-----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, SeH+N4C89RtatrzLjr8HRhRKW1I3l2n40IL367MgFaip/TZK0/IXfu22Gp+j4jYK n7q1NEIIz77XbuNl/W/02A== 0000927016-99-002819.txt : 19990809 0000927016-99-002819.hdr.sgml : 19990809 ACCESSION NUMBER: 0000927016-99-002819 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCAMORE NETWORKS INC CENTRAL INDEX KEY: 0001092367 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043410558 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-84635 FILM NUMBER: 99679354 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 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on August 6, 1999 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- SYCAMORE NETWORKS, INC. (Exact name of registrant as specified in its charter) --------------- Delaware 3576 04-3410558 (State of other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) --------------- 10 Elizabeth Drive Chelmsford, MA 01824 (978) 250-2900 (Address Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- Daniel E. Smith President and Chief Executive Officer Sycamore Networks, Inc. 10 Elizabeth Drive Chelmsford, MA 01824 (978) 250-2900 (Name, Address Including Zip Code and Telephone Number, Including Area Code, of Agent for Service) --------------- Copies to: MARK G. BORDEN, ESQ. MICHAEL D. HOCHBERG, WILLIAM B. ASHER, JR., JEFFREY A. STEIN, ESQ. ESQ. ESQ. HALE AND DORR LLP GENERAL COUNSEL TESTA, HURWITZ & 60 State Street SYCAMORE NETWORKS, INC. THIBEAULT, LLP Boston, MA 02109 10 Elizabeth Drive 125 High Street Telephone: (617) 526- Chelmsford, MA 01824 Boston, MA 02110 6000 Telephone: (978) 250- Telephone: (617) 248- Telecopy: (617) 526-5000 2900 7000 Telecopy: (978) 256- Telecopy: (617) 248-7100 3434 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of each class of Proposed Maximum Amount of securities to be registered Aggregate Offering Price(1) Registration Fee(2) - ------------------------------------------------------------------------------ Common Stock, $.001 par value per share.................... $115,000,000 $31,970
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and we are not soliciting offers to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued , 1999 Shares COMMON STOCK ----------- Sycamore Networks, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share. ----------- We have applied to list our common stock on the Nasdaq National Market under the symbol "SCMR." ----------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 6. ----------- PRICE $ A SHARE -----------
Underwriting Price to Discounts and Proceeds to Public Commissions Sycamore -------- ------------- ----------- Per Share................................. $ $ $ Total..................................... $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Sycamore Networks, Inc. has granted the underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 1999. ----------- MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS J.P. MORGAN & CO. DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated , 1999 [gatefold artwork] TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 4 Risk Factors........................ 6 Special Note Regarding Forward- Looking Statements................. 16 Use of Proceeds..................... 17 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 19 Selected Financial Data............. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21
Page ---- Business......................... 26 Management....................... 36 Certain Transactions............. 43 Principal Stockholders........... 45 Description of Capital Stock..... 46 Shares Eligible for Future Sale.. 49 Underwriters..................... 51 Legal Matters.................... 53 Experts.......................... 53 Where You Can Find More Information..................... 53 Index to Financial Statements.... F-1
We are a Delaware corporation. Our principal executive offices are located at 10 Elizabeth Drive, Chelmsford, Massachusetts 01824 and our telephone number is (978) 250-2900. Our World Wide Web site address is www.sycamorenet.com. The information in the Web site is not incorporated by reference into this prospectus. Sycamore Networks, SN 6000, SN 8000, SilvxSource, SilvxManager, SN 16000 and SilvxONMS are our trademarks. This prospectus also contains trademarks of other companies. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Until , 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Except as set forth in the financial statements or as otherwise indicated, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . reflects the conversion of all outstanding shares of our redeemable convertible preferred stock into 15,761,075 shares of common stock upon the closing of the offering; and . reflects the filing, as of the closing of the offering, of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws implementing certain provisions described below under "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects." Sycamore's fiscal year ends on July 31 of the referenced year. For example, references to the "1999 fiscal year" mean the fiscal year ending on July 31, 1999. 3 PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and financial statements and notes appearing elsewhere in this prospectus. SYCAMORE NETWORKS, INC. We develop and market software-based optical networking products that enable network service providers to quickly and cost effectively provide bandwidth and create new high speed data services. Our target customers are competitive local exchange carriers, incumbent local exchange carriers, long distance carriers, Internet service providers, cable operators, foreign telephone companies and wholesale carriers, all of which we refer to as "service providers". 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 will require new solutions to relieve network congestion and create new data services. We call our products "intelligent optical networking products" because they are designed to transmit and manage data directly on wave lengths of light, "wavelengths", for transmission over fiber optic cable. This will improve the efficiency of the network, because data can be moved across the network and managed entirely in the optical domain. In contrast, the existing SONET/SDH architecture requires optical signals travelling across the network to be converted into electrical signals at each network transit point, and then re- converted into optical signals for transport to the next transit point. The multiple conversions required in a SONET/SDH network increase network complexity and cost. Our products are based on a common software architecture that we believe has a number of significant benefits, including accelerating our release of new products and enabling our customers to upgrade their networks without significant new capital equipment or retraining. Our products are designed to address the current and future needs of service providers by offering an end-to-end optical networking solution that provides the following benefits: . Improves Network Flexibility and Scalability. Our software-based equipment is designed to allow service providers to improve the flexibility and scalability of their networks without the long lead times and large initial capital investment presently required for a network buildout. . Enables Rapid Service Delivery. Our products are designed to shorten the time it takes for service providers to increase bandwidth and provide services. . Facilitates Introduction of New Data Services and Creation of New Revenue Opportunities for Service Providers. The software-based intelligence of our products allows us to rapidly introduce new features into our products, which can in turn be offered as new services by service providers to their customers. . Protects Existing Investments. Our products are designed to enable service providers to increase the functionality and improve the performance of their networks without sacrificing their existing infrastructure investments in SONET/SDH equipment. We market our products through a direct sales force and intend to establish relationships with selected original equipment manufacturers and other marketing partners, both domestically and internationally. In addition, we work collaboratively with our customers and prospective customers to help them identify and create new high speed data services that they can offer to their customers. We believe that this assistance is an integral aspect of our sales and marketing efforts. 4 RECENT DEVELOPMENTS We began shipping our SN 6000 Intelligent Optical Transport product to one customer in the fourth quarter of fiscal 1999. Our initial customer for this product is Williams Communications, Inc. We expect to recognize revenue of approximately $11.3 million in the fourth quarter of fiscal 1999 in connection with these shipments. THE OFFERING Common stock offered............ shares Common stock to be outstanding shares after this offering............. Use of proceeds................. We intend to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, and the repayment of certain indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market "SCMR" symbol..........................
The above information is based upon the number of shares of common stock outstanding as of June 30, 1999 and excludes 1,837,700 shares of common stock issuable upon exercise of outstanding options at an average exercise price of $.81 per share and 6,381,300 shares of common stock reserved for issuance under our stock plan as of June 30, 1999. SUMMARY FINANCIAL DATA (in thousands, except per share data)
Period from inception (February 17, 1998) Nine months ended through July 31, 1998 May 1, 1999 --------------------- ----------------- Statement of Operations Data: Revenue................................ $ -- $ -- Total operating expenses............... 793 10,591 Loss from operations................... (793) (10,591) Net loss............................... (693) (10,103) Pro forma basic and diluted net loss per share (unaudited)................. $(.11) $ (1.08) Weighted average shares used in comput- ing pro forma basic and diluted net loss per share (unaudited)............ 6,252 9,351
Weighted average shares used in computing pro forma basic and diluted net loss per share shown above exclude unvested shares of common stock subject to repurchase rights, which totalled 1,752,000 and 4,230,000 for the period from inception (February 17, 1998) through July 31, 1998 and the nine months ended May 1, 1999, respectively. The pro forma as adjusted column in the balance sheet data below gives effect to the conversion of our outstanding preferred stock into common stock upon the closing of this offering and the sale of the shares of common stock in this offering at an assumed initial public offering price of $ , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
As of May 1, 1999 ---------------------- Pro forma Actual as adjusted --------- ----------- Balance Sheet Data: Cash, cash equivalents and marketable securities......... $ 26,337 $ Working capital.......................................... 26,726 Total assets............................................. 37,502 Long-term obligations, less current portion.............. 666 Redeemable convertible preferred stock................... 40,771 Total stockholders' equity (deficit)..................... $ (10,113) $
5 RISK FACTORS This offering and an investment in our common stock involve a high degree of risk. You should consider carefully the risks described below before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock. Risks Related to Our Business We Expect that Substantially All Of Our Revenues Will Be Generated From A Limited Number Of Customers We currently have only one customer, Williams Communications. Williams is not contractually committed to purchase any minimum quantities of products from us. We expect that in the foreseeable future substantially all of our revenues will continue to depend on sales of our intelligent optical networking products to Williams and a limited number of potential new customers. Williams is currently using our SN 6000 product in its internal network and plans in the future to introduce commercial services based on this product. We cannot assure you that Williams will introduce commercial services on a timely basis, if at all, and any delay in such introduction or failure to introduce such services would seriously harm our revenues, results of operations and financial condition. The rate at which our current and prospective customers purchase products from us will depend, in part, on their success in selling communications services based on these products to their own customers. Any failure of these customers to purchase products from us for any reason, including any downturn in the business of these customers, would seriously harm our business, results of operations and financial condition. Our Business Is Difficult To Evaluate Because We Have A Limited Operating History We were founded in February 1998 and shipped our first intelligent optical networking product in May 1999. We have limited meaningful historical financial data upon which to base projected revenues and planned operating expenses and upon which investors may evaluate us and our prospects. In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are and will continue to be fixed. You should consider the risks and difficulties frequently encountered by companies like ours in a new and rapidly evolving market. Our ability to sell products, and the level of success, if any, we achieve, depends, among other things, on the level of demand for intelligent optical networking products, which is a new and rapidly evolving market. Our Failure To Increase Our Revenues Would Prevent Us From Achieving And Maintaining Profitability We have incurred significant losses since inception and expect to continue to incur losses in the future. As of May 1, 1999, we had an accumulated deficit of $10.8 million. We have not achieved profitability on a quarterly or annual basis, and anticipate that we will continue to incur net losses. We cannot be certain that our revenues will grow or that we will generate sufficient revenues to achieve or sustain profitability. We have large fixed expenses and we expect to continue to incur significant and increasing sales and marketing, product development, administrative and other expenses. As a result, we will need to generate significantly higher revenues to achieve and maintain profitability. We Are Entirely Dependent On Our Line Of Intelligent Optical Networking Products And Our Future Revenue Depends On Their Commercial Success Our future growth depends on the commercial success of our line of intelligent optical networking products. To date, our SN 6000 Intelligent Optical Transport product is the only product that has been shipped to a 6 customer. We intend to develop and introduce new products and enhancements to existing products in the future. We cannot assure you that we will be successful in completing the development or introduction of these products. Failure of our current or planned products to operate as expected could delay or prevent their adoption. If our target customers do not adopt, purchase and successfully deploy our current and planned products, our revenues will not grow significantly and our business, results of operations and financial condition will be seriously harmed. 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. To date, the SN 6000 is the only product that has been shipped to a customer, and that customer is currently using our product solely in its internal network. Our customers may discover errors or defects in the hardware or the software, or the product may not operate as expected, after it has been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, we could experience: . loss of or delay in revenues and loss of market share; . loss of customers; . failure to attract new customers or achieve market acceptance; . diversion of development resources; . increased service and warranty costs; . legal actions by our customers; and . increased insurance costs. The Long And Variable Sales Cycles For Our Products May Cause Revenues And Operating Results To Vary Significantly From Quarter To Quarter A customer's decision to purchase our intelligent optical networking products involves a significant commitment of its resources and a lengthy evaluation, testing and product qualification process. As a result, our sales cycle is likely to be lengthy. Throughout the sales cycle, we spend considerable time and expense educating and providing information to prospective customers about the use and features of our products. Even after making a decision to purchase, we believe that our customers will deploy the products slowly and deliberately. Timing of deployment can vary widely and depends on the skills of the customer, the size of the network deployment, the complexity of the customer's network environment and the degree of hardware and software configuration necessary. Customers with significant or complex networks usually expand their networks in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict these sales and deployment cycles. The long sales cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause our revenues and results of operations to vary significantly and unexpectedly from quarter to quarter. We Depend On The Growth Of Our Customer Base Our future success will depend on the growth of our customer base. The growth of our customer base could be adversely affected by: . customer unwillingness to implement our new optical networking architecture; 7 . 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 be certain 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. Our Business Will Suffer If We Do Not Respond Rapidly To Technological Changes The market for intelligent optical networking products is likely to be characterized by rapid technological change, frequent new product introductions and changes in customer requirements. We may be unable to respond quickly or effectively to these developments. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products and enhancements. The introduction of new products by competitors, market acceptance of products based on new or alternative technologies or the emergence of new industry standards, could render our existing or future products obsolete, which would materially adversely affect our business, results of operations and financial condition. 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 seriously harm our business and operating results. Our Business Will Suffer If Our Products 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 business, results of operations and financial condition. 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 materially adversely affect our business, results of operations and financial condition. 8 We Face Intense Competition Competition in the public network infrastructure market is intense. This market has historically been dominated by large companies, such as Ciena Corporation, Lucent Technologies and Nortel Networks. We may face competition from other large telecommunications companies who may enter our market. In addition, a number of private companies have announced plans for new products to address the same network problems which our products address. Many of 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 than we do and could in the future develop new technologies that compete with our products or even render our products obsolete. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources may enter those markets, thereby further intensifying competition. In order to compete effectively, we must deliver products that: . provide extremely high network reliability; . scale easily and efficiently with minimum disruption to the network; . interoperate with existing network designs and equipment vendors; . reduce the complexity of the network by decreasing the need for overlapping equipment; . provide effective network management; and . provide a cost-effective solution for service providers. In addition, we believe that a knowledge of the infrastructure requirements applicable to service providers, experience in working with service providers to develop new services for their customers, and an ability to provide vendor- sponsored financing are important competitive factors in our market. We do not currently have the 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. 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. Our Business Will Suffer 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 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 establish and expand an indirect sales channel, we may not be able to increase market awareness or sales of our products, which may prevent us from achieving and maintaining profitability. We currently have a small customer service and support organization and will need to increase our staff to support new customers. The support of our products requires highly trained customer service and support personnel. Hiring customer service and support personnel is very competitive in our industry because there are a limited number of people available with the necessary technical skills and understanding of our market. Once we hire them, they may require extensive training in our intelligent optical networking products. If we are unable to 9 expand our customer service and support organization and train them rapidly, we may not be able to increase sales of our products, which would seriously harm our business. 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 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. Celestica, Inc. provides comprehensive manufacturing services, including assembly, test, control and shipment to our customers, and procures material on our behalf. We may not be able to effectively manage our relationship with Celestica, and it may not meet our future requirements for timely delivery. Each of our contract manufacturers also builds products for other companies, and we cannot be certain that they will always have sufficient quantities of inventory available to fill orders placed by our customers, or that they will allocate their internal resources to fill these orders on a timely basis. We do not have long-term supply contracts with these manufacturers. We do not have internal manufacturing capabilities. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming and could result in a significant interruption in the supply of 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 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, which would, in turn, seriously harm our business. The Unpredictability Of Our Quarterly Results May Adversely Affect The Trading Price Of Our Common Stock Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: . fluctuation in demand for intelligent optical networking products; . the timing and size of sales of our products; . the length and variability of the sales cycle for our products; . the timing of recognizing revenue and deferred revenue; . new product introductions and enhancements by our competitors and ourselves; . changes in our pricing policies or the pricing policies of our competitors; . our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; . our ability to obtain sufficient supplies of sole or limited source components; . increases in the prices of the components we purchase; 10 . 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. 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 this offering and 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 will probably 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 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 must 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 Have A Material Adverse Effect On Us 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, which, if they were successful, could have a material adverse effect on our business, results of operations and financial condition. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly. 11 Our Failure To Establish And Maintain Key Customer Relationships May Result In Delays In Introducing New Products Or Cause Customers To Forego Purchasing Our Products Our future success will also depend upon our ability to develop and manage key customer relationships in order to introduce a variety of new products and product enhancements that address the increasingly sophisticated 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 Business Will Suffer If We Fail To Properly Manage Our 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 January 31, 1999, we had a total of 48 employees and at July 31, 1999, we had a total of 148 employees. In addition, we plan to continue to hire a significant number of employees this 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, reporting systems and procedures, 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. We may fail to attract, assimilate or retain qualified personnel to fulfill our current or future needs. Our planned rapid growth places a significant demand on management and financial and operational resources. In order to grow and achieve future success, we must: . retain existing personnel; . hire, train, manage and retain additional qualified personnel; . effectively manage multiple relationships with our customers, suppliers and other third parties; and . implement adequate operational controls, reporting systems and procedures. Failure to do so would have a materially adverse effect on our business, results of operations and financial condition. 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 in the future as we seek to hire qualified personnel or that those claims will not result in material litigation. 12 We could incur substantial costs in defending ourselves or our employees against such claims, regardless of their merits. In addition, defending ourselves from such claims could divert the attention of our management away from our operations. One of our non-officer sales employees has been sued by a former employer which has alleged, among other things, that the employee improperly disclosed confidential information of the former employer regarding its business dealings with our customer. Although we are not a party to the lawsuit, we have chosen to assume the costs of defending this lawsuit. Our Business Will Be Adversely Affected 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 Necessary Licenses Of Third-Party Technology Are Not Available To Us Or Are Very Expensive Our Business Will Be Seriously Harmed 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 our business, results of operations and financial condition. We Could Become Subject To Litigation Regarding Intellectual Property Rights Which Could Seriously Harm Our Business 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 Seriously Harm Our Financial Condition And Results Of Operations We intend to expand into international markets. This expansion will require significant management attention and financial resources to develop successfully direct and indirect international sales and support channels. We may not be able to develop international market demand for our products. 13 We have limited experience in marketing and distributing 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. We Face A Number Of Unknown Risks Associated With Year 2000 Problems The year 2000 computer issue creates a variety of risks for us. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The risks involve: . potential warranty or other claims by our customers; . errors in systems we use to run our business; . errors in systems used by our suppliers; . errors in systems used by our customers; and . potential reduced spending by other companies on intelligent optical network products as a result of significant spending on year 2000 remediation. We have designed our products for use in the year 2000 and beyond and believe they are year 2000 compliant. However, our products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of our customers' networks involves different combinations of third party products. We cannot evaluate whether all of their products are year 2000 compliant. We may face claims based on year 2000 problems in other companies' products or based on issues arising from the integration of multiple products within the overall network. Although no year 2000 claims have been made against us, we may in the future be required to defend our products in legal proceedings which could be expensive regardless of the merits of these claims. If our suppliers, vendors, major distributors, partners, customers and service providers fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which party's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether third party year 2000 failures could harm our business and our financial results. 14 Our current and prospective customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems to become year 2000 compliant. This situation may reduce funds available to purchase our products. In addition, customers may wait to purchase our products until after the year 2000, which may reduce our revenue. Any Acquisitions We Make Could Disrupt Our Business And Seriously Harm Our Financial Condition We intend to consider investments in complementary companies, products or technologies. While we have no current agreements to do so, we may buy businesses, products or technologies in the future. In the event of any future purchases, 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 will also involve numerous risks, including: . problems combining the purchased operations, technologies or products; . unanticipated costs; . diversion of management's attention from our core business; . adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which we have no or limited prior experience; and . potential loss of key employees, particularly those of the purchased organizations. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future and any failure to do so could disrupt our business and seriously harm our financial condition. Risks Related To The Securities Markets And This Offering Our Stock Price May Be Volatile Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering. The market for technology stocks has been extremely volatile. The following factors could cause the market price of our common stock to fluctuate significantly from the price paid by investors in this offering: . our loss of a major customer; . the addition or departure of key personnel; . variations in our quarterly operating results; . announcements by us or our competitors of significant contracts, new products or product enhancements, acquisitions, distribution partnerships, joint ventures or capital commitments; . changes in financial estimates by securities analysts; . our sales of common stock or other securities in the future; . changes in market valuations of broadband access technology companies; . changes in market valuations of networking and telecommunications companies; and . fluctuations in stock market prices and volumes. 15 In addition, the stock market in general, and the Nasdaq National Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and these trading prices and multiples are substantially above historical levels. These trading prices and multiples may not be sustained. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class- action litigation has often been instituted against such companies. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which would materially adversely affect our business, financial condition and results of operations. Management May Apply The Proceeds Of This Offering To Uses That Do Not Increase Our Profits Or Market Value Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our profitability or our market value. Pending application of the proceeds, they may be placed in investments that do not produce income or that lose value. Insiders Will Continue To Have Substantial Control Over Sycamore After This Offering And Could Limit Your Ability To Influence The Outcome Of Key Transactions, Including Changes of Control We anticipate that the executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately % of our outstanding common stock following the completion of this offering. 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. There May Be Sales Of A Substantial Amount Of Our Common Stock After This Offering That Could Cause Our Stock Price To Fall Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares of our common stock within a short period of time after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed above in the section captioned "Risk Factors," as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial position. 16 USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock will be approximately $ assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the over- allotment option is exercised in full, we estimate that such net proceeds will be approximately $ . The principal purposes of this offering are to establish a public market for our common stock, to increase our visibility in the marketplace, to facilitate future access to public capital markets, to provide liquidity to existing stockholders and to obtain additional working capital. We expect to use the net proceeds for general corporate purposes, including working capital and capital expenditures, and the repayment of outstanding amounts under our equipment lines of credit. These lines of credit consist of: . a $1.0 million equipment line of credit which was converted into a term loan as of June 30, 1999 and is required to be repaid in 30 equal monthly installments commencing July 1, 1999. This line of credit bears interest at the bank's prime rate plus 1.5% per annum and is collateralized by all of our assets. At July 31, 1999, an aggregate of $967,000 was outstanding under this line of credit; and . a $5.0 million equipment line of credit which will be converted into a term loan on January 31, 2000 and which will be required to be repaid in 36 equal monthly installments commencing February 1, 2000. This line of credit bears interest at the bank's prime rate plus 1.5% per annum and is collateralized by all of our assets. At July 31, 1999, an aggregate of $4.2 million was outstanding under this line of credit. Although we may use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to our business, we have no specific acquisitions planned. Pending such uses, we plan to invest the net proceeds in investment grade, interest-bearing securities. 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. Our credit agreement with a commercial bank prohibits the payment of dividends. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business condition and such other factors as the board of directors may deem relevant. 17 CAPITALIZATION The following table sets forth our capitalization as of May 1, 1999. The pro forma information gives effect to the conversion of all of our outstanding redeemable convertible preferred stock. The pro forma as adjusted information reflects the issuance and sale of the shares of common stock offered by us in this offering at an assumed initial public offering price of $ per share and the application of the estimated net proceeds we expect to receive from this offering. The outstanding share information excludes: (1) 1,019,000 shares of common stock issuable upon exercise of outstanding options as of May 1, 1999, and (2) 1,487,500 shares of common stock reserved for future issuance under our 1998 Stock Incentive Plan as of May 1, 1999. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this prospectus.
