting such options (the "Non-Qualified Stock Option Agreement") or the Participant's SAR agreement granting such SARs (the "SAR Agreement") provides otherwise. Unless otherwise provided by the Non-Qualified Stock Option Agreement or the SAR Agreement, during the life of the Participant, the Option or SAR shall be exercisable only by him or her. If any Participant should attempt to dispose of or encumber his or her Options or SARs, other than in accordance with the applicable terms of a Non-Qualified Stock Option Agreement or SAR Agreement, his or her interest in such Options or SARs shall terminate. 6.5 Effect of Termination of Employment or Death. -------------------------------------------- (a) If a Participant ceases to be employed by the Company or a Related Corporation for any reason, including retirement but other than death, any Option or SAR granted to such Participant under the Plan shall immediately terminate; provided, however, that any portion of such Option or SAR which -------- ------- was otherwise exercisable on the date of termination of the Participant's employment may be exercised within the three-month period following the date on which the Participant ceased to be so employed, but in no event after the expiration of the exercise period. Any such exercise may be made only to the extent of the number of shares subject to the Option or SAR which were purchasable on the date of such termination of employment. If the Participant dies during such three-month period, the Option or SAR shall be exercisable by the Participant's personal representatives, heirs or legatees to the same extent and during the same period that the Participant could have exercised the Option or SAR on the date of his or her death. (b) If the Participant dies while an employee of the Company or any Related Corporation, any Option or SAR granted to such Participant under the Plan shall be exercisable by the Participant's personal representatives, heirs or legatees, for the purchase of that number of shares and to the same extent that the Participant could have exercised the Option or SAR on the date of his or her death. The Option or SAR or any unexercised portion thereof shall terminate unless so exercised prior to the earlier of the expiration of six months from the date of such death or the expiration of the exercise period. 6.6 Designation of Incentive Stock Options; Limitations. --------------------------------------------------- Options granted under the Plan which are intended to be Incentive Stock Options qualifying under Section 422 of the Code shall be designated as Incentive Stock Options and shall be subject to the following additional terms and conditions: (a) Dollar Limitation. The aggregate fair market value (determined at the ----------------- time the option is granted) of the Common Stock for which Incentive Stock Options are exercisable for the first time during any calendar year by any person under the Plan (and all other incentive stock option plans of the Company and any Related Corporations) shall not exceed $100,000. In the event that Section 422(d)(1) of the Code is amended to alter the limitation set forth therein so that following such amendment such limitation shall differ from the limitation set forth in this Section 6.6(a), the limitation of this Section 6.6(a) shall be automatically adjusted accordingly. (b) l0% Stockholder. If any employee to whom an Incentive Stock Option is --------------- to granted pursuant to the provisions of the Plan is on the date of grant the owner of stock possessing more than l0% of the total combined voting power of all classes of stock of the Company or any Related Corporations, then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The option price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the fair market value of one share of Common Stock on the date of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. In determining whether the 10% threshold has been reached, the stock attribution rules of Section 424(d) of the Code shall apply. (c) Except as modified by the preceding provisions of this Section 6.6, all of the provisions of the Plan shall be applicable to Incentive Stock Options granted hereunder. 6.7 Conversion of Incentive Stock Options into Non-Qualified Options; ----------------------------------------------------------------- Termination of Incentive Stock Options. The Board of Directors, at the written - -------------------------------------- request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant's Incentive Stock Options (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such Incentive Stock Options, regardless of whether the Participant is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Board of Directors (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Board of Directors in its discretion may determine, provided that such conditions shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant's Incentive Stock Options converted into Non-Qualified Options, and no such conversion shall occur until and unless the Board of Directors takes appropriate action. The Board of Directors, with the consent of the Participant, may also terminate any portion of any Incentive Stock Option that has not been exercised at the time of such termination. 