As of May 1, 1999 ------------------------------ Pro Pro forma Actual forma as adjusted -------- ------- ----------- (in thousands, except share data) (unaudited) Long-term debt, less current portion........... $ 666 $ 666 $ -------- ------- --- Redeemable convertible preferred stock, $.01 par value; 15,100,000 authorized, 15,068,874 issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted............................. 40,771 -- -------- ------- --- Stockholders' equity (deficit): Common stock, $.001 par value; 25,000,000 shares authorized, 5,444,104 shares issued and outstanding, actual; 20,512,978 shares issued and outstanding, on a pro forma basis; shares issued and outstanding, on a pro forma as adjusted basis......................................... 5 20 Additional paid-in capital..................... 5,482 46,238 Accumulated deficit............................ (10,796) (10,796) Note receivable................................ (17) (17) Deferred compensation.......................... (4,787) (4,787) -------- ------- --- Total stockholders' equity (deficit)......... (10,113) 30,658 -------- ------- --- Total capitalization....................... $ 31,324 $31,324 $ ======== ======= ===
18 DILUTION Sycamore's pro forma net tangible book value as of May 1, 1999, giving effect to the conversion of all outstanding shares of redeemable convertible preferred stock into common stock on the closing of this offering, was approximately $30.7 million, or $1.49 per share of common stock. Pro forma net tangible book value per share represents our tangible net worth (tangible assets less total liabilities) divided by the 20,512,978 shares of common stock outstanding after giving effect to the conversion of all shares of redeemable convertible preferred stock into common stock. After giving effect to the issuance and sale of the shares of common stock offered by Sycamore in this offering (at an assumed initial public offering price of $ per share) and the receipt and application of the net proceeds from the sale of these shares, Sycamore's pro forma net tangible book value at May 1, 1999 would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $ per share and an immediate dilution to new investors of $ per share. The following table illustrates this per share dilution: Assumed initial public offering price per share $ Pro forma net tangible book value per share before this offering... $ Increase in pro forma net tangible book value per share attributable to new investors..................................... ---- Pro forma net tangible book value per share after this offering...... ---- Dilution per share to new investors.................................. $ ====
The following table summarizes on a pro forma basis, giving effect to the conversion of all outstanding shares of redeemable convertible preferred stock into common stock on the closing of this offering, as of May 1, 1999, the difference between the number of shares of common stock purchased from Sycamore, the total consideration paid to Sycamore, and the average price per share paid by existing stockholders and by new investors (at an assumed initial public offering price of $ per share before deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by Sycamore):
Shares Total Average Purchased Consideration Price -------------- -------------- Per Number Percent Amount Percent Share ------ ------- ------ ------- ------- Existing stockholders..................... % $ % $ New investors............................. --- ----- ---- ----- Total................................... 100.0% $ 100.0% ===== =====
The table above assumes no exercise of stock options outstanding at May 1, 1999. As of May 1, 1999, there were options outstanding to purchase 1,019,000 shares of common stock at a weighted average exercise price of $.66 per share and 1,487,500 shares reserved for future grant or award under our 1998 Stock Incentive Plan. To the extent any of these options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of May 1, 1999, net tangible book value per share after this offering would be $ and total dilution per share to new investors would be $ . If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to shares, or % of the total number of shares of common stock outstanding after this offering. 19 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this prospectus. The statement of operations data for the period from inception (February 17, 1998) through July 31, 1998 and the balance sheet data as of July 31, 1998 are derived from the financial statements of Sycamore audited by PricewaterhouseCoopers LLP, independent accountants, which are included elsewhere in this prospectus. The selected financial data as of May 1, 1999 and for the interim period ended May 1, 1999 are unaudited and, in the opinion of management, have been prepared on the same basis as the audited financials and include all adjustments, consisting only of normal, recurring adjustments, that Sycamore considers necessary for a fair presentation of the financial position and the results of operations for those periods. Operating results for the nine-month period ended May 1, 1999 are not necessarily indicative of the results that may be expected for any future period.
Period from inception (February 17, Nine months 1998) through ended July 31, 1998 May 1, 1999 ------------- ----------- (in thousands, except per share data) Statement of Operations Data: Revenue............................................. $ -- $ -- Operating expenses: Manufacturing..................................... -- 1,173 Research and development.......................... 497 6,572 Sales and marketing............................... 92 1,598 General and administrative........................ 199 752 Amortization of stock compensation................ 5 496 ------ -------- Total operating expenses........................ 793 10,591 ------ -------- Loss from operations................................ (793) (10,591) Interest income..................................... 100 488 ------ -------- Net loss............................................ $ (693) $(10,103) ====== ======== Basic and diluted net loss per share(1)............. $(1.66) $ (15.66) Weighted average shares used in computing basic and diluted net loss per share......................... 417 645 Pro forma basic and diluted net loss per share (unaudited)........................................ $ (.11) $ (1.08) Weighted average shares used in computing pro forma basic and diluted net loss per share(2) (unaudited).................. 6,252 9,351 As of As of July 31, 1998 May 1, 1999 ------------- ----------- (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities.... $4,279 $ 26,337 Working capital..................................... 4,341 26,726 Long term debt, less current portion................ -- 666 Redeemable convertible preferred stock.............. 5,621 40,771 Total stockholders' deficit......................... (678) (10,113)
- -------- (1) See note 2 to the notes to the financial statements for a description of the computation of basic and diluted net loss per share and the number of shares used to compute basic and diluted net loss per share. (2) Pro forma per share calculations reflect the conversion upon the closing of the offering of all outstanding shares of redeemable convertible preferred stock into shares of common stock. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We develop and market software-based intelligent optical networking products that allow service providers to address customer requirements for high-speed data services and bandwidth. From our inception in February 1998 through May 1, 1999, our operating activities consisted primarily of research and development, product design, development and testing. We also staffed and trained our administrative, marketing and sales organizations and began sales and marketing activities. In May 1999, we began shipping our SN 6000 product. We expect that a significant portion of our future revenue will continue to come from sales of the SN 6000. While we are developing and plan to introduce new products and enhancements, we cannot assure you that we will be successful in these efforts. Since our inception, we have incurred significant losses, and as of May 1, 1999, we had an accumulated deficit of $10.8 million. We have not achieved profitability on a quarterly or an annual basis, and anticipate that we will continue to incur net losses. We have a lengthy sales cycle for our products and accordingly we expect to incur sales and other expenses before we realize the related revenue. We expect to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Our policy is to recognize revenue from our product sales upon execution of a contract and the completion of all delivery obligations provided that there are no uncertainties regarding customer acceptance and collectibility is deemed probable. If uncertainties exist, revenue is recognized when such uncertainties are resolved. Our policy is to recognize revenue from our technical support and maintenance contracts ratably over the period of the related agreements. We record a warranty liability for parts and labor on our products. Warranty periods are generally three years from installation date. Estimated warranty costs are recorded at the time of revenue recognition. Our manufacturing expenses consist of amounts paid to third-party manufacturers, manufacturing start-up expenses, manufacturing personnel and related costs and our customer support group. We outsource our manufacturing and assembly requirements. Accordingly, a significant portion of our manufacturing expenses consists of payments to a third-party contract manufacturer. Manufacturing, engineering and documentation controls are conducted 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 the effect on manufacturing and component costs. Research and development expenses consist primarily of salaries and related personnel costs and prototype costs related to the design, development, testing and enhancement of our products. We have to date 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 related personnel costs of sales and marketing personnel, commissions, promotional and other marketing expenses and recruiting expenses. We 21 expect that sales and marketing expenses will increase substantially in absolute dollars in the future as we increase our direct sales efforts, expand our operations internationally, hire additional sales and marketing personnel, initiate additional marketing programs and establish sales offices in new locations. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, facilities, human resources and information technology personnel, recruiting expenses and professional fees. We expect that general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and our operation as a public company. In connection with the granting of certain stock options and the issuance of certain restricted shares during the period from inception (February 17, 1998) through July 31, 1998 and the nine-month period ended May 1, 1999, we recorded deferred stock compensation expense of $184,000 and $4.9 million, respectively. Stock based compensation includes primarily the amortization of stock compensation charges resulting from the granting of stock options and restricted shares with exercise or sales prices deemed to be below the fair value of our common stock on the date of grant. These amounts are being amortized ratably over the vesting periods of the applicable options or restricted stock, which are typically five years, with 20% vesting on the first anniversary of the date of grant and 5% vesting quarterly thereafter. We amortized $5,000 of deferred stock compensation during the period from inception (February 17, 1998) through July 31, 1998, and $261,000 of deferred stock compensation during the nine months ended May 1, 1999. Results of Operations Period from inception (February 17, 1998) through July 31, 1998 (fiscal 1998) and the nine months ended May 1, 1999 Manufacturing Expenses. Manufacturing expenses were zero for the period from inception (February 17, 1998) to July 31, 1998 and $1.2 million for the nine months ended May 1, 1999. Manufacturing expenses represented 11% of total operating expenses for the nine months ended May 1, 1999. The increase in manufacturing expenses was due to the commencement of manufacturing. Research and Development Expenses. Research and development expenses were $497,000 for the period from inception (February 17, 1998) to July 31, 1998 and represented 63% of total operating expenses in fiscal 1998. Research and development expenses for the nine months ended May 1, 1999 were $6.6 million and represented 62% of total operating expenses for the nine months ended May 1, 1999. The period-to-period increases were 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 development of the SN 6000, SN 8000 and SN 16000 products. Development is essential to our future success and we expect that research and development expenses will increase in absolute dollars in future periods. Sales and Marketing Expenses. Sales and marketing expenses were $92,000 for the period from inception (February 17, 1998) to July 31, 1998 and represented 12% of total operating expenses in fiscal 1998. Sales and marketing expenses for the nine months ended May 1, 1999 were $1.6 million and represented 15% of total operating expenses for the period. The period-to-period increases reflect the hiring of additional sales and marketing personnel and marketing program costs, including web development, trade shows and product launch activities. General and Administrative Expenses. General and administrative expenses were $199,000 for the period from inception (February 17, 1998) to July 31, 1998 and represented 25% of total operating expenses in fiscal 1998. General and administrative expenses for the nine months ended May 1, 1999 were $752,000 and represented 7% of total operating expenses for the period. The period-to-period increases reflect the hiring of additional general and administrative personnel and expenses necessary to support and scale our operations. 22 Amortization of Stock Compensation. Amortization of stock compensation expense were $5,000 and $496,000 for the period from inception (February 17, 1998) through July 31, 1998 and the nine months ended May 1, 1999, respectively. Amortization of stock compensation expense for the nine months ended May 1, 1999 consisted of $261,000 for the amortization of deferred stock compensation expense resulting 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, and $235,000 of compensation expense associated with the grant of options to non-employees. The period to period increase was due to an increase in the number of options granted to our employees at exercise prices deemed to be below the fair value of our common stock and the issuance of options to non-employees. Interest Income. Interest income was $100,000 and $488,000 for the period from inception (February 17, 1998) through July 31, 1998 and the nine months ended May 1, 1999, respectively. Interest income consists of interest earned on our cash balances and marketable securities and increased due to higher invested balances. Net Operating Losses and Tax Credit Carryforwards. As of July 31, 1998, we had approximately $330,000 of state and federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income. Such net operating loss carryforwards expire in 2004 and 2019, respectively, to the extent that they are not utilized. We have not recognized any benefit from the future use of loss carryforwards for these periods, or for any other periods, since inception. Management's evaluation of all the available evidence in assessing realizability of the tax benefits of such loss carryforwards indicates that the underlying assumptions of future profitable operations contain risks that do not provide sufficient assurance to recognize the tax benefits currently. The net operating loss carryforwards could be limited in future years if there is a significant change in our ownership. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private sales of our capital stock totaling approximately $40.8 million in net proceeds through May 1, 1999. We have also financed our operations through borrowings on long-term debt agreements for the purchase of capital equipment. At May 1, 1999, cash, cash equivalents and marketable securities totaled $26.3 million. Cash used in operating activities was $598,000 for fiscal 1998 and $10.0 million for the nine months ended May 1, 1999. Net cash flows from operating activities in each period reflect increasing net losses and to a lesser extent inventory purchases offset in part by increased accounts payable and accrued expenses. Cash used in investing activities was $3.7 million for fiscal 1998 and $3.2 million for the nine months ended May 1, 1999. Net cash used for investing activities in each period reflect increasing purchases of property and equipment, primarily computers and test equipment for our development and manufacturing activities. Cash used for investing activities also reflect increased purchases of marketable securities. Cash provided by financing activities was $5.5 million for fiscal 1998 and $35.4 million for the nine months ended May 1, 1999. Cash provided by financing activities for these periods was derived primarily from private sales of redeemable convertible preferred stock. At July 31, 1998, a $100,000 certificate of deposit was being utilized to collateralize a standby letter of credit for a facility lease. No claims have been presented against the letter of credit. At May 1, 1999, a $92,000 United States treasury bill was being utilized to collateralize a standby letter of credit for a facility lease. We have two equipment lines of credit aggregating $1.0 million and $5.0 million, respectively. These lines of credit are collateralized by all of our assets and bear interest at the bank's prime rate plus 1.5% per annum. At May 1, 1999, an aggregate of approximately $1.0 million was outstanding under these lines of credit. We believe that the net proceeds from this offering, together with our current cash, cash equivalents and marketable securities and lines of credit, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. If additional funds are raised 23 through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the term of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and operating results. Year 2000 Compliance Impact of the Year 2000 Computer Problem. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. State of Readiness of our Products. We have designed our products, including the SN 6000, for use in the year 2000 and beyond and believe our products are year 2000 compliant. However, our products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of our customers' networks involves different combinations of third party products. We cannot evaluate whether all of their products are year 2000 compliant. We may face claims based on year 2000 problems in other companies' products or based on issues arising from the integration of multiple products within the overall network. Although no such claims have been made against us, we may in the future be required to defend our products in legal proceedings which could be expensive regardless of the merits of such claims. State of Readiness of our Internal Systems. Our business may be affected by year 2000 issues related to non-compliant internal systems developed by us or by third-party vendors. Our material third-party vendors have stated that they are, or expect to be, year 2000 compliant in a timely manner. We are not currently aware of any year 2000 problem relating to any of our material internal systems. We are in the process of testing all such systems for year 2000 compliance and plan to complete such testing before September 30, 1999. We do not believe that we have any significant systems that contain embedded chips that are not year 2000 compliant. Our internal operations and business are also dependent upon the computer-controlled systems of third parties such as our manufacturers, suppliers, customers and other service providers. We believe that absent a systemic failure outside our control, such as a prolonged loss of electrical or telephone service, year 2000 problems at third parties such as manufacturers, suppliers, customers and service providers will not have a material impact on our operations. If our manufacturers, suppliers, vendors, partners, customers and service providers fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which party's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party manufacturers, suppliers and vendors, we are unable to determine at this time whether year 2000 failures could harm our business and our financial results. Our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems to become year 2000 compliant. This situation may reduce funds available to purchase our products. In addition, some customers may wait to purchase our products until after the year 2000, which may negatively impact our revenue. Risks. The failure of our internal systems to be year 2000 compliant could temporarily prevent us from processing orders, issuing invoices and developing products and could require us to devote significant resources to correct such problems. Due to the general uncertainty inherent in the year 2000 computer problem, resulting from the uncertainty of the year 2000 readiness of third- party suppliers and vendors, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our business, results of operations or financial condition. 24 To date, we have not incurred material expense associated with our efforts to become year 2000 compliant and do not anticipate that any future costs associated with our year 2000 remediation efforts will be material. Market Risk Sycamore does not use derivative financial instruments. We generally place our marketable security investments in high credit quality instruments, primarily U.S. Government obligations and corporate obligations with contractual maturities of less than one year. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is not material. Recent Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the effective date of the FASB Statement No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is not expected to have an impact on our financial condition or results of operations. 25 BUSINESS Overview We develop and market software-based intelligent optical networking products that enable network service providers to quickly and cost-effectively provide bandwidth and create new high speed data services. We believe that the existing public network is unable to meet the demands of high speed data applications that are driving network growth. As data traffic on the public network continues to grow at rates that surpass available network capacity, we believe that service providers require new solutions to relieve network congestion and create new data services. Our intelligent optical networking products are designed to allow service providers to deploy, manage and optimize the performance of their fiber optic networks. Our products are based on a common software architecture that we believe will accelerate our release of new products and enable our customers to upgrade with minimal network impact and operator training. We have designed our products to protect service providers' existing investment in fiber optic and transmission equipment and provide a migration path to the next generation optical public network infrastructure. Industry Background Increase in Data Traffic on the Public Network Over the past decade, the volume of high speed data traffic across the public network has grown significantly, reflecting the increasing use of the network for Internet access, electronic mail communications, electronic commerce, remote access by telecommuters and other network data transmission services. According to RHK, a leading market research and consulting firm, public network bandwidth will have to increase by over 2000% between 1998 and 2002 to satisfy expected Internet and other data traffic requirements. To meet the growth in the demand for high speed data services, service providers are investing significantly to upgrade the public network infrastructure, which was originally built for voice traffic. Service providers are laying fiber optic cable and installing transmission equipment which transforms the fiber from available capacity to usable bandwidth by "lighting" the fiber. According to RHK, more than $6.9 billion was invested in the United States alone in 1998 in building and enhancing the transmission capability of the public network. This investment was spread across fiber deployment, SONET equipment and dense wave division multiplexing equipment, known as DWDM. Existing Public Network Transmission Infrastructure Despite these investments, service providers are still unable to quickly respond to the bandwidth demands of their customers. We believe that this inability is due in large part to the transmission architecture of the existing public network. This architecture is based upon telecommunications standards, referred to as SONET in North America and SDH elsewhere in the world, which set the hierarchical characteristics for transmitting optical signals. A SONET/SDH network typically consists of three primary components: . fiber optic cable that serves as the physical transmission medium and provides the available capacity; . DWDM equipment, which multiplies the transmission capacity of a specific fiber by dividing a single strand into multiple lightpaths, or wavelengths; and . SONET/SDH transmission equipment, which converts data traffic from an electrical signal to an optical signal for transport over the fiber network. In the current public network transmission infrastructure, the ability to manage data resides in the SONET/SDH equipment which converts the data traffic from an electrical signal to an optical signal which is transmitted over the fiber. The optical fiber itself is only a physical transmission medium with no imbedded 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; 26 . At each network transit point, the optical data traveling across the network is terminated at a SONET/SDH network terminal; . The optical data is then converted into an electrical signal and examined to see which portions of the data are to be extracted from the network at that transit point; and . The data is then converted back to an optical signal by the SONET/SDH equipment for transport to the next network transit point, where the process is repeated. The technology of a SONET/SDH architecture typically requires a linear or ring-based network topology. The following diagram illustrates the process of transmitting data across a typical SONET/SDH architecture: [Illustration showing a linear SONET/SDH network. The drawing of the network contains a fiber optic cable with SONET/SDH transmission equipment and DWDM equipment attached. The network shows the conversion of traffic from the optical domain to the electrical domain and back to the optical domain as data travels across the network.] Limitations of the Existing Public Network Transmission Infrastructure The SONET/SDH network architecture was originally designed to transport voice traffic rather than for today's high speed data services. Unlike voice traffic, which is generally characterized by slow growth and stable demand, data traffic is characterized by rapid growth and unpredictable demand. Data networks must be capable of being deployed cost-effectively and expanded quickly. The SONET/SDH network architecture, however, is not sufficiently flexible to meet these requirements. Generally, the process of expanding the capacity of a SONET/SDH network is time-consuming and requires significant capital investment by the service provider. There are currently only two methods to expand a SONET/SDH network. The first option is to increase the speed at which the network operates. Because SONET/SDH equipment is designed to operate at a specific speed and all devices on a ring must operate at the same speed, this option requires that all equipment on the SONET/SDH ring be replaced with higher speed devices on a concurrent basis. In addition, because the rings at the core of the network must carry the aggregate traffic of all of the rings feeding them, the upgrading of one SONET/SDH ring frequently requires the upgrading of some or all of the interconnected SONET/SDH rings. Accordingly, adding capacity to a SONET/SDH ring network is a complex and time consuming process. The second option to expand a SONET/SDH ring network is to construct new rings with new fiber or increase the capacity of each individual fiber on a ring through the utilization of DWDM technology, which can transform each fiber strand into as many as 100 parallel optical wavelengths. Under either approach, network complexity increases since each optical wavelength must be terminated by SONET/SDH equipment and the interconnection of multiple SONET/SDH rings will absorb some available network capacity. Data traffic will typically transit through multiple SONET/SDH rings when traversing the public network. In addition, in SONET/SDH networks, up to 50% of network capacity must be reserved to provide alternative routing for traffic in the event of a network outage. This redundancy, and the numerous optical-to- electrical-to-optical conversions within each ring and between rings, create a costly and complex network architecture. As a result of these limitations, the buildout of a SONET/SDH network generally requires lengthy time commitments and significant initial equipment investment by service providers. In today's competitive environment, long lead times for service provisioning and significant purchase commitments are often not compatible with the need of service providers to rapidly and cost- effectively deploy new services and be 27 responsive to their customer demand. To manage the frequently unpredictable demand of data traffic, service providers need to move toward a "just-in-time" investment and service delivery model allowing them to introduce and expand services when and where needed in response to demand. The migration to a "just-in-time" model will require a public network architecture that is scalable, flexible and cost-effective and that is capable of supporting the anticipated growth in high speed data communications services. The Sycamore Solution We develop and market software-based intelligent optical networking products that enable service providers to quickly and cost-effectively provide bandwidth and create new high speed data services. Our products are designed to move data directly onto the fiber without a requirement for intermediary SONET/SDH equipment. Once on the optical network, data moves through the network without the need to convert the optical signals to electrical signals at each network transit point. We believe that adding intelligence to the optical network enhances the functionality of the network and preserves the management and restoration benefits of SONET/SDH, while providing the capacity benefits of DWDM. Our products will provide the tools to enable service providers to utilize, restore, provision and maintain intelligent optical networks and optimize the performance of these networks, while providing a migration path to the next generation optical network. Key benefits of our solution include the following: Improves Network Flexibility and Scalability. Our software-based products are designed to allow service providers to improve the flexibility and scalability of their networks without the long lead times and large, upfront capital investment presently required for a network buildout. The software- based capabilities of our products will permit service providers to change and upgrade their network infrastructure and services without significant hardware changes or additions. This improved flexibility and scalability will enable service providers to more easily expand their network architecture, support new high speed data applications and introduce value-added services for the benefit of their customers. Enables Rapid Service Delivery. The competitive marketplace facing service providers and the pace of technological change require that the public network infrastructure be adaptable to accommodate rapid changes in the demand for service. Our products are designed to shorten the time it takes for service providers to increase bandwidth and provide services, thereby enabling our customers to introduce network services on a rapid basis in response to their customers' demand. We believe that this flexibility will be cost-effective for service providers because it will enable them to increase capacity based on current, rather than forecasted, market demand for their services. Facilitates Introduction of New Data Services and Creation of New Revenue Opportunities for Service Providers. Because our products are software-based, we are able to rapidly introduce new features into our products, which can in turn be offered by service providers to their customers as new services or service enhancements. We believe that these added features will provide revenue opportunities for our customers and will enable them to differentiate their network services from those of their competitors. We have designed a comprehensive network management solution, which will enable service providers to monitor the performance of their network, isolate and manage network faults, and otherwise manage their network on a real-time basis. With our network management system, service providers will be able to offer value-added services such as customer network management (CNM) 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 28 supported by our intelligent optical network products. Furthermore, the common software architecture, which will serve as the basis for our future products, is intended to ensure the continued interoperability and manageability of our products as our product line evolves. Strategy Our objective is to be the leading provider of intelligent optical networking products. Key elements of our strategy include the following: Offer End-to-End Optical Network Solutions To Customers. We intend to develop and offer a full range of intelligent optical networking products to our customers. Our current products help service providers improve the utilization of fiber optic capacity that has already been deployed in the network. We expect that our future products, which will be based on the same software architecture, will include an optical switch, which is necessary for 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 29 target customer base. We believe that our experience and relationships will be important in enabling us to develop products to meet our customers' needs and to penetrate our target market. Products and Technology Product Architecture Our software-based intelligent optical networking products will enable service providers to use their existing optical network infrastructure to deliver high speed end-to-end services to meet the bandwidth intensive needs of data applications. Our products will enable service providers to offer high speed services over wavelengths directly from the optical network. Our product architecture is designed to provide the following benefits: . lowered network infrastructure cost by reducing the number of optical-to- electrical-to-optical conversions required to transmit data traffic across the network; . network simplification by eliminating the need for a separate layer of SONET/SDH equipment for new services; . more rapid service delivery by enabling automated end-to-end provisioning of services; . non-disruptive network upgrades through advanced software capabilities; . a practical migration path from a SONET/SDH architecture to an all- optical network; and . provide service providers with new revenue opportunities through advanced features that support value-added service offerings. We believe that the acceptance and implementation of intelligent optical networking technology by service providers will be a gradual process driven by high speed data service demands and network scaling requirements. Our product strategy will allow service providers to migrate from today's SONET/SDH network architecture to an intelligent optical network while preserving their investment in the existing network. As intelligent optical networking equipment is introduced into an existing SONET/SDH network, the service provider can increasingly deliver high speed services directly from the optical network. As the intelligent optical network continues to grow, switching can be introduced into the optical network to support increased scaling and efficient traffic routing and to complete the transition to a meshed-based network architecture. Throughout all of these stages of network development, we expect to offer the software-based management tools which will allow the service provider to effectively provision and manage services end- to-end. Sycamore's intelligent optical networking products incorporate the following features: Intelligent Optical Networking Software. Our entire product line shares a common software base. This software foundation allows us to minimize product development time by leveraging our software architecture across multiple product lines. Our software architecture is designed to provide service providers with tools to continue to evolve their network without requiring the replacement of existing infrastructure. In addition, the architecture is designed to enable service providers to rapidly absorb new optical technology and functionality into the network with minimal effort, training and incremental investment. Software-based features such as topology discovery, system self-inventory and dynamic power balancing will allow service providers to quickly respond to customer needs. Additionally, advances in optical components, such as new lasers, filters, and amplifiers, can be quickly integrated within this software-based environment. SONET/SDH Functionality. Our products are designed to provide the optical interfaces and management and restoration capabilities traditionally offered on SONET/SDH equipment. By supporting these capabilities within the optical domain, rather than the electrical domain, service providers can directly offer services without the need for separate SONET/SDH products. 30 DWDM Technology. DWDM technology creates capacity by multiplying the number of wavelengths that a single fiber can support. We integrate commercially available DWDM optical technology into our products, providing a comprehensive solution for our customers' multiplexing needs. Network Management. Our network management products will provide end-to-end management and control of the intelligent optical network. Network management functions include fault management, configuration management, accounting management, performance management and security management. Comprised of SilvxManager, a network management platform, and SilvxSource, a system- resident management application, our network management products constitute a distributed solution designed to provide end-to-end management of the intelligent optical network. Our network management products are designed to manage Sycamore's intelligent optical networking products, provide for the management of third party products and integrate with other operating support systems when introduced into an existing network environment. Sycamore's Intelligent Optical Networking Products The following chart describes our current and planned products:
Product Application Service* Status - ------------------------------------------------------------------------------------- SN 6000 Intelligent OC-48/STM-16 Wave Service (Long Commercially Optical Distance) available Transport Product - ------------------------------------------------------------------------------------- SN 8000 Intelligent OC-48/STM-16 Wave Service (Medium In test stage Optical Distance) ------------------------------------------------------ Add/Drop Product OC-48/STM-16 Wave Service (Long In test stage Distance) ------------------------------------------------------ OC-12/STM-4 Wave Service In development ------------------------------------------------------ OC-3/STM-1 Wave Service In development ------------------------------------------------------ OC-192/STM-64 Wave Service In development - ------------------------------------------------------------------------------------- SilvxSource SN 6000/8000 Provides local management of wave Field test at Management services customer's site Software - ------------------------------------------------------------------------------------- SilvxManager Network Provides end-to-end management of In test stage Management wave services System (Software) - ------------------------------------------------------------------------------------- SN 16000 Intelligent Will provide wave-based switching In development Optical Switch and routing in meshed network environment
- -------- * References to "OC" services are to data transport services at a speed indicated by the number following the "OC" designation. For example, OC-48 service designates a transmission speed of 2.5 gigabytes per second. Higher numbers denote faster transmission speeds. SN 6000. The SN 6000 is an intelligent optical transport product designed specifically to work within an existing SONET/SDH network. The SN 6000 enables high speed services over fiber optic wavelengths and can be overlaid on top of the existing network. The SN 6000 will allow a service provider to begin the migration from a SONET/SDH network to an intelligent optical network. SN 8000. The SN 8000 is an intelligent optical add/drop product that will be used to provide high speed services over fiber optic wavelengths for access, interoffice, regional, and backbone networks. The SN 8000 will provide a complete stand-alone optical networking solution and can be configured in point-to-point linear or ring applications. The SN 8000 can be overlaid on top of existing SONET/SDH networks, allowing service providers to implement optical networking technology when and where needed, without replacing an installed infrastructure. SilvxSource and SilvxManager. The SILVX optical network management system provides end-to-end management of data communications services across a service provider's optical network. SILVX simplifies network configuration, network provisioning and network management by implementing many of today's manual and labor-intensive network management processes within software. Additionally, SILVX allows service providers to offer network management-based services to their customers. SilvxSource software runs on the intelligent optical network elements (SN 6000, SN 8000 and in the future, SN 16000) and the SilvxManager software runs on a centralized management station. 31 SN 16000. We are developing the SN 16000 optical switch for end-to-end wavelength switching and routing, which is necessary for the creation of a meshed topology network. The SN 16000 will support incremental network growth through a modular architecture and is being designed to coexist with the SN 6000 and the SN 8000, as well as other third-party optical networking products. Customers Our target customer base includes competitive local exchange carriers, incumbent local exchange carriers, long distance carriers, Internet service providers, cable operators, PTTs (foreign telephone companies) and wholesale carriers. At July 31, 1999, we had shipped product to one customer, Williams Communications, Inc. Williams Communications is a leading US-based wholesale carrier, providing communications services to other carriers. Williams is currently using our SN 6000 intelligent optical networking product in its internal data network to provision OC-48 waves between its ATM switches. Sales and Marketing We sell our products through a direct sales force. In addition, we intend to establish relationships with selected OEMs and other marketing partners, both domestically and internationally, in order to serve particular markets and provide our customers with opportunities to purchase our products in combination with related services and products. As of July 31, 1999, our sales and marketing organization consisted of 30 employees, of which: . 16 are located in our headquarters in Chelmsford, Massachusetts, and . 14 are located in a total of sales and support offices around the United States. Our marketing objectives include building market awareness and acceptance of Sycamore and our products as well as generating qualified customer leads. We send out direct mail and attend trade shows, and provide information about our company and our products on our Web site. We also conduct public relations activities, including interviews and demonstrations for industry analysts. In addition, our senior executives have significant industry contacts as a result of their prior experience. 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 We have assembled a team of highly skilled engineers with significant telecommunications industry experience. Our engineers have expertise in optics, hardware and software. As of July 31, 1999, we had 87 employees responsible for product development, quality assurance and documentation. Our development group's priority includes the release of new products which will facilitate the deployment of optical networks. We are focused on enhancing the scalability, performance and reliability of our intelligent optical network products. We have made, and will continue to make, a substantial investment in research and development. Research and development expenses were $497,000 for the period from inception through July 31, 1998 and $6.6 million for the nine months ended May 1, 1999. All of our software development costs have been expensed as incurred. While we have developed, and expect to continue to develop, most new products and enhancements to existing products internally, we have licensed certain commercially available software technology from third parties. See "Risk Factors-- If Necessary Licenses Of Third-Party Technology Are Not Available To Us Or Are Very Expensive Our Business Will Be Seriously Harmed." 32 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 optical network equipment, such as Ciena Corporation, Lucent Technologies and Nortel Networks, and private companies that have focused on our target market. Many of our competitors have significantly greater financial resources than us and are able to devote greater resources to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer bases and broader customer relationships than us, including relationships with our potential customers. In order to compete effectively, we must deliver products that: . provide extremely high network reliability; . scale easily and efficiently with minimum disruption to the network; . interoperate with existing network designs and equipment vendors; . reduce the complexity of the network by decreasing the need for overlapping equipment; . provide effective network management; and . provide a cost-effective solution for service providers. In addition, we believe that a knowledge of the infrastructure requirements applicable to service providers, experience in working with service providers to develop new services for their customers, and an ability to provide vendor- sponsored financing are important competitive factors in our market. We do not currently have the 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. See "Risk Factors--We Face Intense Competition." 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 three 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 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 and consultants 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 33 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 property 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 product 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. See "Risk Factors--We Could Become Subject To Litigation Regarding Intellectual Property Rights Which Could Seriously Harm Our Business." We integrate third-party software into our products. This third-party software may not continue to be available on commercially reasonable terms. If we cannot maintain licenses to this third-party software, distribution of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and financial condition. Manufacturing The manufacturing of our products is entirely outsourced. Celestica, Inc. provides comprehensive manufacturing services, including assembly, test, control and shipment to our customers, and procures materials on our behalf. We design, specify and monitor all of the tests that are required to meet our internal and external quality standards, which are conducted by Celestica with test equipment owned by us. We believe that the outsourcing of our manufacturing will enable us to conserve the working capital that would be required to purchase inventory, will allow us to better adjust manufacturing volumes to meet changes in demand, and will better enable us to more quickly deliver products. At present, we purchase products from Celestica and our other manufacturers on a purchase order basis. We are in the process of negotiating a long-term contract with Celestica. We cannot assure you that we will be able to enter into a long-term contract on terms acceptable to us, if at all. Employees As of July 31, 1999, we had a total of 148 employees of which: . 87 were in research and development, . 30 were in sales and marketing, . 7 were in customer service and support, . 9 were in manufacturing, and . 15 were in finance and administration. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. Our employees are not represented by any collective bargaining unit. We believe our relations with our employees are good. Properties Our headquarters are currently located in a leased facility in Chelmsford, Massachusetts, consisting of approximately 35,000 square feet under a lease that expires in 2002. 34 Legal Proceedings We are not currently a party to any material litigation. One of our non-officer sales employees has been sued by a former employer which has alleged, among other things, that the employee improperly disclosed confidential information of the former employer regarding its business dealings with our customer. We have chosen to assume the cost of defending this lawsuit. 35 MANAGEMENT Executive Officers, Directors and Key Employees The executive officers, directors and key employees of Sycamore, and their respective ages and positions as of July 31, 1999, are as follows:
Name Age Position - ---- --- -------- Executive Officers and Directors: Gururaj Deshpande....... 48 Chairman of the Board of Directors Daniel E. Smith......... 49 President, Chief Executive Officer and Director Frances M. Jewels....... 34 Chief Financial Officer, Vice President, Finance and Administration, Treasurer and Secretary Chikong Shue............ 48 Vice President, Engineering Ryker Young............. 35 Vice President, Sales John E. Dowling......... 46 Vice President, Operations Kurt Trampedach......... 55 Vice President, International Sales Jeffrey A. Kiel......... 34 Vice President, Product Marketing Anita Brearton.......... 40 Vice President, Corporate Marketing Timothy Barrows (1)(2).. 42 Director Paul J. Ferri (1)(2).... 60 Director Other Key Employees: Richard A. Barry........ 33 Chief Technical Officer Eric A. Swanson......... 38 Chief Scientist