6.8 Stock Appreciation Rights. An SAR is the right to receive, without ------------------------- payment, an amount equal to the excess, if any, of the fair market value of a share of Common Stock on the date of exercise over the grant price, which amount will be multiplied by the number of shares with respect to which the SARs shall have been exercised. The grant of SARs under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Board of Directors shall deem desirable: (a) Grant. SARs may be granted in tandem with, in addition to or ----- completely independent of any Plan Benefit. (b) Grant Price. The grant price of an SAR may be the fair market value of ----------- a share of Common Stock on the date of grant or such other price as the Board of Directors may determine. (c) Exercise. An SAR may be exercised by a Participant in accordance with -------- procedures established by the Board of Directors or as otherwise provided in any agreement evidencing any SARs. The Board of Directors may provide that an SAR shall be automatically exercised on one or more specified dates. (d) Form of Payment. Payment upon exercise of an SAR may be made in cash, --------------- in shares of Common Stock or any combination thereof, as the Board of Directors shall determine. (e) Fair Market Value. Fair market value shall be determined in accordance ----------------- with Section 6.1(c) with the "Determination Date" being determined by reference to the date of grant or the date of exercise of an SAR, as applicable. 6.9 Rights as a Stockholder. ----------------------- The holder of an Option or SAR shall have no rights as a stockholder with respect to any shares covered by the Option or SAR until the date of issue of a stock certificate to him or her for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 6.10 Special Provisions Applicable to Non-Qualified Options and SARs --------------------------------------------------------------- Granted to Covered Employees. - ---------------------------- If the Company is subject to Section 162(m) of the Code, in order for the full value of Non-Qualified Options or SARs granted to Covered Employees to be deductible by the Company for federal income tax purposes, the Company may intend for such Non-Qualified Options or SARs to be treated as "qualified performance-based compensation" as described in Treas. Reg. (S)1.162-27(e) (or any successor regulation). In such case, Non-Qualified Options or SARs granted to Covered Employees shall be subject to the following additional requirements: (a) such options and rights shall be granted only by the Committee; and (b) the exercise price of such Options and the grant price of such SARs granted shall in no event be less than the fair market value of the Common Stock as of the date of grant of such Options or SARs. SECTION 7. Special Provisions Applicable to Awards - --------- --------------------------------------- 7.1 Grants of Awards. The Board of Directors may grant a Participant an ---------------- Award subject to such terms and conditions as the Board of Directors deems appropriate, including, without limitation, restrictions on the pledging, sale, assignment, transfer or other disposition of such shares and the requirement that the Participant forfeit all or a portion of such shares back to the Company upon termination of employment. 7.2 Conditions. Approvals of Awards may be subject to the following ---------- conditions: (a) Each Participant receiving an Award shall enter into an agreement (a "Stock Restriction Agreement") with the Company, if required by the Board of Directors, in a form specified by the Board of Directors agreeing to such terms and conditions of the Award as the Board of Directors deems appropriate. (b) Shares issued and transferred to a Participant pursuant to an Award may, if required by the Board of Directors, be deposited with the Treasurer or other officer of the Company designated by the Board of Directors to be held until the lapse of the restrictions upon such shares, and each Participant shall execute and deliver to the Company stock powers enabling the Company to exercise its rights hereunder. (c) Certificates for shares issued pursuant to an Award shall, if the Company shall deem it advisable, bear a legend to the effect that they are issued subject to specified restrictions. (d) Certificates representing the shares issued pursuant to an Award shall be registered in the name of the Participant and shall be owned by such Participant. Such Participant shall be the holder of record of such shares for all purposes, including voting and receipt of dividends paid with respect to such shares. 7.3 Nontransferability. Shares issued pursuant to an Award may not be ------------------ sold, assigned, transferred, alienated, commuted, anticipated, or otherwise disposed of (except, subject to the provisions of such Participant's Stock Restriction Agreement, by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and are not subject to attachment, garnishment, execution or other legal or equitable process, prior to the lapse of restrictions on such shares, and any attempt at action in contravention of this Section shall be null and void. If any Participant should attempt to dispose of or encumber his or her shares issued pursuant to an Award prior to the lapse of the restrictions imposed on such shares, his or her interest in such shares shall terminate. 7.4 Effect of Termination of Employment or Death on Awards. If, prior to ------------------------------------------------------ the lapse of restrictions applicable to Awards, the Participant ceases to be an employee of the Company or the Related Companies for any reason, Awards to such Participant, as to which restrictions have not lapsed, shall be forfeited to the Company, effective on the date of the Participant's termination of employment. The Board of Directors shall have the sole power to decide in each case to what extent leaves of absence shall be deemed a termination of employment. SECTION 8. Special Provisions Applicable to Purchases. - --------- ------------------------------------------ All approvals of Purchases which provide that the Company has a right to repurchase the shares subject to such Purchase (the "Restricted Shares") shall be subject to the terms and conditions set forth in the related agreement (the "Stock Purchase Restriction Agreement") approved by the Board of Directors, and shall be subject to the other terms and conditions of this Section 8. 8.1 Conditions. All approvals of Purchases shall be subject to the ---------- following conditions: (a) Prior to the issuance and transfer of Restricted Shares, the Participant shall pay to the Company the purchase price (the "Purchase Price") of the Restricted Shares in cash or in such other manner as shall be as approved by the Board of Directors. (b) Restricted Shares issued and transferred to a Participant may, if required by the Board of Directors, be deposited with the Treasurer or other officer of the Company designated by the Board of Directors to be held until the lapse of the restrictions upon such Restricted Shares, and each Participant shall execute and deliver to the Company stock powers enabling the Company to exercise its rights hereunder. (c) Certificates for Restricted Shares shall, if the Company shall deem it advisable, bear a legend to the effect that they are issued subject to specified restrictions. (d) Certificates representing the Restricted Shares shall be registered in the name of the Participant and shall be owned by such Participant. Such Participant shall be the holder of record of such Restricted Shares for all purposes, including voting and receipt of dividends paid with respect to such Restricted Shares. 8.2 Nontransferability. A Participant's Restricted Shares may not be sold, ------------------ assigned, transferred, alienated, commuted, anticipated, or otherwise disposed of (except, subject to the provisions of such Participant's Stock Purchase Restriction Agreement by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and are not subject to attachment, garnishment, execution or other legal or equitable process, prior to the lapse of restrictions on such Restricted Shares, and any attempt at action in contravention of this Section shall be null and void. If any Participant should attempt to dispose of or encumber his or her Restricted Shares prior to the lapse of the restrictions imposed on such Restricted Shares, his or her interest in the Restricted Shares awarded to him or her shall terminate. SECTION 9. Requirements of Law. - --------- ------------------- 9.1 Violations of Law. No shares shall be issued and delivered upon ----------------- exercise of any Option or the making of any Award or Purchase or the payment of any SAR unless and until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of l933, as amended, any applicable listing requirements of any national securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, shall have been fully complied with. Each Participant may, by accepting Plan Benefits, be required to represent and agree in writing, for himself or herself and for his or her transferees by will or the laws of descent and distribution, that the stock acquired by him, her or them is being acquired for investment. The requirement for any such representation may be waived at any time by the Board of Directors. 9.2 Compliance with Rule 16b-3. If the Company has a class of stock -------------------------- registered pursuant to Section 12 of the Exchange Act, the intent of this Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board of Directors and shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board of Directors may exercise discretion to modify this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. SECTION 10. Recapitalization. - ---------- ---------------- In the event that dividends are payable in Common Stock of the Company or in the event there are splits, sub-divisions or combinations of shares of Common Stock of the Company, the number of shares available under the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares deliverable upon the exercise thereafter of any Option previously granted shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price, and the number of shares to which granted SARs relate shall be increased or decreased proportionately, as the case may be, and the grant price of such SARs shall be decreased or increased proportionately, as the case may be. SECTION 11. Reorganization. - ---------- -------------- In case the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or, in case the property or stock of the Company is acquired by any other corporation, or in case of a reorganization or liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company hereunder, shall, as to outstanding Plan Benefits, either (i) make appropriate provision for the protection of any such outstanding Plan Benefits by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect of the shares of Common Stock of the