- -------- (1) Member of Audit Committee (2) Member of Compensation Committee Set forth below is information regarding the professional experience for each of the above-named persons. Gururaj Deshpande has served as Chairman of our board of directors since our inception in February 1998. He served as our Treasurer and Secretary from February 1998 to June 1999 and as our President from February 1998 to October 1998. Before founding Sycamore, Mr. Deshpande founded Cascade Communications Corp., a provider of wide area network switches. From October 1990 to April 1992, Mr. Deshpande served as President of Cascade and from April 1992 to June 1997, he served as Cascade's Executive Vice President of Marketing and Customer Service. Mr. Deshpande was a member of the board of directors of Cascade since its inception and was chairman of the board of directors of Cascade from 1996 to 1997. Daniel E. Smith has served as our President, Chief Executive Officer and as a member of our board of directors since October 1998. From June 1997 to July 1998, Mr. Smith was Executive Vice President and General Manager of the Core Switching Division of Ascend Communications, Inc., a provider of wide area network switches and access data networking equipment. Mr. Smith was also a member of the board of directors of Ascend Communications, Inc. during that time. From April 1992 to July 1997, Mr. Smith served as President and Chief Executive Officer and a member of the board of directors of Cascade Communications Corp. Frances M. Jewels has served as our Vice President of Finance and Administration, Treasurer and Secretary since June 1999 and Chief Financial Officer since July 1999. From June 1997 to June 1999, Ms. Jewels served as Vice President and General Counsel of Ascend Communications, Inc. From April 1994 to June 1997, Ms. Jewels served as Corporate Counsel of Cascade Communications Corp. Prior to April 1994, Ms. Jewels practiced law in private practice and, prior to that, practiced as a certified public accountant. Chikong Shue has served as our Vice President of Engineering since August 1998. From March 1997 to July 1998, Mr. Shue was Vice President of Software and Systems Engineering of the Core Switching Division 36 of Ascend Communications, Inc. Mr. Shue was a co-founder of Cascade Communications Corp. and served as director of software engineering at Cascade from May 1991 to August 1994 and as a corporate fellow and Vice President of Cascade's Remote Access Engineering division from September 1994 until March 1997. Ryker Young has served as our Vice President of Sales since August 1998. From July 1997 to August 1998, Mr. Young was Central Region Director of Sales for Ascend Communications, Inc. From January 1996 to June 1997, Mr. Young was the South Central Regional District Manager for Cascade Communications Corp. From October 1994 to December 1995, Mr. Young was Major Account Manager for Cisco Systems, Inc. John E. Dowling has served as our Vice President of Operations since August 1998. From July 1997 to August 1998, Mr. Dowling served as Vice President of Operations of Aptis Communications, a manufacturer of carrier-class access switches for network service providers. Mr. Dowling served as Vice President of Operations of Cascade Communications Corp. from May 1994 to June 1997. Kurt Trampedach has served as our Vice President of International Sales since July 1999. From June 1999 to July 1999, Mr. Trampedach was Vice President, Carrier Market Development for Lucent Technologies, Inc. From June 1997 to June 1999 he was Vice President, Carrier Market Development for Ascend Communications, Inc. From September 1996 to June 1997, Mr. Trampedach was Vice President, International Sales for Cascade Communications Corp. Mr. Trampedach was Vice President, European Operations for Alcatel USA, Inc. from April 1994 to September 1996. Jeffrey A. Kiel has served as our Vice President, Product Marketing since July 1999 and as Director of Marketing from September 1998 to July 1999. Mr. Kiel served as Director of Product Marketing at Ascend Communications, Inc. from June 1997 to September 1998. From August 1996 to June 1997, Mr. Kiel served as Product Marketing Manager of Cascade Communications Corp. From October 1993 to August 1996, Mr. Kiel was Senior Manager, Technical Staff at BellSouth Telecommunications. Anita Brearton has served as our Vice President, Corporate Marketing since July 1999 and as Director of Marketing Programs from September 1998 to July 1999. From September 1997 to August 1998, Ms. Brearton served as Vice President of Marketing for Artel Video Systems, Inc., a producer of fiber optic video transmission and routing products. From June 1997 to September 1997, Ms. Brearton was director of marketing programs for the core switching division of Ascend Communications, Inc. Ms. Brearton served as Director of Marketing Programs for Cascade Communications Corp. from November 1995 to June 1997. From July 1980 to August 1995, Ms. Brearton held several positions at General DataCom Industries, Inc., most recently as International Marketing Programs Manager. Timothy Barrows has served as a director since February 1998. Mr. Barrows has been a general partner of Matrix Partners since September 1985. Paul J. Ferri has served as a director since February 1998. Mr. Ferri has been a general partner of Matrix Partners, a venture capital firm, since February 1982. Mr. Ferri also serves on the board of directors of VideoServer, Inc. and Applix, Inc. Richard A. Barry has served as our Chief Technical Officer since July 1999 and as our Director of Architecture from our inception in February 1998 to July 1999. Prior to co-founding Sycamore, from September 1994 to February 1998, Mr. Barry was Chief Network Architect of the Advanced Networks Group at MIT's Lincoln Laboratory. Mr. Barry was an assistant professor in the Electrical Engineering and Computer Science Department at George Washington University from September 1993 to August 1994. Eric A. Swanson, a co-founder of Sycamore, has served as Chief Scientist since our inception in February 1998. From 1982 to February 1998, Mr. Swanson was Associate Group Leader of the Advanced Networks Group at MIT's Lincoln Laboratory. 37 Each executive officer serves at the discretion of the board of directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of the directors or executive officers of Sycamore. Each of the directors serves on the board of directors pursuant to the terms of an agreement that will terminate upon the closing of this offering. Election of Directors Following this offering, the board of directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Messrs. and will serve in the class whose term expires in 2000; Messrs. and will serve in the class whose term expires in 2001; and Mr. will serve in the class whose term expires in 2002. Upon the expiration of the term of a class of directors, directors in such class will be elected for three-year terms at the annual meeting of stockholders in the year in which such term expires. Compensation of Directors We reimburse directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors. Compensation Committee Interlocks and Insider Participation Prior to the appointment of the Compensation Committee, Sycamore's full board of directors (which includes Messrs. Deshpande and Smith) was responsible for the functions of a Compensation Committee. No interlocking relationship exists between any member of our board of directors or our Compensation Committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. Board Committees The board of directors has established a Compensation Committee and an Audit Committee. The Compensation Committee, which consists of Messrs. Ferri and Barrows, reviews executive salaries, administers bonuses, incentive compensation and stock plans, and approves the salaries and other benefits of our executive officers. In addition, the Compensation Committee consults with our management regarding our benefit plans and compensation policies and practices. The Audit Committee, which consists of Messrs. Ferri and Barrows, reviews the professional services provided by our independent accountants, the independence of such accountants from our management, our annual financial statements and our system of internal accounting controls. The Audit Committee also reviews such other matters with respect to our accounting, auditing and financial reporting practices and procedures as it may find appropriate or may be brought to its attention. 38 Executive Compensation The table below sets forth, for the fiscal year ended July 31, 1999, the cash compensation earned by (1) our Chairman of the Board, (2) our Chief Executive Officer and (3) the other most highly compensated executive officer who received annual compensation in excess of $100,000, collectively referred to below as the Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the compensation set forth in the table below does not include medical, group life or other benefits which are available to all of our salaried employees, and perquisites and other benefits, securities or property which do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. In the table below, columns required by the regulations of the Securities and Exchange Commission have been omitted where no information was required to be disclosed under those columns. Summary Compensation Table
Long-Term Annual Compensation Compensation --------------------------------- ---------------- Awards ---------------- Other Annual Securities All Other Salary Bonus Compensation Underlying Compensation ($) ($) ($) Options/SARS (#) ($) ------- ------ ------------ ---------------- ------------ Gururaj Deshpande Chairman and Founder... 100,000 -- -- -- -- Daniel E. Smith President and Chief Executive Officer ..... 73,077(1) -- -- -- -- Ryker Young Vice President, Sales.. 117,788 49,998(2) -- 20,000 9,326(3)
- -------- (1) Represents the total amount of compensation Mr. Smith received in fiscal 1999 for the portion of the year during which he was one of our executive officers. Mr. Smith joined us in October 1998. (2) Represents advance commission income. (3) Represents reimbursement for relocation expenses. Stock Options The following table contains information concerning the grant of options to purchase shares of our common stock to each of the Named Executive Officers during the fiscal year ended July 31, 1999: Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Percent of Annual Rates of Number of Total Options Stock Securities Granted To Appreciation for Underlying Employees in Exercise Option Term(3) Options Fiscal Price Expiration ----------------- Granted Year(1) ($/Share)(2) Date 5% 10% ---------- ------------- ------------ ------------- -------- -------- Gururaj Deshpande....... -- -- -- -- -- -- Daniel E. Smith......... -- -- -- -- -- -- Ryker Young............. 20,000(4) .81% $1.00 June 16, 2009 12, 578 31,875
- -------- (1) Based on options to purchase an aggregate of 2,484,000 shares granted to Sycamore employees in fiscal 1999. (2) All options were granted at fair market value as determined by the board of directors on the date of grant. 39 (3) Amounts reported in these columns represent amounts that may be realized upon exercise of options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) on Sycamore's common stock over the term of the options. The potential realizable values set forth above do not take into account applicable tax and expense payments that may be associated with such option exercises. Actual realizable value, if any, will be dependent on the future price of the common stock on the actual date of exercise, which may be earlier than the stated expiration date. The 5% and 10% assumed annualized rates of stock price appreciation over the exercise period of the options used in the table above are mandated by the rules of the Securities and Exchange Commission and do not represent Sycamore's estimate or projection of the future price of the common stock on any date. There is no representation either express or implied that the stock price appreciation rates for the common stock assumed for purposes of this table will actually be achieved. (4) These options are exercisable immediately on the grant date, but unvested shares are subject to a repurchase right in favor of Sycamore that generally entitles us to repurchase these shares at their original exercise price upon termination of Mr. Young's services with Sycamore. Approximately one year from the hire date of Mr. Young, the repurchase right lapses as to a portion of the shares subject to the option and thereafter such right lapses as to an additional 5% of the shares subject to the option for each full three months of employment completed by Mr. Young. Fiscal Year-End Option Values The following table sets forth information for each of the Named Executive Officers with respect to the value of options outstanding as of July 31, 1999. Aggregated Year-End Option Table
Shares Number of Securities Value of Unexercised Acquired Underlying Unexercised In-The-Money Options at on Value Options at July 31, 1999 July 31, 1999 ($) Exercise Realized ------------------------- ------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Gururaj Deshpande....... -- -- -- -- -- -- Daniel E. Smith......... -- -- -- -- -- -- Ryker Young............. 20,000(1) 40,000(2) -- -- -- --
- -------- (1) These shares are subject to a repurchase right in favor of Sycamore that generally entitles us to repurchase these shares at their original exercise price upon termination of Mr. Young's services with Sycamore. Approximately one year from the hire date of Mr. Young, the repurchase right lapses as to a portion of the shares subject to the option and thereafter such right lapses as to an additional 5% of the shares subject to the option for each full three months of employment completed by Mr. Young. (2) Calculated on the basis of the fair market value of our common stock as of the date of exercise, of $3.00 per share, as determined by the board of directors on such date, less the aggregate exercise price. Benefit Plans 1999 Stock Incentive Plan. Our 1999 Stock Incentive Plan was adopted by our board of directors in August , 1999 and approved by our stockholders in August , 1999. The 1999 plan authorizes the issuance of up to shares of our common stock. The 1999 plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock awards and other stock-based awards. Our officers, employees, directors, consultants and advisors and those of our subsidiaries are eligible to receive awards under the 1999 plan. Under present law, however, incentive stock options may only be granted to employees. No participant may receive any award for more than 500,000 shares in any calendar year. 40 Optionees receive the right to purchase a specified number of shares of common stock at a specified option price and subject to such other terms and conditions as are specified in connection with the option grant. We may grant options at an exercise price less than, equal to or greater than the fair market value of our common stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise price less than the fair market value of the common stock on the date of grant or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the company. The 1999 plan permits our board of directors to determine how optionees may pay the exercise price of their options, including by cash, check or in connection with a "cashless exercise" through a broker, by surrender to us of shares of common stock, by delivery to us of a promissory note, or by any combination of the permitted forms of payment. Our board of directors administers the 1999 plan. Our board of directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the plan and to interpret its provisions. It may delegate authority under the 1999 plan to one or more committees of the board of directors and, subject to certain limitations, to one or more of our executive officers. Our board of directors has authorized the Compensation Committee to administer the 1999 plan, including the granting of options to our executive officers. Subject to any applicable limitations contained in the 1999 plan, our board of directors, our Compensation Committee or any other committee or executive officer to whom our board of directors delegates authority, as the case may be, selects the recipients of awards and determines: . the number of shares of common stock covered by options and the dates upon which such options become exercisable; . the exercise price of options; . the duration of options; and . the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including the conditions for repurchase, issue price and repurchase price. In the event of a merger, liquidation or other acquisition event, our board of directors is authorized to provide for outstanding options or other stock- based awards to be assumed or substituted for by the acquiror. If the acquiror refuses to assume or substitute for outstanding awards, they will accelerate, becoming fully exercisable and free of restrictions, prior to consummation of the acquisition event. In addition, following an acquisition event, under certain circumstances, an assumed or substituted award will accelerate if the employment of its holder with the acquiror is terminated within one year of the acquisition event. No award may be granted under the 1999 plan after 2009, but the vesting and effectiveness of Awards previously granted may extend beyond that date. Our board of directors may at any time amend, suspend or terminate the 1999 plan, except that no award granted after an amendment of the 1999 plan and designated as subject to Section 162(m) of the Internal Revenue Code by our board of directors shall become exercisable, realizable or vested, to the extent such amendment was required to grant such award, unless and until such amendment is approved by our stockholders. 1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was adopted by our board of directors in August , 1999 and received stockholder approval in August , 1999. The purchase plan authorizes the issuance of up to a total of shares of our common stock to participating employees. All of our employees, including directors who are employees, and all employees of any participating subsidiaries: . whose customary employment is more than 20 hours per week for more than five months in a calendar year, . who have been employed by us for at least three months prior to enrolling, and . who are employed on the first day of a designated payroll deduction offering period 41 are eligible to participate in the purchase plan. Employees who would immediately after the grant own five percent or more of the total combined voting power or value of our stock or any subsidiary are not eligible to participate. As of July 31, 1999, approximately of our employees would have been eligible to participate in the purchase plan. On the first day of an offering period, we will grant to each eligible employee who has elected to participate in the purchase plan an option to purchase shares of common stock as follows: the employee may authorize an amount (up to 10%, or such lesser amount as shall be determined by the Board, of such employee's base pay) to be deducted from such employee's base pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the purchase plan, the option exercise price is an amount equal to 85% of the closing price per share of the common stock on either the first day or the last day of the offering period, whichever is lower. The first offering period under the purchase plan will commence on the date on which trading of our common stock commences on the Nasdaq National Market, with the option price on the first day of such offering period equivalent to the initial public offering price. In no event may an employee purchase in any one offering period a number of shares which exceeds the number of shares determined by dividing the product of (1) $2,083 and (2) the number of full months in the offering period by the closing market price of a share of common stock on the first business day of the offering period or such other number as may be determined by the Board prior to the commencement date of the offering period. The Compensation Committee may, in its discretion, choose an offering period of 12 months or less for each offering and may choose a different offering period for each offering. An employee who is not a participant on the last day of the offering period, as a result of voluntary withdrawal or termination of employment or for any other reason, is not entitled to exercise any option, and the employee's accumulated payroll deductions will be refunded. However, upon termination of employment because of death, the employee's beneficiary has certain rights to elect to exercise the option to purchase the shares that the accumulated payroll deductions in the participant's account would purchase at the date of death. Because participation in the purchase plan is voluntary, we cannot now determine the number of shares of our common stock to be purchased by any of our current executive officers, by all of our current executive officers as a group or by our non-executive employees as a group. 1999 Non-Employee Director Option Plan. Our 1999 Non-Employee Director Option Plan was adopted by our board of directors and received stockholder approval in August , 1999. The option plan authorizes the issuance of up to a total of shares of our common stock to participating directors who are not also an employee or officer. On the day each of our directors who is not also an employee or officer is elected to our board of directors, we will grant to him a nonqualified stock option to purchase shares of common stock. In addition, on the date of each annual meeting of stockholders, we will grant each such director a nonqualified stock option to purchase shares of our common stock beginning with the 2000 annual meeting of stockholders. The option exercise price per share for all options granted under the option plan will be equal to the fair market value of our common stock on the date of grant. Under the plan, options vest immediately, but may not be exercised until . The term of each option is years from the date of grant. In addition, the Compensation Committee may grant additional options to non-employee directors and determine the terms applicable to such options. Our board of directors has discretion to establish the terms of options granted under the Plan. No options to purchase shares have been granted to date under the option plan. 401(k) Plan. On December 9, 1998, we adopted an employee savings and retirement plan qualified under Section 401 of the Internal Revenue Code and covering all of our employees. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) plan. We may make matching or additional contributions to the 401(k) plan in amounts to be determined annually by our board of directors. We have made no contributions to the 401(k) plan to date. 42 CERTAIN TRANSACTIONS Preferred Stock Issuances Since inception in February 1998, we have issued and sold shares of redeemable convertible preferred stock to the following persons and entities who are our executive officers, directors or principal stockholders. For more detail on shares held by these purchasers, see "Principal Stockholders."
Series A Series B Series C Preferred Preferred Preferred Investor Stock Stock Stock - -------- --------- --------- --------- Gururaj Deshpande................................. 2,750,000 1,059,976 385,647 Daniel E. Smith................................... 2,475,000 953,979 347,082 Chikong Shue...................................... 300,000 115,634 42,071 John E. Dowling................................... -- 71,429 -- Matrix V Management Co., L.L.C.(1)................ 2,750,000 1,059,976 385,647
- -------- (1) Composed of Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. Matrix V Management Co., L.L.C. is the general partner of each of Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. Timothy Barrows and Paul J. Ferri, directors of Sycamore, are general partners of Matrix V Management Co., L.L.C. Series A Financing. On February 19, 1998, April 2, 1998, July 31, 1998 and October 19, 1998, we issued an aggregate of 8,961,812 shares of Series A preferred stock to 8 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue and Matrix Partners V, L.P. The per share purchase price for our Series A preferred stock was $.91. Series B Financing. On December 3, 1998 and February 11, 1999, we issued an aggregate of 3,607,062 shares of Series B preferred stock to 11 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue, John E. Dowling and Matrix Partners V, L.P. The per share purchase price for our Series B preferred stock was $3.50. Series C Financing. On March 2, 1999, we issued an aggregate of 2,500,000 shares of Series C preferred stock to 15 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue, Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. The per share purchase price for our Series C preferred stock was $8.00. Common Stock Issuances During fiscal 1999, Frances M. Jewels, our Chief Financial Officer, purchased an aggregate of 145,000 shares of common stock for $1.00 per share and Kurt Trampedach, our Vice President of International Sales, purchased an aggregate of 125,000 shares of common stock for $1.00 per share, each pursuant to stock restriction agreements that give us the right to repurchase all or a portion of the shares at their purchase price in the event that the employee ceases to be employed by us. Other executive officers have purchased shares of common stock pursuant to similar stock restriction agreements for aggregate purchase prices which did not exceed $60,000 for any one executive officer. The repurchase right generally lapses as to 20% of the shares subject to such option approximately one year from the hire date of the executive officer and thereafter lapses as to an additional 5% of the shares for each full three months of employment completed by such person. 43 All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, including a majority of the independent and disinterested directors on the board of directors, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of June 30, 1999, by: . each person who owns beneficially more than 5% of the outstanding shares of our common stock; . each of our directors and the Named Executive Officers; and . all of our directors and executive officers as a group. The number of shares of common stock deemed outstanding prior to this offering includes 20,820,478 shares of common stock outstanding as of June 30, 1999. The number of shares of common stock deemed outstanding after this offering includes the shares that are being offered for sale by us in this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to shares. Common stock subject to options exercisable within 60 days of June 30, 1999 are deemed outstanding for purposes of computing the percentage ownership of the person holding such option but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise indicated, the address of each person owning more than 5% of the outstanding shares of common stock is c/o Sycamore Networks, Inc., 10 Elizabeth Drive, Chelmsford, Massachusetts 01824.
Percentage of Common Stock Number of Outstanding(%) Shares ----------------- Beneficially Before After Name and Address of Beneficial Owner Owned Offering Offering ------------------------------------ ------------ -------- -------- Gururaj Deshpande(1)......................... 5,445,623 26.2 Daniel E. Smith.............................. 4,901,061 23.5 Matrix V Management Co., L.L.C.(2) 1000 Winter Street, Suite 4500 Waltham, MA 02154........................... 4,195,623 20.2 Ryker Young.................................. 340,604(3) 1.6 Timothy Barrows(2) c/o Matrix V Management Co., L.L.C. 1000 Winter Street, Suite 4500 Waltham, MA 02154........................... 4,195,623 20.2 Paul J. Ferri(2) c/o Matrix V Management Co., L.L.C. 1000 Winter Street, Suite 4500 Waltham, MA 02154........................... 4,195,623 20.2 Jaishree Deshpande, as Trustee of the Gururaj Deshpande Grantor Retained Annuity Trust.... 2,000,000 9.6 All executive officers and directors as a group (10 persons).......................... 16,557,045(4) 79.0
- -------- * Less than 1% of the outstanding common stock. (1) Includes 437,500 shares held by the Deshpande Irrevocable Trust and 2,000,000 shares held by Jaishree Deshpande, as Trustee of the Gururaj Deshpande Grantor Retained Annuity Trust. Jaishree Deshpande is Mr. Deshpande's wife. Mr. Deshpande disclaims beneficial ownership of the shares held by the Deshpande Irrevocable Trust. (2) Composed of 3,776,060 shares held by Matrix Partners V, L.P. and 419,563 shares held by Matrix V Entrepreneurs Fund, L.P. Matrix V Management Co., L.L.C. is the general partner of each of Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. Mr. Barrows and Mr. Ferri, directors of Sycamore, are general partners of Matrix V Management Co., L.L.C. Mr. Barrows and Mr. Ferri disclaim beneficial ownership of the shares held by Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. except to the extent of their pecuniary interests therein arising from their general partnership interests in Matrix V Management Co., L.L.C. (3) Includes immediately exercisable options to purchase 20,000 shares. (4) Includes immediately exercisable options to purchase 265,000 shares. 45 DESCRIPTION OF CAPITAL STOCK After this offering, the authorized capital stock of Sycamore will consist of shares of common stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.01 par value per share. As of June 30, 1999, there were outstanding (1) 20,820,478 shares of common stock held by 67 stockholders of record, assuming the conversion into common stock of all outstanding shares of convertible preferred stock, and (2) options to purchase an aggregate of 1,837,700 shares of common stock. Based upon the number of shares outstanding as of that date, and giving effect to the issuance of the shares of common stock offered by Sycamore in this offering, there will be shares of common stock outstanding upon the closing of this offering. The following summary of provisions of our securities, various provisions of our amended and restated certificate of incorporation and our amended and restated bylaws and provisions of applicable law is not intended to be complete and is qualified by reference to the provisions of applicable law and to our amended and restated certificate of incorporation and amended and restated bylaws included as exhibits to the Registration Statement of which this prospectus is a part. See "Where You Can Find More Information." Common Stock Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any such dividends declared by the board of directors, subject to any preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of Sycamore, the holders of common stock are entitled to receive ratably the net assets of Sycamore available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are, and the shares offered by Sycamore in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any series of preferred stock which Sycamore may designate and issue in the future. Certain holders of common stock have the right to require Sycamore to register their shares of common stock under the Securities Act in certain circumstances. See "Shares Eligible for Future Sale." Preferred Stock Under the terms of our amended and restated certificate of incorporation to be filed as of the closing of this offering, the board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. The board has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock. The purpose of authorizing the board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a majority of the outstanding voting stock of Sycamore. Sycamore has no present plans to issue any shares of preferred stock. Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects Sycamore is subject to the provisions of Section 203 of the General Corporation Law of Delaware. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the 46 person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The amended and restated certificate of incorporation and amended and restated by-laws to be effective on the closing of this offering provide: . that the board of directors be divided into three classes, as nearly equal in size as possible, with staggered three-year terms; . that directors may be removed only for cause by the affirmative vote of the holders of at least 66 2/3% of the shares of our capital stock entitled to vote; and . that any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. The classification of the board of directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, Sycamore. The amended and restated certificate of incorporation and amended and restated by-laws also provide that, after the closing of this offering: . any action required or permitted to be taken by the stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting; and . special meetings of the stockholders may only be called by the Chairman of the board of directors, the President, or by the board of directors. Our amended and restated by-laws provide that, in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with requirements regarding advance notice to us. These provisions could delay until the next stockholders' meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. Delaware's corporation law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or by-laws, unless a corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. Our amended and restated certificate of incorporation requires the affirmative vote of the holders of at least 66 2/3% of the shares of our capital stock entitled to vote to amend or repeal any of the foregoing provisions of our amended and restated certificate of incorporation. Generally our amended and restated by-laws may be amended or repealed by a majority vote of the board of directors or the holders of a majority of the shares of our capital stock issued and outstanding and entitled to vote. To amend our amended and restated by-laws regarding special meetings of stockholders, written actions of stockholders in lieu of a meeting, and the election, removal and classification of members of the board of directors requires the affirmative vote of the holders of at least 66 2/3% of the shares of our capital stock entitled to vote. The stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series preferred stock that might be outstanding at the time any such amendments are submitted to stockholders. 47 Limitation of Liability and Indemnification Our amended and restated certificate of incorporation provides that our directors and officers shall be indemnified by us to the fullest extent authorized by Delaware law. This indemnification would cover all expenses and liabilities reasonably incurred in connection with their services for or on behalf of us. In addition, our amended and restated certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. Transfer Agent and Registrar The transfer agent and registrar for the common stock is . 48 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have shares of common stock outstanding (assuming no exercise of outstanding options). Of these shares, the shares to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, except that any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. Sales of Restricted Shares
Days After Date of Approximate Shares This Prospectus Eligible for Future Sale Comment ------------------ ------------------------ ------- On effectiveness.... Freely tradeable sold in offering 90 days after effectiveness...... Shares salable under Rule 144 days after Shares salable under effectiveness...... Rule 144, 144(k) or 701
In general, under Rule 144, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (1) one percent of the then outstanding shares of common stock (approximately shares immediately after this offering) or (2) the average weekly trading volume in the common stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of such sale is filed, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, our affiliates must comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, in order to sell shares of common stock which are not restricted securities. Under Rule 144(k), a person who is not an affiliate and has not been an affiliate for at least three months prior to the sale and who has beneficially owned shares for at least two years may resell such shares without compliance with the foregoing requirements. In meeting the one- and two-year holding periods described above, a holder of shares can include the holding periods of a prior owner who was not an affiliate. The one-and two-year holding periods described above do not begin to run until the full purchase price or other consideration is paid by the person acquiring the shares from the issuer or an affiliate. Rule 701 provides that currently outstanding shares of common stock acquired under our employee compensation plans, and shares of common stock acquired upon exercise of presently outstanding options granted under these plans, may be resold beginning 90 days after the date of this prospectus (1) by persons, other than affiliates, subject only to the manner of sale provisions of Rule 144, and (2) by affiliates under Rule 144 without compliance with its one-year minimum holding period, subject to certain limitations. Stock Options At July 31, 1999, approximately shares of common stock were issuable pursuant to immediately exercisable options or pursuant to other rights granted under our 1998 Stock Incentive Plan of which approximately shares are not subject to Lock-up Agreements with the Underwriters. We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable following the date of this prospectus, to register up to shares of common stock issuable under our stock plans, including the shares of common stock subject to outstanding options as of July 31, 1999. This registration statement is expected to become effective upon filing. 49 Lock-up Agreements Subject to certain exceptions, Sycamore and its executive officers, directors and other security holders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, they will not, during the period ending days after the date of this prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (regardless of whether such shares or any such securities are then owned by such person or are thereafter acquired), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, regardless of whether any such transactions described in clauses (1) or (2) of this paragraph are to be settled by delivery of such common stock or such other securities, in cash or otherwise. In addition, for a period of days from the date of this prospectus, except as required by law, we have agreed that our board of directors will not consent to any offer for sale, sale or other disposition, or any transaction which is designed or could be expected, to result in, the disposition by any person, directly or indirectly, of any shares of common stock without the prior written consent of Morgan Stanley & Co. Incorporated. See "Underwriters." Registration Rights After this offering, the holders of approximately 19,266,000 shares of common stock will be entitled to rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreement between us and the holders of such registrable securities, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such common stock therein. Additionally, such holders are also entitled to demand registration rights pursuant to which they may require us on up to two occasions to file a registration statement under the Securities Act at our expense with respect to shares of our common stock, and we are required to use our best efforts to effect such registration. Further, holders may require us on up to three occasions to file additional registration statements on Form S-3 at our expense. All of these registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration. 50 UNDERWRITERS Under the terms and subject to the conditions contained in the underwriting agreement dated the date hereof, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc, J. P. Morgan Securities Inc and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, an aggregate of shares of common stock. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below:
Number of Name Shares ---- ----------- Morgan Stanley & Co. Incorporated............................. Lehman Brothers Inc........................................... J. P. Morgan Securities Inc................................... Dain Rauscher Wessels......................................... ----------- Total....................................................... ===========
The underwriters are offering the shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered hereby, other than those covered by the over- allotment option described below, if any such shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the initial public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the initial public offering price. Any underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain other dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the initial public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. If the underwriter's over-allotment option is exercised in full, the total price to public would be $ , the total underwriters' discounts and commissions would be $ , and the total proceeds to us would be $ before deducting estimated offering expenses of $ . 51 At our request, the underwriters have reserved up to shares of common stock to be sold in the offering and offered hereby for sale, at the initial public offering price, to our directors, officers, employees and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. Sycamore, our directors, officers and certain other of our stockholders have each agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the period ending days after the date of this prospectus, we will not, directly or indirectly: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (whether such shares or any such securities are then owned by such person or are thereafter acquired directly from us); or . enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. We have filed an application for our common stock to be quoted on the Nasdaq National Market under the symbol "SCMR." In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Pricing of the Offering Prior to this offering, there has been no public market for the shares of common stock. Consequently, the public offering price for the shares of common stock will be determined by negotiations between Sycamore and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be our record of operations, our current financial position and future prospects, the experience of our management, sales, earnings and certain of our other financial and operating information in recent periods, the 52 price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. EXPERTS The financial statements as of July 31, 1998 and for the period from inception (February 17, 1998) through July 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock we propose to sell in this offering. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement. For further information about us and the common stock we propose to sell in this offering, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. The registration statement may be inspected without charge at the principal office of the Securities and Exchange Commission in Washington, D.C. and copies of all or any part of which may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. 53 SYCAMORE NETWORKS, INC. (A Development Stage Enterprise) INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants......................................... F-2 Balance Sheets at July 31, 1998 and May 1, 1999 (unaudited)............... F-3 Statements of Operations for the period from inception (February 17, 1998) through July 31, 1998, the nine months ended May 1, 1999 (unaudited) and the period from inception (February 17, 1998) through May 1, 1999 (unaudited).............................................................. F-4 Statements of Stockholders' Deficit for the period from inception (February 17, 1998) through July 31, 1998, the nine months ended May 1, 1999 (unaudited) and the period from inception (February 17, 1998) through May 1, 1999 (unaudited).......................................... F-5 Statements of Cash Flows the period from inception (February 17, 1998) through July 31, 1998, the nine months ended May 1, 1999 (unaudited) and the period from inception (February 17, 1998) through May 1, 1999 (unaudited).............................................................. F-6
Notes to Financial Statements............................................... F-7
F-1 Report of Independent Accountants To the Stockholders and the Board of Directors of Sycamore Networks, Inc.: In our opinion, the accompanying balance sheet and the related statements of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Sycamore Networks, Inc. (a development stage enterprise) at July 31, 1998 and the results of its operations and its cash flows for the period from inception (February 17, 1998) to July 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts July 29, 1999 F-2 SYCAMORE NETWORKS, INC. (A Development Stage Enterprise) BALANCE SHEETS (in thousands, except share data)
Pro Forma July 31, May 1, 1999 May 1, 1999 1998 (Unaudited) (Unaudited) -------- ----------- ----------- Assets Current assets: Cash and cash equivalents................... $1,197 $ 23,406 $ 23,406 Marketable securities....................... 3,082 2,931 2,931 Inventories................................. -- 6,220 6,220 Prepaids and other current assets........... 200 347 347 ------ -------- -------- Total current assets......................... 4,479 32,904 32,904 Property and equipment, net.................. 500 4,391 4,391 Other assets................................. 102 207 207 ------ -------- -------- Total assets................................. $5,081 $ 37,502 $ 37,502 ====== ======== ======== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Current portion of note payable............. $ -- $ 334 $ 334 Accounts payable............................ 42 5,521 5,521 Accrued expenses............................ 96 323 323 ------ -------- -------- Total current liabilities.................... 138 6,178 6,178 Note payable................................. -- 666 666 Commitments and contingencies (Note 4) Series A Redeemable Convertible Preferred Stock $.01 par value; 6,380,000 and 8,975,000 shares authorized at July 31, 1998 and May 1, 1999, respectively; 6,186,812 and 8,961,812 shares issued and outstanding at July 31, 1998 and May 1, 1999, respectively; 0 shares issued and outstanding on a pro forma basis; liquidation value of $5,630 and $8,155 at July 31, 1998 and May 1, 1999, respectively................................ 5,621 8,146 -- Series B Redeemable Convertible Preferred Stock $.01 par value; 3,625,000 shares authorized at May 1, 1999; 3,607,062 shares issued and outstanding at May 1, 1999; 0 shares issued and outstanding on a pro forma basis; liquidation value of $12,625 at May 1, 1999..................................... -- 12,625 -- Series C Redeemable Convertible Preferred Stock $.01 par value; 2,500,000 shares authorized at May 1, 1999; 2,500,000 shares issued and outstanding at May 1, 1999; 0 shares issued and outstanding on a pro forma basis; liquidation value of $20,000 at May 1, 1999..................................... -- 20,000 -- Stockholders' equity (deficit): Common stock, $.001 par value; 15,000,000 and 25,000,000 shares authorized at July 31, 1998 and May 1, 1999, respectively; 2,345,000 and 5,444,104 shares issued and outstanding at July 31, 1998 and May 1, 1999, respectively: 20,512,978 shares issued and outstanding on a pro forma basis...................................... 2 5 20 Additional paid-in capital.................. 192 5,482 46,238 Accumulated deficit......................... (693) (10,796) (10,796) Note receivable............................. -- (17) (17) Deferred compensation....................... (179) (4,787) (4,787) ------ -------- -------- Total stockholders' equity (deficit)......... (678) (10,113) 30,658 ------ -------- -------- Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)................................... $5,081 $ 37,502 $ 37,502 ====== ======== ========
The accompanying notes are an integral part of the financial statements. F-3 SYCAMORE NETWORKS, INC. (A Development Stage Enterprise) STATEMENTS OF OPERATIONS (in thousands, except per share data)
Period from inception Period from inception (February 17, 1998) Nine months (February 17, 1998) through July 31, 1998 ended May 1, 1999 through May 1, 1999 --------------------- ----------------- --------------------- (unaudited) (unaudited) Operating expenses: Manufacturing.......... $ -- $ 1,173 $ 1,173 Research and development........... 497 6,572 7,069 Sales and marketing.... 92 1,598 1,690 General and administrative........ 199 752 951 Amortization of stock compensation.......... 5 496 501 ------ -------- -------- Total operating expenses.............. 793 10,591 11,384 ------ -------- -------- Loss from operations.... (793) (10,591) (11,384) Interest income......... 100 488 588 ------ -------- -------- Net loss................ (693) (10,103) (10,796) ====== ======== ======== Basic and diluted net loss per share......... $(1.66) $ (15.66) $ (19.31) Weighted average shares used in computing basic and diluted net loss per share.............. 417 645 559 Pro forma basic and diluted net loss per share (unaudited)...... $ (.11) $ (1.08) $ (1.38) Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)............ 6,252 9,351 7,829
The accompanying notes are an integral part of the financial statements. F-4 SYCAMORE NETWORKS, INC. (A Development Stage Enterprise) STATEMENTS OF STOCKHOLDERS' DEFICIT (in thousands)
Common Stock Additional Total ------------- Paid-in Accumulated Note Deferred Stockholders' Shares Amount Capital Deficit Receivable Compensation Deficit ------ ------ ---------- ----------- ---------- ------------ ------------- Issuance of common stock.................. 2,345 $ 2 $ 8 $ -- $ -- $ -- $ 10 Deferred compensation expense associated with equity awards.......... -- -- 184 -- -- (184) -- Amortization of deferred compensation........... -- -- -- -- -- 5 5 Net loss................ -- -- -- (693) -- -- (693) ----- --- ------ -------- ---- ------- -------- Balance, July 31 1998... 2,345 2 192 (693) -- (179) (678) ----- --- ------ -------- ---- ------- -------- Issuance of common stock.................. 3,099 3 186 -- -- -- 189 Deferred compensation expense associated with equity awards.......... -- -- 4,869 -- -- (4,869) -- Issuance of equity awards in exchange for services............... -- -- 235 -- -- -- 235 Amortization of deferred compensation .......... -- -- -- -- -- 261 261 Issuance of common stock in exchange for note receivable............. -- -- -- -- (17) -- (17) Net loss................ -- -- -- (10,103) -- -- (10,103) ----- --- ------ -------- ---- ------- -------- Balance, May 1, 1999 (unaudited)............ 5,444 $ 5 $5,482 $(10,796) $(17) $(4,787) $(10,113) ===== === ====== ======== ==== ======= ========
The accompanying notes are an integral part of the financial statements. F-5 SYCAMORE NETWORKS, INC. (A Development Stage Enterprise) STATEMENTS OF CASH FLOWS (in thousands)
Period from Period from inception inception (February 17, 1998) Nine months (February 17, 1998) through ended through July 31, 1998 May 1, 1999 May 1, 1999 ------------------- ----------- ------------------- (unaudited) (unaudited) Cash flows from operating activities: Net loss.................. $ (693) $(10,103) $(10,796) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization............ 27 404 431 Amortization of stock compensation............ 5 496 501 Changes in operating assets and liabilities: Inventories.............. -- (6,220) (6,220) Prepaids and other current assets.......... (75) (272) (347) Accounts payable......... 42 5,479 5,521 Accrued expenses......... 96 227 323 ------ -------- -------- Net cash used in operating activities................ (598) (9,989) (10,587) ------ -------- -------- Cash flows from investing activities: Purchases of property and equipment............... (528) (3,294) (3,822) Purchases of marketable securities.............. (3,082) (6,026) (9,108) Maturities of marketable securities.............. -- 6,177 6,177 Increase in other assets.................. (102) (105) (207) ------ -------- -------- Net cash used in investing activities................ (3,712) (3,248) (6,960) ------ -------- -------- Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net.... 5,496 35,275 40,771 Proceeds from issuance of common stock............ 11 171 182 ------ -------- -------- Net cash provided by financing activities...... 5,507 35,446 40,953 ------ -------- -------- Net increase in cash and cash equivalents.......... 1,197 22,209 23,406 Cash and cash equivalents, beginning of period....... -- 1,197 -- ------ -------- -------- Cash and cash equivalents, end of period............. $1,197 $ 23,406 $ 23,406 ====== ======== ======== Supplementary information: Equipment acquired under term note............... $ -- $ 1,000 $ 1,000 Preferred stock note receivable.............. 125 -- -- Issuance of common stock in exchange for note receivable.............. -- 17 17
The accompanying notes are an integral part of the financial statements. F-6 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS 1. Nature of the Business: Sycamore Networks (the "Company") was incorporated in Delaware on February 17, 1998. The Company develops and markets software-based intelligent optical networking products that enable service providers to quickly and cost effectively provide bandwidth and create new high speed data services. To date, the Company has principally marketed its products in the United States. Through May 1, 1999, the Company was considered to be in the development stage and was principally engaged in research and development, raising capital and building its management team. The Company shipped its first product in May 1999. The Company is subject to risks common to technology-based companies including, but not limited to, the development of new technology, development of markets and distribution channels, dependence on key personnel, and the ability to obtain additional capital as needed to meet its product plans. The Company has a limited operating history and has never achieved profitability. To date the Company has been funded principally by private equity financings. The Company's ultimate success is dependent upon its ability to raise additional capital and 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: Unaudited Interim Financial Data The accompanying balance sheet as of May 1, 1999, the statements of operations, cash flows and stockholders' deficit for the nine months ended May 1, 1999, and the statements of operations, cash flows and stockholders' deficit for the period from inception (February 17, 1998) through May 1, 1999 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of these periods. The data disclosed in notes to the financial statements for these periods are unaudited. The results for the nine months ended May 1, 1999 are not necessarily indicative of results to be expected for the entire year, although the Company expects to incur a significant loss for the year ending July 31, 1999. Cash Equivalents and Marketable Securities The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents, and investments with original maturity dates greater than three months but less than 12 months to be short-term investments. The Company classifies all marketable securities as available-for-sale. The securities are stated at their fair market value. At July 31, 1998, the fair value of marketable securities, which were comprised of commercial paper, approximated amortized cost and, as such, unrealized holding gains and losses were not material. The fair value of marketable securities was determined based on quoted market prices at the reporting date for those instruments. Inventory Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). F-7 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) Revenue Recognition Revenue from product sales is recognized upon execution of a contract and the completion of all delivery obligations provided that there are no uncertainties regarding customer acceptance and collectibility is deemed probable. If uncertainties exist, revenue is recognized when such uncertainties are resolved. Revenue from technical support and maintenance contracts is recognized ratably over the period of the related agreements. The Company records a warranty liability for parts and labor on its products. Warranty periods are generally three years from installation date. Estimated warranty costs are recorded at the time of revenue recognition. Property and Equipment Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method, based upon the following asset lives: 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. 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 straight-line method over the 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 revenues and expenses during the reporting period. Actual results could differ from these estimates. F-8 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents. The Company invests its excess cash primarily in deposits with commercial banks and high-quality corporate securities. Certain components and parts used in the Company's products are procured from a single source. The Company obtains some of its 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 on a purchase order basis. The failure of a supplier, including subcontractor, to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's revenues and profits. Other Comprehensive Income The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" for the period from inception (February 17, 1998) through July 31, 1998. This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. To date, comprehensive loss and net loss are the same. Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and unvested restricted common shares. There were no dilutive common equivalent shares for the period. F-9 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net loss per share:
Period from inception Period from inception (February 17, 1998) Nine months (February 17, 1998) through July 31, 1998 ended May 1, 1999 through May 1, 1999 --------------------- ----------------- --------------------- (unaudited) (unaudited) (in thousands, except per share data) Numerator: Net loss................ $ (693) $(10,103) $(10,796) Denominator: Historical: Weighted average common shares outstanding..... 2,169 4,875 3,522 Weighted average common shares outstanding subject to repurchase.. (1,752) (4,230) (2,963) ------- -------- -------- Denominator for basic and diluted calculation............ 417 645 559 ------- -------- -------- Basic and diluted net loss per share......... $ (1.66) $(15.66) $(19.31) ======= ======== ======== Pro forma: Net loss................ $ (693) $(10,103) $(10,796) ======= ======== ======== Historical weighted average common shares outstanding............ 417 645 559 Weighted average number of shares assumed upon conversion of redeemable convertible preferred stock........ 5,835 8,706 7,270 ------- -------- -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 6,252 9,351 7,829 ======= ======== ======== Pro forma basic and diluted net loss per share (unaudited)...... $ (.11) $ (1.08) $ (1.38) ======= ======== ========