Company, provided only that the excess of the aggregate fair market value of the shares subject to the Plan Benefits immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such Plan Benefits immediately before such substitution over the purchase price thereof, (ii) upon written notice to the Participants, provide that all unexercised Plan Benefits must be exercised within a specified number of days of the date of such notice or such Plan Benefits will be terminated, or (iii) upon written notice to the Participants, provide that the Company or the merged, consolidated or otherwise reorganized corporation shall have the right, upon the effective date of any such merger, consolidation, sale of assets or reorganization, to purchase all Plan Benefits held by each Participant and unexercised as of that date at an amount equal to the aggregate fair market value on such date of the shares subject to the Plan Benefits held by such Participant over the aggregate purchase price therefor, such amount to be paid in cash or, if stock of the merged, consolidated or otherwise reorganized corporation is issuable in respect of the shares of the Common Stock of the Company, then, in the discretion of the Board of Directors, in stock of such merged, consolidated or otherwise reorganized corporation equal in fair market value to the aforesaid amount. In any such case the Board of Directors shall, in good faith, determine fair market value and may, in its discretion, advance the lapse of any waiting or installment periods and exercise dates. SECTION 12. No Special Employment Rights. - ---------- ---------------------------- Nothing contained in the Plan or in any Plan Benefit documentation shall confer upon any Participant receiving a grant of any Plan Benefit any right with respect to the continuation of his or her employment by the Company (or any Related Corporation) or interfere in any way with the right of the Company (or any Related Corporation), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of any Plan Benefit. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Board of Directors. SECTION 13. Amendment of the Plan. - ---------- --------------------- The Board of Directors may at any time and from time to time modify or amend the Plan in any respect. The termination or any modification or amendment of the Plan shall not, without the consent of a recipient of any Plan Benefit, affect his or her rights under any Plan Benefit previously granted. With the consent of the affected Participant, the Board of Directors may amend outstanding agreements relating to any Plan Benefit, in a manner not inconsistent with the Plan. The Board of Directors hereby reserves the right to amend or modify the terms and provisions of the Plan and of any outstanding Options to the extent necessary to qualify any or all Options under the Plan for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, provided, however, that the consent of an optionee is required if such amendment or modification would cause unfavorable income tax treatment for such optionee. SECTION 14. Withholding. - ---------- ----------- The Company's obligation to deliver shares of stock upon the exercise of any Option or the granting of an Award or to make payment upon any exercise of any SAR or making of a Purchase shall be subject to the satisfaction by the Participant of all applicable federal, state and local income and employment tax withholding requirements. SECTION 15. Effective Date and Duration of the Plan. - ---------- --------------------------------------- 15.1 Effective Date. The Plan shall become effective when adopted by the -------------- Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within l2 months after the date of the Board's adoption of the Plan, then any Incentive Stock Options previously granted under the Plan shall terminate and no further Incentive Stock Options shall be granted. Subject to such limitation, Options may be granted under the Plan at any time after the effective date and before the date fixed herein for termination of the Plan. 15.2 Duration. Unless sooner terminated in accordance with Section l1 -------- hereof, the Plan shall terminate upon the earlier of (i) the tenth anniversary of the date of its adoption by the Board of Directors or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to any Awards or Purchases or the exercise or cancellation of Options and SARs granted hereunder. If the date of termination is determined under (i) above, then Plan Benefits outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such Plan Benefits. SECTION 16. Governing Law. - ---------- ------------- The Plan and all actions taken thereunder shall be governed by the laws of the State of Connecticut. EX-23.1 3 0003.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (Nos. 333-45502 and 333-90839) of Sycamore Networks, Inc. of our report dated August 22, 2000, except for the information presented in Note 11 for which the date is September 7, 2000, relating to the financial statements, which appear in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts October 23, 2000 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 12-MOS JUL-31-2000 AUG-01-1999 JUL-31-2000 422,963 710,398 43,407 0 39,739 1,241,556 47,512 7,077 1,677,661 98,978 0 0 0 245 1,575,108 1,677,661 198,137 198,137 104,986 104,986 103,666 0 41,178 30,663 10,264 20,399 0 0 0 20,399 0.13 0.10
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