Options to purchase 1,019,000 shares of common stock at an average exercise price of $.66 per share have not been included in the computation of diluted net loss per share for the nine months ended May 1, 1999 and for the period from inception (February 17, 1998) through May 1, 1999, as their effect would have been anti-dilutive. F-10 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) Pro Forma Net Loss Per Share (Unaudited) Pro forma net loss per share for the period from inception (February 17, 1998) through July 31, 1998 and the nine months ended May 1, 1999 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, and C 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. Pro Forma Balance Sheet (Unaudited) Upon the closing of the Company's initial public offering, all of the outstanding shares of Series A, B and C redeemable convertible preferred stock will automatically convert into 15,068,874 shares of the Company's common stock. The unaudited pro forma presentation of the balance sheet has been prepared assuming the conversion of the preferred stock into common stock as of May 1, 1999. Stock Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Segment Information The Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information," which requires companies to report selected information about operating segments, as well as enterprise-wide disclosures about products, services, geographic areas, and major customers. Operating segments are determined based on the way management organizes its business for making operating decisions and assessing performance. The Company has determined that it conducts its operations in one business segment. Recent Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Company will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the effective date of the FASB Statement No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is not expected to have an impact on our financial condition or results of operations. F-11 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) 3. Property and Equipment: Property and equipment consisted of the following at July 31, 1998: Computer software and equipment........................................... $500 Furniture and office equipment............................................ 27 ---- 527 Less accumulated depreciation and amortization............................ (27) ---- $500 ====
Depreciation and amortization expense was $27,000 for the period from inception (February 17, 1998) through July 31, 1998. 4. Commitments and Contingencies: Capital and Operating Leases The Company's primary office facility is leased under a noncancelable lease that expires in 1999. Rent expense under operating leases was $27,500 for the period from inception (February 17, 1998) through July 31, 1998. At July 31, 1998 future minimum lease payments under all non-cancelable operating leases are as follows, in thousands: 1999..................................................................... $ 158 2000..................................................................... 42 ----- Total future minimum lease payments...................................... $ 200 =====
At July 31, 1998, as collateral for the primary office facility lease, the Company issued a stand-by letter of credit for $100,000 which is collaterlized by commercial paper. The letter of credit is irrevocable and expires in July 1999. 5. Common Stock The Company has authorized 15,000,000 shares of common stock, $.001 par value. The voting, dividend and liquidation rights of the holders of the common stock are subject to, and qualified by, the rights of the holders of preferred stock. The holders of the common stock are entitled to one vote for each share held. Dividends may be declared by the board of directors from lawfully available funds, subject to any preferential dividend rights of any outstanding preferred stock. 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. 6. Restricted Stock Restricted stock may be issued to employees, officers, directors, consultants, and other advisors. The Company has the right to repurchase the common stock at the issuance price (which shall be at least equal to the par value per share for each share of common stock subject to such award) or other stated or formula price in the event that conditions specified by the board of directors in the award agreement are not satisfied prior to the end of the applicable restriction period or periods established for such award. The vesting period is generally five years. The number of shares of restricted stock outstanding at July 31, 1998 was 2,345,000 of which 1,876,250 were subject to repurchase at their original issuance prices ranging from $.001 to $.05. F-12 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) The weighted average grant date fair value of restricted stock awards for the period from inception (February 17, 1998) through July 31, 1998 was $.49. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates in accordance with SFAS 123, the Company's net loss for the period from inception (February 17, 1998) through July 31, 1998 would have been increased to $807,000 or $1.94 per basic and diluted share. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts and additional awards in future years are anticipated. For this pro forma calculation, the fair value of each restricted stock award was estimated on the date of grant using the minimum value option pricing model with the following weighted average assumptions: no volatility, a weighted average risk free interest rate of 5.4%, a weighted average expected option life of 4 years and no dividend yield. 7. Redeemable Convertible Preferred Stock The Company's board of directors has authorized 6,380,000 shares of Series A redeemable convertible preferred stock ("Series A"), $.01 par value. In February 1998, the Company sold 6,049,450 shares 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. The terms of the Series A are as follows: Conversion Each share of Series A may be converted into one share 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 $5 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 of directors, dividends on Series A are payable in cash in preference and prior to any payment of any dividend on common shares. The holders of Series A 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 of Series A 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 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 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 held, equal to $.91, plus any declared and unpaid dividends. The liquidation preferences are subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. Redemption If the holders of at least a majority of Series A, 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 price of each share of Series A is $.91 plus all declared and unpaid dividends, if any. F-13 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) 8. Income Taxes: No provision for taxes has been recorded since the Company has incurred losses since inception. The components of the net deferred tax asset as of July 31, 1998 are as follows (in thousands): Net operating loss carryforwards......................................... $ 122 Capitalized start up costs............................................... 124 Other.................................................................... 21 ----- 267 ----- Valuation allowance...................................................... (267) ----- Net deferred tax asset................................................... $ -- =====
At July 31, 1998, the Company had available net operating loss carryforwards for federal and state tax income purposes of approximately $330,000. The state and federal carryforwards expire in 2004 and 2019, respectively. As required by statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," the management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and has established a full valuation allowance for such assets which are comprised principally of net operating loss carryforwards. Management reevaluates the positive and negative evidence periodically. The net operating loss carryforwards could be limited in future years if there is a significant change in our ownership. 9. Employee Benefit Plan: The Company sponsors a defined contribution plan covering substantially all of its employees which is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the 401(k) plan through payroll deductions within statutory and plan limits. The Company has made no contributions to the plan to date. 10. Subsequent Events Redeemable Convertible Preferred Stock 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 redeemable convertible preferred stock ("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. The terms of the Series B are similar to the terms of Series A. In February 1999, the Company authorized 2,500,000 shares of Series C redeemable convertible preferred stock ("Series C"), $.01 par value. In February 1999, the Company sold 2,500,000 shares of Series C at a price of $8.00 per share and received proceeds of approximately $20,000,000. The terms of the Series C are similar to the terms of Series A. In July 1999, the Company authorized 692,201 shares of Series D redeemable convertible preferred stock ("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. The terms of the Series D are similar to the terms of Series A. F-14 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) Note Payable On August 5, 1998, the Company entered into an equipment loan agreement with a bank. Under this loan agreement, the Company may borrow up to $1,000,000, for the purpose of acquisition of equipment, for a period of ten months. At June 30, 1999, the outstanding balance will be converted into a term loan, to be repaid in thirty equal monthly installments commencing July 1, 1999. The interest on the outstanding balance is calculated daily at the bank's prime rate, plus 1.5%. The loan is collateralized by all the Company's assets, including accounts receivable, inventory and fixed assets. The Company is required to maintain certain financial covenants and tangible net worth calculations. At May 1, 1999, a total of $1,000,000 is outstanding under this equipment loan agreement. On April 22, 1999, the Company entered into an equipment loan agreement with the same bank. Under this loan agreement, the Company may borrow up to $5,000,000, for the purpose of acquisition of equipment, for a period of six months. At January 31, 2000, the outstanding balance will be converted into a term loan, to be repaid in thirty-six equal monthly installments commencing February 1, 2000. The interest on the outstanding balance is calculated daily at the bank's prime rate, plus 1.5%. This loan is also collateralized by all the Company's assets, including accounts receivable, inventory and fixed assets. The Company is required to maintain certain financial covenants and tangible net worth calculations. Letters of Credit In December 1998, as collateral for an office facility lease, the Company has issued a stand-by letter of credit for $92,000 which is collateralized by United States Treasury Bills. The letter of credit is irrevocable and is reduced by 25% after 13 months and 25% after 25 months. In July 1999, as collateral for inventory purchases made by a third party manufacturer on behalf of the Company, the Company has issued a stand-by letter of credit for $4,000,000 which is collateralized by a United States Government Security. The letter of credit is irrevocable and expires in October 1999. 1998 Stock Incentive Plan In August 1998, the 1998 Stock Incentive Plan (the "Plan") was adopted by the board of directors (the "Board") and received stockholder approval on October 19, 1998. Up to 8,855,000 shares of common stock, subject to adjustment in the event of stock splits and other similar events, may be issued pursuant to awards granted under the Plan. The Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock awards and other stock-based awards. Officers, employees, directors, consultants and advisors and those of our subsidiaries are eligible to receive awards under the Plan. Under present law, however, incentive stock options may only be granted to employees. No participant may receive any award for more than 500,000 shares in any calendar year. Optionees receive the right to purchase a specified number of shares of our common stock at a specified option price, subject to the terms and conditions of the option grant. We may grant options at an exercise price less than, equal to or greater than the fair market value of our common stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise price less than the fair market value of the common stock on the date of grant, or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company. The Board determines F-15 SYCAMORE NETWORKS, INC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) the term of each option, the option exercise price, and the vesting terms. Stock options generally expire ten years from the date of grant. The Plan permits the Board to determine how optionees may pay the exercise price of their options, including by cash, check or in connection with a "cashless exercise" through a broker, by surrender to us of shares of common stock, by delivery to us of a promissory note, or by any combination of the permitted forms of payment. All employees who have been granted options by the Company under the 1998 Stock Incentive Plan are eligible to elect immediate exercise of all such options. However, shares obtained by employees who elect immediate exercise prior to the original option vesting schedule are subject to the Company's right of repurchase, at the option exercise price, in the event of termination. The Company's repurchase rights lapse at the same rate as the shares would have become exercisable under the original vesting schedule. Deferred Stock Compensation During the period from August 1, 1998 to May 1, 1999, the Company granted stock awards to purchase 3,964,604 shares of its common stock with exercise prices ranging from $.05 to $1.00. The Company recorded deferred compensation and compensation expense relating to these awards totaling $4,869,000 and $261,000, respectively, representing the difference between the deemed fair market value of the common stock on the date of grant and the exercise price. Compensation relating to options which vested immediately upon grant was expensed in full at the date of grant, while compensation related to options which vest over time was recorded as a component of stockholders' deficit and is being amortized over the vesting periods of the related options. Non-Employee Stock Compensation During the nine months ended May 1, 1999, the Company granted 63,500 stock awards to non-employees with an estimated fair value of $322,000. The fair value of each stock option was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: a weighted- average risk free interest rates of 4.5%, a weighted-average expected option life of 3 years, no dividend yield and a 60% volatility. For the nine months ended May 1, 1999, the Company recognized compensation expense of $235,000 related to these options. Stockholder Note Receivable At May 1, 1999, the Company held a note receivable in the amount of $17,500 from a stockholder in consideration for the purchase of common stock. The note is due in February 2004 and is collateralized by the underlying common stock and, consequently, is reflected as a component of stockholders' deficit. Common Stock Purchase Option In March 1999, the Company signed a Purchase and License Agreement (the "Agreement') with a customer to provide certain Company products. Under the terms of the Agreement, the customer also has the right to purchase shares of the Company in the Company's initial public offering ("IPO") of shares on a national exchange to an upper limit equal to the number of shares, which when multiplied by the initial public offering price, equals 5% of the dollar value of the customer's accumulated purchases of the Company's products and services as of the date of the initial public offering, but in no event more than 5% of the shares offered in the IPO. F-16 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses, other than the underwriting discount, payable by the Registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC registration fee................................................ $31,970 NASD filing fee..................................................... 12,000 Nasdaq National Market listing fee.................................. * Printing and engraving expenses..................................... * Legal fees and expenses............................................. * Accounting fees and expenses........................................ * Blue Sky fees and expenses (including legal fees)................... * Transfer agent and registrar fees and expenses...................... * Miscellaneous....................................................... * ------- Total........................................................... * =======
- -------- * To be filed by amendment Item 14. Indemnification of Directors and Officers. Article EIGHTH of the Registrant's Amended and Restated Certificate of Incorporation (the "Restated Certificate") provides that no director of the Registrant shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty. Article NINTH of the Restated Certificate provides that a director or officer of the Registrant (a) shall be indemnified by the Registrant against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Registrant) brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful and (b) shall be indemnified by the Registrant against all expenses (including attorneys' fees) and amounts paid in settlement incurred in connection with any action by or in the right of the Registrant brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Registrant, unless the Court of Chancery of Delaware determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he is required to be indemnified by the Registrant against all expenses (including attorneys' fees) incurred in connection therewith. Expenses shall be advanced to a director or officer at his request, unless it is determined that he did not act in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding had reasonable cause to believe that his conduct was unlawful, provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. II-1 Indemnification is required to be made unless the Registrant determines that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Registrant that the director or officer did not meet the applicable standard of conduct required for indemnification, or if the Registrant fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether such person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Registrant notice of the action for which indemnity is sought and the Registrant has the right to participate in such action or assume the defense thereof. Article NINTH of the Restated Certificate further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers, the Registrant must indemnify those persons to the fullest extent permitted by such law as so amended. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). Reference is made to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto. The Registrant expects to obtain liability insurance for its officers and directors. Item 15. Recent Sales of Unregistered Securities. Since inception, the Registrant has issued the following securities that were not registered under the Securities Act as summarized below. (a) Issuances of Capital Stock. 1. Between February 18, 1998 and October 28, 1998, the Registrant issued and sold pursuant to stock restriction agreements outside of the 1998 Stock Incentive Plan an aggregate of 5,115,604 shares of its common stock for an aggregate purchase price of approximately $158,005. 2. Between February 19, 1998 and October 29, 1998, the Registrant issued and sold an aggregate of 8,961,812 shares of its Series A redeemable convertible preferred stock for an aggregate purchase price of approximately $8,155,249. 3. Between October 26, 1998 and July 31, 1999, the Registrant issued and sold pursuant to stock restriction agreements under the 1998 Stock Incentive Plan an aggregate of 617,500 shares of its common stock for an aggregate purchase price of $353,250. 4. Between December 3, 1998 and February 11, 1999, the Registrant issued and sold an aggregate of 3,607,062 shares of its Series B redeemable convertible preferred stock for an aggregate purchase price of $12,624,717. II-2 5. On March 2, 1999, the Registrant issued and sold an aggregate of 2,500,000 shares of its Series C redeemable convertible preferred stock for an aggregate purchase price of $20,000,000. 6. On July 23, 1999, the Registrant issued and sold an aggregate of 692,201 shares of its Series D redeemable convertible preferred stock for an aggregate price of $14,999,996. (b) Certain Grants and Exercises of Stock Options. 1. From inception through June 30, 1999, the Registrant granted stock options to purchase 1,856,200 shares of common stock at exercise prices ranging from $.05 to $1.00 per share to employees, consultants and directors pursuant to its 1998 Stock Incentive Plan, as amended. 2. From inception through June 30, 1999, the Registrant issued and sold an aggregate of 18,500 shares of its common stock to employees, consultants and directors for aggregate consideration of approximately $6,025 pursuant to exercises of options granted under its 1998 Stock Incentive Plan. No underwriters were involved in any of the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder, or, in the case of options to purchase common stock and sales of restricted common stock, Rule 701 of the Securities Act. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act. II-3 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits:
Exhibit No. Description ------- --------------------------------------------------------------------- *1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Registrant, as amended *3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed prior to the closing of this offering 3.3 By-Laws of the Registrant *3.4 Form of Amended and Restated By-Laws of the Registrant, to be effective upon the closing of this offering *4.1 Specimen common stock certificate 4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Registrant 4.3 Second Amended and Restated Investor Rights Agreement dated February 26, 1999, as amended by Amendment No. 1 dated July 23, 1999 *5.1 Opinion of Hale and Dorr LLP 10.1 1998 Stock Incentive Plan, as amended *10.2 1999 Non-Employee Directors' Option Plan +10.3 Purchase and License Agreement between Sycamore and Williams Communications, Inc. 10.4 Letter Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.5 Inventory and Accounts Receivable Security Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.6 Supplementary Security Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.7 Lease dated as of December 21, 1998 between BerCar II LLC, a Massachusetts limited liability company and the Company regarding 10 Elizabeth Drive, Chelmsford, MA *10.8 1999 Stock Incentive Plan 23.1 Consent of PricewaterhouseCoopers LLP *23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (see page II-5) 27.1 Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission. (b) Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Item 17. Undertakings. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the registrant pursuant to the Delaware General Corporation Law, the Restated Certificate of the registrant, the Underwriting Agreement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purpose of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purpose of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Chelmsford, Massachusetts, on this 6th day of August, 1999. SYCAMORE NETWORKS, INC. By: /s/ Daniel E. Smith ---------------------------------- Daniel E. Smith President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers, directors and authorized representatives of Sycamore Networks, Inc. hereby severally constitute and appoint Gururaj Deshpande, Daniel E. Smith and Frances M. Jewels, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, with full powers of substitution and resubstitution, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S- 1 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement, and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b), and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable Sycamore Networks, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, or their substitute or substitutes, to said Registration Statement and any and all amendments thereto or to any subsequent Registration Statement for the same offering which may be filed under Rule 462(b). Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities set forth below on August 6, 1999. Signature Title /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/ Fances M. Jewels Chief Financial Officer, Vice President, - ----------------------------------- Finance and Administration, Secretary and Frances M. Jewels Treasurer /s/ Timothy Barrows Director - ----------------------------------- Timothy Barrows /s/ Paul Ferri Director - ----------------------------------- Paul J. Ferri
II-6 EXHIBIT INDEX
Exhibit No. Description ------- --------------------------------------------------------------------- *1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Registrant, as amended *3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed prior to the closing of this offering 3.3 By-Laws of the Registrant *3.4 Form of Amended and Restated By-Laws of the Registrant, to be effective upon the closing of this offering *4.1 Specimen common stock certificate 4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Registrant 4.3 Second Amended and Restated Investor Rights Agreement dated February 26, 1999, as amended by Amendment No. 1 dated July 23, 1999 *5.1 Opinion of Hale and Dorr LLP 10.1 1998 Stock Incentive Plan, as amended *10.2 1999 Non-Employee Directors' Option Plan +10.3 Purchase and License Agreement between Sycamore and Williams Communications, Inc. 10.4 Letter Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.5 Inventory and Accounts Receivable Security Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.6 Supplementary Security Agreement between Sycamore and Fleet National Bank dated April 22, 1999 10.7 Lease dated as of December 21, 1998 between BerCar II LLC, a Massachusetts limited liability company and the Company regarding 10 Elizabeth Drive, Chelmsford, MA *10.8 1999 Stock Incentive Plan 23.1 Consent of PricewaterhouseCoopers LLP *23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (see page II-5) 27.1 Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission. EX-3.1 2 CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF SYCAMORE NETWORKS, INC. FIRST. The name of the Corporation is: Sycamore Networks, Inc. SECOND. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 22,500,000 shares, consisting of (i) 15,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii) 7,500,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. COMMON STOCK. ------------ 1. General. The voting, dividend and liquidation rights of the holders ------- of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware . 3. Dividends. Dividends may be declared and paid on the Common Stock --------- from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. PREFERRED STOCK. --------------- 1. Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. -2- FIFTH. The name and mailing address of the sole incorporator are as follows: NAME MAILING ADDRESS ---- --------------- Mark G. Borden 60 State Street Boston, MA 02109 SIXTH. In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws of the Corporation. SEVENTH. Except to the extent that the General Corporation Law of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. EIGHTH. The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by or on behalf of an Indemnitee in connection with such action, suit or proceeding and any appeal therefrom. As a condition precedent to his right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving him for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its -3- own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. In the event that the Corporation does not assume the defense of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, the Corporation shall pay in advance of the final disposition of such matter any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom; provided, however, that the payment of -------- ------- such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article, which undertaking shall be accepted without reference to the financial ability of the Indemnitee to make such repayment; and further provided that no such advancement of expenses shall ------- -------- be made if it is determined that (i) the Indemnitee did not act in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, or (ii) with respect to any criminal action or proceeding, the Indemnitee had reasonable cause to believe his conduct was unlawful. The Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. In addition, the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund such indemnification payments to the Corporation to the extent of such insurance reimbursement. All determinations hereunder as to the entitlement of an Indemnitee to indemnification or advancement of expenses shall be made in each instance by (a) a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the action, suit or proceeding in question ("disinterested directors"), whether or not a quorum, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit or proceeding in question, (c) independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation), or (d) a court of competent jurisdiction. The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which an Indemnitee may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and -4- (ii) shall inure to the benefit of the heirs, executors and administrators of the Indemnitees. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. NINTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. EXECUTED at Boston, Massachusetts, on February 17, 1998. /s/ Mark G. Borden -------------------- Mark G. Borden Incorporator -5- Certificate of Designations of the Preferred Stock of Sycamore Networks, Inc. To be Designated Series A Convertible Preferred Stock -------------------------------------------------- Sycamore Networks, Inc., a Delaware corporation (the "Corporation"), pursuant to authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, certifies that the Board of Directors of the Corporation duly adopted the following resolution: RESOLVED: That, pursuant to the authority expressly granted to and vested -------- in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be and hereby is established, consisting of 5,830,000 shares, to be designated "Series A Convertible Preferred Stock" (hereinafter "Series A Preferred Stock"); that the Board of Directors be and hereby is authorized to issue such shares of Series A Preferred Stock from time to time and for such consideration and on such terms as the Board of Directors shall determine; and that, subject to the limitations provided by law and by the Certificate of Incorporation, the powers, designations, preferences and relative, participating, optional or other special rights of, and the qualifications, limitations or restrictions upon, the Series A Preferred Stock shall be as follows: 1. Dividends. --------- (a) The Corporation shall not declare or pay any dividends or distributions (as defined below) on shares of Common Stock until the holders of the Series A Preferred Stock then outstanding shall have first received, or simultaneously receive, a like distribution on each outstanding share of Series A Preferred Stock, in an amount at least equal to the product of (i) the per share amount, if any, of the dividends or distributions to be declared, paid or set aside for the Common Stock, multiplied by (ii) the number of whole shares of Common Stock into which such share of Series A Preferred Stock is convertible as of the record date for such dividend or distribution. (b) For purposes of this Section 1, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock or other securities of the Corporation, or the purchase or redemption of shares of the Corporation (other than repurchases of Common Stock held by employees or directors of, or consultants to, the Corporation upon termination of their employment or services pursuant to agreements approved by the Board of Directors providing for such repurchase at a price equal to the original issue price of such shares) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. 2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations ----------------------------------------------------------------------- and Asset Sales. --------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock, but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Series A Preferred Stock by reason of their ownership thereof, an amount equal to $0.91 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid on such shares. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series A Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Series A Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of any class or series of stock of the Corporation ranking on liquidation prior to and in preference to the Common Stock, upon the dissolution, liquidation or winding up of the Corporation, the remaining assets and funds of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock. (c) Any (i) merger or consolidation which results in the voting securities of the Corporation outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than a majority of the combined voting power of the voting securities of the Corporation or such surviving or acquiring entity outstanding immediately after such merger or consolidation, -2- (ii) sale of all or substantially all of the assets of the Corporation or (iii) sale of shares of capital stock of the Corporation, in a single transaction or series of related transactions, representing at least 80% of the of the voting power of the voting securities of the Corporation, shall be deemed to be a liquidation of the Corporation, and all consideration payable to the stockholders of the Corporation (in the case of a merger or consolidation), or all consideration payable to the Corporation (net of obligations owed by the Corporation), together with all other available assets of the Corporation (in the case of an asset sale), shall be distributed to the holders of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the holders of shares of Series A Preferred Stock such information concerning the terms of such merger, consolidation or asset sale and the value of the assets of the Corporation as may reasonably be requested by the holders of Series A Preferred Stock. If applicable, the Corporation shall cause the agreement or plan of merger or consolidation to provide for a rate at which the shares of capital stock of the Corporation are converted into or exchanged for cash, new securities or other property which gives effect to this provision. The amount deemed distributed to the holders of Series A Preferred Stock upon any such merger or consolidation shall be the cash or the value of the property, rights or securities distributed to such holders by the Corporation and/or by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) Each holder of outstanding shares of Series A Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof) as of the record date, at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of Section 3(b) or Section 7 below or by the provisions establishing any other series of stock, holders of Series A Preferred Stock and of any other outstanding series of stock shall vote together with the holders of Common Stock as a single class. (b) For so long as at least 1,375,000 shares of Series A Preferred Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) are outstanding (or such lesser number of shares of Series A Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred Stock when such redemption was due in accordance with Section 6 below), the holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect two members of the Board of Directors of the -3- Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Series A Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock for the purpose of electing directors by holders of the Series A Preferred Stock. A vacancy in any directorship filled by the holders of Series A Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series A Preferred Stock . 4. Optional Conversion. The holders of the Series A Preferred Stock ------------------- shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock shall be ---------------- convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.91 by the Conversion Price (as defined below) in effect at the time of conversion. The "Conversion Price" shall initially be $0.91. Such Conversion Price, and the rate at which shares of Series A Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a notice of redemption of any shares of Series A Preferred Stock pursuant to Section 6 hereof, the Conversion Right of the shares designated for redemption shall terminate at the close of business on the first full day preceding the date fixed for redemption, unless the redemption price is not paid when due, in which case the Conversion Right for such shares shall continue until such price is paid in full. In the event of a liquidation of the Corporation (or deemed liquidation under Section 2(c) hereof), the Conversion Right shall terminate at the close of business on the first full business day preceding the date fixed for the payment of any amounts distributable on liquidation (or deemed liquidation under Section 2(c) hereof) to the holders of Series A Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. (c) Mechanics of Conversion. ----------------------- (i) In order for a holder of Series A Preferred Stock to convert shares of Series A Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series A Preferred Stock, at the office of the transfer agent for the Series A Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares -4- of the Series A Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series A Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Series A Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series A Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. (iii) Upon any such conversion, no adjustment to the Conversion Price shall be made for any declared but unpaid dividends on the Series A Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Series A Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any dividends declared but unpaid thereon. Any shares of Series A Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock accordingly. (v) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of -5- Common Stock upon conversion of shares of Series A Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (d) Adjustments to Conversion Price for Diluting Issues: --------------------------------------------------- (i) Special Definitions. For purposes of this Subsection 4(d), ------------------- the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "Original Issue Date" shall mean the date on which a ------------------- share of Series A Preferred Stock was first issued. (C) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares --------------------------------- of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than: (I) shares of Common Stock issued or issuable as a dividend or other distribution on Series A Preferred Stock; (II) shares of Common Stock issued or issuable by reason of a dividend or other distribution on shares of Common Stock that is covered by Subsection 4(e) or 4(f) below; (III) shares of Common Stock issued or issuable upon conversion of those shares of Series A Preferred Stock sold pursuant to the Series A Preferred Stock Purchase Agreement dated as of February 19, 1998, as the same may be amended from time to time; -6- (IV) up to 2,525,000 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee members of the Board of Directors of the Corporation, issued or issuable to employees or directors of, or consultants to, the Corporation; and (V) shares of Common Stock issued to equipment lessors, as approved by a majority of the non-employee members of the Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. No adjustment in the --------------------------------- number of shares of Common Stock into which the Series A Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred Stock, agreeing that no such adjustment shall be made as the result of the issuance of Additional Shares of Common Stock. (iii) Issue of Securities Deemed Issue of Additional Shares ---------------------------------------------- ------ of Common Stock. --------------- If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of and immediately prior to -7- such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Conversion Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Conversion Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti- dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to clause (B) or (D) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. In the event the Corporation, after the Original Issue Date, amends any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date) to increase the number of shares issuable thereunder or decrease the consideration to be paid upon exercise or conversion thereof, then such Options or -8- Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply. (iv) Adjustment of Conversion Price Upon Issuance of Additional -------------------------------------------- ------------- Shares of Common Stock. ---------------------- In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (v) Determination of Consideration. For purposes of this Subsection ------------------------------ 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and -9- (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Multiple Closing Dates. In the event the Corporation shall ---------------------- issue on more than one date Additional Shares of Common Stock which are comprised of shares of the same series or class of Convertible Securities, and such issuance dates occur within a period of no more than 120 days, then, upon the final such issuance, the Conversion Price shall be adjusted to give effect to all such issuances as if they occurred on the date of the final such issuance (and without giving effect to any adjustments as a result of such prior issuances within such period). (e) Adjustment for Stock Splits and Combinations. If the Corporation -------------------------------------------- shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. -10- (f) Adjustment for Certain Dividends and Distributions. In the event -------------------------------------------------- the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series A Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for the Series A Preferred Stock then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series A Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for the Series A Preferred Stock shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of Series A Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series A Preferred Stock had been converted into Common Stock on the date of such event. (g) Adjustments for Other Dividends and Distributions. In the event ------------------------------------------------- the Corporation at any time or from time to time after the Original Issue Date for the Series A Preferred Stock shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving -11- application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of the Series A Preferred Stock; and provided further, however, that no such adjustment shall be made if the holders of Series A Preferred Stock simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all outstanding shares of Series A Preferred Stock had been converted into Common Stock on the date of such event. (h) Adjustment for Reclassification, Exchange, or Substitution. If --------------------------------------------- ------------ the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Series A Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (i) Adjustment for Merger or Reorganization, etc. In case of any -------------------------------------------- consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a consolidation, merger or sale which is covered by Subsection 2(c)), each share of Series A Preferred Stock shall thereafter be convertible (or shall be converted into a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series A Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Series A Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A Preferred Stock. (j) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to -12- be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. (k) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series A Preferred Stock. (l) Notice of Record Date. In the event: --------------------- (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Series A Preferred Stock, and shall cause to be mailed to the holders of the Series A Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten days prior to the date specified in (A) below or twenty days before the date specified in (B) below, a notice stating -13- (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. 5. Mandatory Conversion. -------------------- (a) Upon the earlier of (x) the closing of the sale of shares of Common Stock, at a price of at least $5.00 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of proceeds to the Corporation (net of the underwriting discounts or commissions and offering expenses) and (y) the first date on which at least 3,750,000 shares of Series A Preferred Stock have been converted into Common Stock pursuant to Section 5 above (the "Mandatory Conversion Date"), (i) all outstanding shares of Series A Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate, and (ii) all provisions hereof included under the caption "Series A Convertible Preferred Stock", and all references herein to the Series A Preferred Stock, shall be deleted and shall be of no further force or effect. (b) All holders of record of shares of Series A Preferred Stock shall be given written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Series A Preferred Stock, pursuant to this Section 5. Such notice need not be given in advance of the occurrence of a Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Series A Preferred Stock at such holder's address last shown on the records of the transfer agent for the Series A Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Series A Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date, all rights -14- with respect to the Series A Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock) will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Series A Preferred Stock has been converted, and payment of any declared but unpaid dividends thereon. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Date and the surrender of the certificate or certificates for Series A Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Series A Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Series A Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized Series A Preferred Stock accordingly. 6. Redemption. ---------- (a) The Corporation will, subject to the conditions set forth below, on February 15, 2003, February 15, 2004 and February 15, 2005 (each, a "Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120 days prior to the applicable Mandatory Redemption Date of written request(s) for redemption from holders of at least 66 2/3% of the shares of Series A Preferred Stock then outstanding (a "Series A Redemption Request"), redeem from each holder of shares of Series A Preferred Stock, at a price equal to $0.91 per share (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared but unpaid dividends thereon (the "Mandatory Redemption Price"), the following respective portions of the number of shares of Series A Preferred Stock held by such holder set forth opposite the applicable Mandatory Redemption Date: -15- Portion of then Outstanding Shares of Mandatory Series A Preferred Stock Redemption Date To Be Redeemed --------------- ------------------------ February 15, 2003 33 1/3% February 15, 2004 50% February 15, 2005 All Shares then held The Corporation shall provide notice of its redemption obligations under this Section 6, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 120 nor more than 180 days prior to the applicable Mandatory Redemption Date. The Corporation shall provide notice of any Series A Redemption Request, specifying the time and place of redemption and the Mandatory Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 20 days prior to the Mandatory Redemption Date. (b) If the funds of the Corporation legally available for redemption of Series A Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the number of shares of Series A Preferred Stock required under this Section 6 to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares of Series A Preferred Stock ratably on the basis of the number of shares of Series A Preferred Stock which would be redeemed on such date if the funds of the Corporation legally available therefor had been sufficient to redeem all shares of Series A Preferred Stock required to be redeemed on such date. At any time thereafter when additional funds of the Corporation become legally available for the redemption of Series A Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem, to the extent of the available funds, the balance of the shares which the Corporation was theretofore obligated to redeem. (c) Unless there shall have been a default in payment of the Mandatory Redemption Price, on such Mandatory Redemption Date all rights of each holder of shares of Series A Preferred Stock as a stockholder of the Corporation by reason of the ownership of such shares will cease, except the right to receive the Mandatory Redemption Price for such shares, without interest, upon presentation and surrender of the certificate representing such shares, and such shares will not from and after such Mandatory Redemption Date be deemed to be outstanding. -16- (d) Any Series A Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock accordingly. 7. Negative Covenants. ------------------ (a) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. For this purpose, without limiting the generality of the foregoing, the authorization of any shares of capital stock with preference or priority over the Series A Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall be deemed to affect adversely the Series A Preferred Stock and the authorization of any shares of capital stock on a parity with Series A Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall not be deemed to affect adversely the Series A Preferred Stock. (b) So long as at least 1,375,000 shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares) are outstanding (or such lesser number of shares of Series A Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred Stock when such redemption was due in accordance with Section 6 above), the Corporation shall not, without the prior written consent of the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred Stock: (i) adopt any amendment to the Corporation's Certificate of Incorporation adversely affecting the Series A Preferred Stock; (ii) amend the Corporation's By-laws in a manner adverse to the holders of Series A Preferred Stock; (iii) declare or pay any dividends on Common Stock other than dividends payable solely in Common Stock; (iv) repurchase shares of Common Stock at a price greater than the price at which they were originally issued; -17- (v) liquidate, dissolve or wind-up the Corporation; (vi) make (or permit any subsidiary to make) any loan or advance to any person, including without limitation, any employee or director of the Corporation or any subsidiary, except (A) advances and similar expenditures in the ordinary course of business or (B) as approved by the Board of Directors; or (vii) (A) merge with or into or consolidate with any other corporation (other than a merger of consolidation in which the stockholders of the Company immediately prior thereto own at least 80% of the outstanding voting stock of the surviving or acquiring corporation), (B) sell, lease, or otherwise dispose of all or substantially all, or a Significant Portion (as defined below), of its properties or assets (for this purpose, "Significant Portion" shall mean properties or assets with a fair market value equal to more than 35% of the book value of the Company's total properties or assets as of the end of the most recent fiscal quarter), or (C) acquire all or substantially all of the properties or assets of any other corporation or entity (except for consideration of less than 20% of the Corporation's consolidated net worth as of the end of the prior fiscal quarter. 8. Waiver. Any of the rights of the holders of Series A Preferred Stock ------ set forth herein may be waived by the affirmative vote of the holders of more than 66 2/3% of the shares of Series A Preferred Stock then outstanding. -18- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations to be signed by its President this 19th day of February, 1998. Sycamore Networks, Inc. By: /s/ Gururaj Deshpande ------------------------------ Gururaj Deshpande President -19- CERTIFICATE OF INCREASE TO CERTIFICATE OF DESIGNATIONS OF SYCAMORE NETWORKS, INC. March 31, 1998 Sycamore Networks, Inc., a Delaware corporation (the "Corporation"), pursuant to authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation and in accordance with the provisions of Section 151(g) of the general Corporation Law of the State of Delaware, certifies that the Board of Directors of the Corporation has duly adopted the following resolution: RESOLVED: That the number of shares of Preferred Stock of the Corporation - -------- designated as "Series A Convertible Preferred Stock" be, and hereby is, increased from 5,830,000 shares to 6,380,000 shares, and the Certificate of Designations designating the Series A Convertible Preferred Stock is hereby amended accordingly. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Increase to be signed by its President on this 31st day of March, 1998. SYCAMORE NETWORKS, INC. By: /s/ Gururaj Deshpande -------------------------------- Gururaj Deshpande President CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYCAMORE NETWORKS, INC. Pursuant to Section 242 of the General Corporation Law of the State of Delaware ________________________________________________________________________________ Sycamore Networks, Inc. (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: At a meeting of the Board of Directors of the Corporation, a resolution was duly adopted pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. The resolution setting forth the amendment is as follows: RESOLVED: That the first paragraph of Article FOURTH of the Certificate of - -------- Incorporation of the Corporation be and hereby is deleted and the following paragraph is inserted in lieu thereof: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 29,500,000 shares, consisting of (i) 20,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii) 9,500,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock")." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its President this 19 of October, 1998. SYCAMORE NETWORKS, INC. By: /s/ Gururaj Deshpande ------------------------------- Gururaj Deshpande President -2- CERTIFICATE OF INCREASE TO CERTIFICATE OF DESIGNATIONS OF SYCAMORE NETWORKS, INC. October 19, 1998 Sycamore Networks, Inc., a Delaware corporation (the "Corporation"), pursuant to authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation and in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, certifies that the Board of Directors of the Corporation has duly adopted the following resolution: RESOLVED: That the number of shares of Preferred Stock of the Corporation - -------- designated as "Series A Convertible Preferred Stock" be, and hereby is, increased from 6,380,000 shares to 9,155,000 shares, and the Certificate of Designations designating the Series A Convertible Preferred Stock is hereby amended accordingly. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Increase to be signed by its President on this 19 day of October, 1998. SYCAMORE NETWORKS, INC. By: /s/ Gururaj Deshpande ----------------------------------- Gururaj Deshpande President CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYCAMORE NETWORKS,INC. Sycamore Networks, Inc. (the "Corporation"), organized and existing under and by virtue of the General Law of the State of Delaware, does hereby certify as follows: The Board of Directors of the Corporation duly adopted, pursuant to Section 242 of the General Corporation Law of Delaware, a resolution setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Section 242 of the General Corporation Law of the State of Delaware by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendment. The resolution setting forth the amendment is as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of -------- the Corporation be and hereby is deleted in its entirety and the following Article FOURTH is inserted in lieu thereof: FOURTH: The total number of shares of all classes of stock which the ------ Corporation shall have authority to issue is 40,000,000 shares, consisting of (i) 25,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii) 15,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), 9,155,000 shares of which have been designated as Series A Convertible Preferred Stock ("Series A Preferred Stock") and 4,000,000 shares of which have been designated as Series B Convertible Preferred Stock ("Series B Preferred Stock"). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. Common Stock. ------------ 1.General. The voting, dividend and liquidation rights of the holders of ------- the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2.Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. 3.Dividends. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4.Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the -2- creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. C. Series A Preferred Stock and Series B Preferred Stock. ----------------------------------------------------- 1. Dividends. --------- (a) The Corporation shall not declare or pay any dividends or distributions (as defined below) on shares of Common Stock until the holders of the Series A Preferred Stock and the Series B Preferred Stock then outstanding shall have first received, or simultaneously receive, a like distribution on each outstanding share of Series A Preferred Stock and Series B Preferred Stock, in an amount at least equal to the product of (i) the per share amount, if any, of the dividends or distributions to be declared, paid or set aside for the Common Stock, multiplied by (ii) the number of whole shares of Common Stock into which such share of Series A Preferred Stock or Series B Preferred Stock, as the case may be, is convertible as of the record date for such dividend or distribution. (b) For purposes of this Section 1, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock or other securities of the Corporation, or the purchase or redemption of shares of the Corporation (other than repurchases of Common Stock held by employees or directors of, or consultants to, the Corporation upon termination of their employment or services pursuant to agreements approved by the Board of Directors providing for such repurchase at a price equal to the original issue price of such shares) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. -3- 2. Liquidation, Dissolution or Winding Up; Certain Mergers, ------------------------------------------------------- Consolidations and Asset Sales. - ------------------------------ (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Preferred Stock and Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock and the Series B Preferred Stock, but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Series A Preferred Stock and the Series B Preferred Stock by reason of their ownership thereof, an amount equal to $0.91 per share in the case of the Series A Preferred Stock and $3.50 per share in the case of the Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid on such shares. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock and Series B Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series A Preferred Stock and Series B Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Series A Preferred Stock and Series B Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of any class or series of stock of the Corporation ranking on liquidation prior to and in preference to the Common Stock, upon the dissolution, liquidation or winding up of the Corporation, the remaining assets and funds of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock. (c) Any (i) merger or consolidation which results in the voting securities of the Corporation outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than a majority of the combined voting power of the voting securities of the Corporation or such surviving or acquiring entity outstanding immediately after such merger or consolidation, (ii) sale of all or substantially all of the assets of the Corporation or (iii) sale of shares of capital stock of the Corporation, in a single transaction or series of related -4- transactions, representing at least 80% of the of the voting power of the voting securities of the Corporation, shall be deemed to be a liquidation of the Corporation, and all consideration payable to the stockholders of the Corporation (in the case of a merger or consolidation), or all consideration payable to the Corporation (net of obligations owed by the Corporation), together with all other available assets of the Corporation (in the case of an asset sale), shall be distributed to the holders of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the holders of shares of Series A Preferred Stock and Series B Preferred Stock such information concerning the terms of such merger, consolidation or asset sale and the value of the assets of the Corporation as may reasonably be requested by the holders of Series A Preferred Stock and Series B Preferred Stock. If applicable, the Corporation shall cause the agreement or plan of merger or consolidation to provide for a rate at which the shares of capital stock of the Corporation are converted into or exchanged for cash, new securities or other property which gives effect to this provision. The amount deemed distributed to the holders of Series A Preferred Stock and Series B Preferred Stock upon any such merger or consolidation shall be the cash or the value of the property, rights or securities distributed to such holders by the Corporation and/or by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) Each holder of outstanding shares of Series A Preferred Stock and Series B Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock and Series B Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof) as of the record date, at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of Section 3(b) or Section 7 below or by the provisions establishing any other series of stock, holders of Series A Preferred Stock and Series B Preferred Stock and of any other outstanding series of stock shall vote together with the holders of Common Stock as a single class. (b) For so long as at least 1,375,000 shares of Series A Preferred Stock and Series B Preferred Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) are outstanding (or such lesser number of shares of Series A Preferred Stock and Series B Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred Stock and Series B Preferred Stock when such redemption was due in accordance with Section 6 below), the holders of record of the shares of Series A Preferred Stock and Series B Preferred Stock, -5- exclusively and as a separate class, shall be entitled to elect two members of the Board of Directors of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Series A Preferred Stock and Series B Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock and the Series B Preferred Stock for the purpose of electing directors by holders of the Series A Preferred Stock and the Series B Preferred Stock. A vacancy in any directorship filled by the holders of Series A Preferred Stock and Series B Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series A Preferred Stock and the Series B Preferred Stock. 4. Optional Conversion. The holders of the Series A Preferred Stock and ------------------- Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock shall ---------------- be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.91 by the Series A Conversion Price (as defined below) in effect at the time of conversion. The "Series A Conversion Price" shall initially be $0.91. Such Series A Conversion Price, and the rate at which shares of Series A Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $3.50 by the Series B Conversion Price (as defined below) in effect at the time of conversion. The "Series B Conversion Price" shall initially be $3.50. Such Series B Conversion Price, and the rate at which shares of Series B Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a notice of redemption of any shares of Series A Preferred Stock or Series B Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the first full day preceding the date fixed for redemption, unless the redemption price is not paid when due, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation of the Corporation (or deemed liquidation under Section 2(c) hereof), the Conversion Rights shall terminate at the close of business on the first full business day preceding the date fixed for the payment of any amounts distributable on liquidation (or deemed liquidation under Section 2(c) hereof) to the holders of such series of Preferred Stock. -6- (b) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of the Series A Preferred Stock or the Series B Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Series A Conversion Price or Series B Conversion Price, as the case may be. (c) Mechanics of Conversion. ----------------------- (i) In order for a holder of Series A Preferred Stock or Series B Preferred Stock to convert shares of Series A Preferred Stock or Series B Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock, at the office of the transfer agent for such shares of Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series A Preferred Stock or Series B Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series A Preferred Stock or Series B Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Series A Preferred Stock or the Series B Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series A Preferred Stock and the Series B Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Stock and Series B Preferred Stock. Before taking any action which would cause an adjustment reducing the Series A Conversion Price or the Series B Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock or the Series B Preferred Stock, as the case may be, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Series A Conversion Price or Series B Conversion Price. -7- (iii) Upon any such conversion, no adjustment to the Series A Conversion Price or the Series B Conversion Price shall be made for any declared but unpaid dividends on the Series A Preferred Stock or the Series B Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Series A Preferred Stock or Series B Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any dividends declared but unpaid thereon. Any shares of Series A Preferred Stock or Series B Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock or Series B Preferred Stock accordingly. (v) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series A Preferred Stock or Series B Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock or Series B Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (d) Adjustments to Conversion Price for Diluting Issues: --------------------------------------------------- (i) Special Definitions. For purposes of this Subsection ------------------- 4(d), the following definitions shall apply: (A) "Option" shall mean rights, options or ------ warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "Original Issue Date" shall mean the date on ------------------- which a share of Series A Preferred Stock was first issued. (C) "Convertible Securities" shall mean any ---------------------- evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. -8- (D) "Additional Shares of Common Stock" shall --------------------------------- mean all shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than: (I) shares of Common Stock issued or issuable as a dividend or other distribution on Series A Preferred Stock or Series B Preferred Stock; (II) shares of Common Stock issued or issuable by reason of a dividend or other distribution on shares of Common Stock that is covered by Subsection 4(e) or 4(f) below; (III) shares of Common Stock issued or issuable upon conversion of those shares of (1) Series A Preferred Stock sold pursuant to the Series A Preferred Stock Purchase Agreement dated as of February 19, 1998, as the same may be amended from time to time and (2) Series B Preferred Stock sold pursuant to the Series B Preferred Stock Purchase Agreement dated as of December 3, 1998, as the same may be amended from time to time; (IV) up to 4,025,000 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee members of the Board of Directors of the Corporation, issued or issuable to employees or directors of, or consultants to, the Corporation; and (V) shares of Common Stock issued to equipment lessors, as approved by a majority of the non-employee members of the Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. No adjustment in the --------------------------------- number of shares of Common Stock into which the Series A Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to -9- be issued by the Corporation is less than the applicable Series A Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series B Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series B Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least 66 2/3% of the then outstanding shares of Series B Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. (iii) Issue of Securities Deemed Issue of Additional Shares ----------------------------------------------------- of Common Stock. - --------------- If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that (x) for the purpose of adjusting the Series A Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series A Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and (y) for the purpose of adjusting the Series B Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series B Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Series A Conversion Price or the Series B Conversion Price shall be made upon subsequent issue of Convertible -10- Securities or shares of Common Stock upon exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, upon the exercise, conversion or exchange thereof, the Series A Conversion Price and the Series B Conversion Price, as applicable, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Series A Conversion Price and the Series B Conversion Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Series A Conversion Price or the Series B Conversion Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Series A Conversion Price and the Series B Conversion Price then in effect shall forthwith be readjusted to such Series A Conversion Price and the Series B Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to clause (B) or (D) above shall have the effect of increasing the Series A Conversion Price or the Series B Conversion Price to an amount which exceeds the lower of (i) the Series A Conversion Price or the Series B Conversion Price, as the case may be, on the original adjustment date, or (ii) the Series A Conversion Price or the Series B Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. In the event the Corporation, after the Original Issue Date, amends any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date) to increase the number of shares issuable thereunder or decrease the consideration to be paid upon exercise or conversion thereof, then such Options or -11- Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply. (iv) Adjustment of Conversion Price Upon Issuance of ----------------------------------------------- Additional Shares of Common Stock. - --------------------------------- (A) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series A Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series A Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (B) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration -12- received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series B Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose ------------- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (v) Determination of Consideration. For purposes of this ------------------------------ Subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The ---------------------------------- consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) -13- payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Multiple Closing Dates. In the event the Corporation ---------------------- shall issue on more than one date Additional Shares of Common Stock which are comprised of shares of the same series or class of Convertible Securities, and such issuance dates occur within a period of no more than 120 days, then, upon the final such issuance, the Series A Conversion Price and the Series B Conversion Price shall be adjusted to give effect to all such issuances as if they occurred on the date of the final such issuance (and without giving effect to any adjustments as a result of such prior issuances within such period). (e) Adjustment for Stock Splits and Combinations. If the Corporation -------------------------------------------- shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Series A Conversion Price and the Series B Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Series A Conversion Price and the Series B Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. In the event -------------------------------------------------- the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Series A Conversion Price and the Series B Conversion Price for the Series A Preferred Stock or the Series B Preferred Stock, as the case may be, then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price and the Series B Conversion Price for the Series A Preferred Stock or the Series B Preferred Stock, as the case may be, then in effect by a fraction: -14- (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price and the Series B Conversion Price for the Series A Preferred Stock or the Series B Preferred Stock, as the case may be, shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price or the Series B Conversion Price, as the case may be, shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of Series A Preferred Stock or Series B Preferred Stock, as the case may be, simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series A Preferred Stock or Series B Preferred Stock, as the case may be, had been converted into Common Stock on the date of such event. (g) Adjustments for Other Dividends and Distributions. In the event ------------------------------------------------- the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series A Preferred Stock or the Series B Preferred Stock, as the case may be, shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Series A Preferred Stock or the Series B Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of the Series A Preferred Stock or the Series B Preferred Stock, as the case may be; and provided further, however, that no such adjustment shall be made if the holders of Series A Preferred Stock or Series B Preferred Stock, as the case may be, simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all -15- outstanding shares of Series A Preferred Stock or Series B Preferred Stock had been converted into Common Stock on the date of such event. (h) Adjustment for Reclassification, Exchange, or Substitution. If ---------------------------------------------------------- the Common Stock issuable upon the conversion of the Series A Preferred Stock and the Series B Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Series A Preferred Stock and Series B Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock and Series B Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (i) Adjustment for Merger or Reorganization, etc. In case of any -------------------------------------------- consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a consolidation, merger or sale which is covered by Subsection 2(c)), each share of Series A Preferred Stock and Series B Preferred Stock shall thereafter be convertible (or shall be converted into a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series A Preferred Stock and Series B Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Series A Preferred Stock and the Series B Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series A Conversion Price and the Series B Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A Preferred Stock and the Series B Preferred Stock, as the case may be. (j) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking -16- of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock and the Series B Preferred Stock against impairment. (k) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Series A Conversion Price or the Series B Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock or Series B Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock or Series B Preferred Stock furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price or the Series B Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series A Preferred Stock or Series B Preferred Stock, as the case may be. (l) Notice of Record Date. In the event: --------------------- (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Series A Preferred Stock and the Series B Preferred Stock, and shall cause to be mailed to the holders of the Series A Preferred Stock and the Series B Preferred Stock at their last addresses as shown on the records of the -17- Corporation or such transfer agent, at least ten days prior to the date specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. 5. Mandatory Conversion. -------------------- (a) Upon the earlier of (x) the closing of the sale of shares of Common Stock, at a price of at least $10.50 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of proceeds to the Corporation (net of the underwriting discounts or commissions and offering expenses) and (y) the first date on which at least 8,300,000 shares of Series A Preferred Stock and Series B Preferred Stock have been converted into Common Stock pursuant to Section 4 above (the "Mandatory Conversion Date"), (i) all outstanding shares of Series A Preferred Stock and Series B Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate, and (ii) all provisions hereof included under the captions "Series A Convertible Preferred Stock" and "Series B Convertible Preferred Stock," and all references herein to the Series A Preferred Stock and the Series B Preferred Stock, shall be deleted and shall be of no further force or effect. (b) All holders of record of shares of Series A Preferred Stock and Series B Preferred Stock shall be given written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Series A Preferred Stock and Series B Preferred Stock, pursuant to this Section 5. Such notice need not be given in advance of the occurrence of a Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Series A Preferred Stock and Series B Preferred Stock at such holder's address last shown on the records of the transfer agent for the Series A Preferred Stock and the Series B Preferred Stock (or the records of the -18- Corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Series A Preferred Stock and Series B Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date, all rights with respect to the Series A Preferred Stock and the Series B Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock) will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Series A Preferred Stock or Series B Preferred Stock, as the case may be, has been converted, and payment of any declared but unpaid dividends thereon. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Date and the surrender of the certificate or certificates for Series A Preferred Stock or Series B Preferred Stock, as the case may be, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Series A Preferred Stock or Series B Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Series A Preferred Stock or Series B Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized Series A Preferred Stock and Series B Preferred Stock accordingly. 6. Redemption. ---------- (a) The Corporation will, subject to the conditions set forth below, on February 15, 2003, February 15, 2004 and February 15, 2005 (each, a "Series A Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120 days prior to the applicable Series A Mandatory Redemption Date of written request(s) for redemption from holders of at least 66 2/3% of the shares of Series A Preferred Stock then outstanding (a "Series A Redemption Request"), redeem from each holder of shares of Series A Preferred Stock, at a price equal to $0.91 per share (subject to -19- appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared but unpaid dividends thereon (the "Series A Mandatory Redemption Price"), the following respective portions of the number of shares of Series A Preferred Stock held by such holder set forth opposite the applicable Series A Mandatory Redemption Date:
Portion of then Outstanding Shares of Series A Mandatory Series A Preferred Stock Redemption Date To Be Redeemed --------------- ------------------------ February 15, 2003 33 1/3% February 15, 2004 50% February 15, 2005 All Shares then held
The Corporation shall provide notice of its redemption obligations under this Section 6, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 120 nor more than 180 days prior to the applicable Series A Mandatory Redemption Date. The Corporation shall provide notice of any Series A Redemption Request, specifying the time and place of redemption and the Series A Mandatory Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 20 days prior to the Series A Mandatory Redemption Date. (b) The Corporation will, subject to the condition set forth below, on December 3, 2003, December 3, 2004 and December 3, 2005 (each a "Series B Mandatory Redemption Date," collectively the Series A Mandatory Redemption Date and the Series B Mandatory Redemption Date shall be referred to as the "Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120 days prior to the applicable Series B Mandatory Redemption Date of written request(s) for redemption from holders of at least 50% of the shares of Series B Preferred Stock then outstanding (a "Series B Redemption Request"), redeem from each holder of shares of Series B Preferred Stock, at a price equal to $3.50 per share (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared but unpaid dividends thereon (the "Series B Mandatory Redemption Price"), the following respective portions of the number of shares of Series B Preferred Stock held by such holder set forth opposite the applicable Series B Mandatory Redemption Date: -20-
Portion of then Outstanding Shares of Series B Mandatory Series B Preferred Stock Redemption Date To Be Redeemed --------------- ------------------------ December 3, 2003 33 1/3% December 3, 2004 50% December 3, 2005 All Shares then held
The Corporation shall provide notice of its redemption obligations under this Section 6, by first class or registered mail, postage prepaid, to each holder of record of Series B Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 120 nor more than 180 days prior to the applicable Series B Mandatory Redemption Date. The Corporation shall provide notice of any Series B Redemption Request, specifying the time and place of redemption and the Series B Mandatory Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Series B Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 20 days prior to the Series B Mandatory Redemption Date. (c) If the funds of the Corporation legally available for redemption of Series A Preferred Stock or Series B Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the number of shares of Series A Preferred Stock or Series B Preferred Stock required under this Section 6 to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably in proportion to the respective amounts which would otherwise be payable to the holders of Series A Preferred Stock or Series B Preferred Stock, as the case may be, if the funds of the Corporation legally available therefor had been sufficient to redeem all shares required to be redeemed on such date. At any time thereafter when additional funds of the Corporation become legally available for the redemption of Series A Preferred Stock or Series B Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem, to the extent of the available funds and in the same proportion as set forth in the preceding sentence, the balance of the shares which the Corporation was theretofore obligated to redeem. (d) Unless there shall have been a default in payment of the Series A Mandatory Redemption Price or the Series B Mandatory Redemption Price, on the applicable Mandatory Redemption Date all rights of each holder of shares of Series A Preferred Stock or Series B Preferred Stock as a stockholder of the Corporation by reason of the ownership of such shares will cease, except the right to receive the -21- Series A Mandatory Redemption Price or the Series B Mandatory Redemption Price, as the case may be, for such shares, without interest, upon presentation and surrender of the certificate representing such shares, and such shares will not from and after such Mandatory Redemption Date be deemed to be outstanding. (e) Any Series A Preferred Stock or Series B Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock or Series B Preferred Stock accordingly. 7. Negative Covenants. ------------------ (a) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class. (b) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series B Preferred Stock so as to affect adversely the Series B Preferred Stock, without the written consent or affirmative vote of the holders of at least 66 2/3% of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class. (c) So long as at least 3,000,000 shares of Series A Preferred Stock and Series B Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares) are outstanding (or such lesser number of shares of Series A Preferred Stock and Series B Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred Stock and Series B Preferred Stock when such redemption was due in accordance with Section 6 above), the Corporation shall not, without the prior written consent of the holders of shares of Series A Preferred Stock and Series B Preferred Stock representing at least 66 2/3 % of the combined votes represented by the outstanding shares of Series A Preferred Stock and Series B Preferred Stock: (i) authorize any shares of capital stock with preference or priority over the Series A Preferred Stock or Series B Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation; -22- (ii) amend the Corporation's By-laws in a manner adverse to the holders of Series A Preferred Stock and/or Series B Preferred Stock; (iii) declare or pay any dividends on Common Stock other than dividends payable solely in Common Stock; (iv) repurchase shares of Common Stock at a price greater than the price at which they were originally issued; (v) liquidate, dissolve or wind-up the Corporation; (vi) make (or permit any subsidiary to make) any loan or advance to any person, including without limitation, any employee or director of the Corporation or any subsidiary, except (A) advances and similar expenditures in the ordinary course of business or (B) as approved by the Board of Directors; or (vii)(A) merge with or into or consolidate with any other corporation (other than a merger of consolidation in which the stockholders of the Company immediately prior thereto own at least 80% of the outstanding voting stock of the surviving or acquiring corporation), (B) sell, lease, or otherwise dispose of all or substantially all, or a Significant Portion (as defined below), of its properties or assets (for this purpose, "Significant Portion" shall mean properties or assets with a fair market value equal to more than 35% of the book value of the Company's total properties or assets as of the end of the most recent fiscal quarter), or (C) acquire all or substantially all of the properties or assets of any other corporation or entity (except for consideration of less than 20% of the Corporation's consolidated net worth as of the end of the prior fiscal quarter. FURTHER RESOLVED: That the terms of the Series A Preferred Stock set forth in the - -------- Certificate of Designations filed with the Secretary of State of the State of Delaware on February 19, 1998 ("Certificate of Designations") be and hereby are superseded in their entirety by the terms set forth in this Certificate of Amendment and said Certificate of Designations shall be of no further force or effect. -23- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President this 3rd day of December, 1998. Sycamore Networks, Inc. By: /s/ Daniel Smith ------------------- Daniel Smith President -24- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYCAMORE NETWORKS, INC. Sycamore Networks, Inc. (the "Corporation"), organized and existing under and by virtue of the General Law of the State of Delaware, does hereby certify as follows: The Board of Directors of the Corporation duly adopted, pursuant to Section 242 of the General Corporation Law of Delaware, a resolution setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Section 242 of the General Corporation Law of the State of Delaware by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendment. The resolution setting forth the amendment is as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of -------- the Corporation be and hereby is deleted in its entirety and the following Article FOURTH is inserted in lieu thereof: FOURTH: The total number of shares of all classes of stock ------ which the Corporation shall have authority to issue is 40,500,000 shares, consisting of (i) 25,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii) 15,500,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), 8,975,000 shares of which have been designated as Series A Convertible Preferred Stock ("Series A Preferred Stock"), 3,625,000 shares of which have been designated as Series B Convertible Preferred Stock ("Series B Preferred Stock") and 2,500,000 shares of which have been designated as Series C Convertible Preferred Stock ("Series C Preferred Stock", the Series A Preferred Stock, Series B Preferred Stock and the Series C Preferred Stock shall collectively be referred to as the "Designated Preferred Stock"). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. Common Stock. ------------ 1. General. The voting, dividend and liquidation rights of the holders of ------- the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. 3. Dividends. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed -2- to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. C. Series A Preferred Stock, Series B Preferred Stock and Series C Preferred ------------------------------------------------------------------------- Stock. - ----- 1. Dividends. --------- (a) The Corporation shall not declare or pay any dividends or distributions (as defined below) on shares of Common Stock until the holders of the Designated Preferred Stock then outstanding shall have first received, or simultaneously receive, a like distribution on each outstanding share of Designated Preferred Stock, in an amount at least equal to the product of (i) the per share amount, if any, of the dividends or distributions to be declared, paid or set aside for the Common Stock, multiplied by (ii) the number of whole shares of Common Stock into which such share of Designated Preferred Stock is convertible as of the record date for such dividend or distribution. (b) For purposes of this Section 1, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock or other securities of the Corporation, or the purchase or redemption of shares of the Corporation (other than repurchases of Common Stock held by employees or directors of, or consultants to, the Corporation upon termination of their employment or services pursuant to agreements approved by the Board of Directors providing for such repurchase at a price equal to the -3- original issue price of such shares) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. 2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations ----------------------------------------------------------------------- and Asset Sales. - --------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Designated Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Designated Preferred Stock, but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Designated Preferred Stock by reason of their ownership thereof, an amount equal to $0.91 per share in the case of the Series A Preferred Stock, $3.50 per share in the case of the Series B Preferred Stock and $8.00 per share in the case of the Series C Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid on such shares. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Designated Preferred Stock the full amount to which they shall be entitled, the holders of shares of Designated Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Designated Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of any class or series of stock of the Corporation ranking on liquidation prior to and in preference to the Common Stock, upon the dissolution, liquidation or winding up of the Corporation, the remaining assets and funds of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock. (c) Any (i) merger or consolidation which results in the voting securities of the Corporation outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than a majority of the combined voting power of the voting securities of the Corporation or such surviving or acquiring entity outstanding immediately after such merger or consolidation, (ii) sale -4- of all or substantially all of the assets of the Corporation or (iii) sale of shares of capital stock of the Corporation, in a single transaction or series of related transactions, representing at least 80% of the voting power of the voting securities of the Corporation, shall be deemed to be a liquidation of the Corporation, and all consideration payable to the stockholders of the Corporation (in the case of a merger or consolidation), or all consideration payable to the Corporation (net of obligations owed by the Corporation), together with all other available assets of the Corporation (in the case of an asset sale), shall be distributed to the holders of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the holders of shares of Designated Preferred Stock such information concerning the terms of such merger, consolidation or asset sale and the value of the assets of the Corporation as may reasonably be requested by the holders of Designated Preferred Stock. If applicable, the Corporation shall cause the agreement or plan of merger or consolidation to provide for a rate at which the shares of capital stock of the Corporation are converted into or exchanged for cash, new securities or other property which gives effect to this provision. The amount deemed distributed to the holders of Designated Preferred Stock upon any such merger or consolidation shall be the cash or the value of the property, rights or securities distributed to such holders by the Corporation and/or by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) Each holder of outstanding shares of the Designated Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Designated Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof) as of the record date, at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of Section 3(b) or Section 7 below or by the provisions establishing any other series of stock, holders of Designated Preferred Stock and of any other outstanding series of stock shall vote together with the holders of Common Stock as a single class. (b) For so long as at least 2,500,000 shares of Designated Preferred Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) are outstanding (or such lesser number of shares of Designated Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, as the case may be, when such redemption was due in accordance with Section 6 below), the holders of record of the shares of Designated Preferred Stock, exclusively and as a separate -5- class, shall be entitled to elect two members of the Board of Directors of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Designated Preferred Stock then outstanding shall constitute a quorum of the Designated Preferred Stock for the purpose of electing directors by holders of Designated Preferred Stock. A vacancy in any directorship filled by the holders of Designated Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of Designated Preferred Stock. 4. Optional Conversion. The holders of Designated Preferred Stock shall ------------------- have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock shall ---------------- be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.91 by the Series A Conversion Price (as defined below) in effect at the time of conversion. The "Series A Conversion Price" shall initially be $0.91. Such Series A Conversion Price, and the rate at which shares of Series A Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $3.50 by the Series B Conversion Price (as defined below) in effect at the time of conversion. The "Series B Conversion Price" shall initially be $3.50. Such Series B Conversion Price, and the rate at which shares of Series B Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $8.00 by the Series C Conversion Price (as defined below) in effect at the time of the conversion. The "Series C Conversion Price" shall initially be $8.00. Such Series C Conversion Price, and the rate at which shares of Series C Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a notice of redemption of any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the first full day preceding the date fixed for redemption, unless the redemption price is not paid when due, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation of the Corporation (or deemed liquidation under Section 2(c) hereof), the -6- Conversion Rights shall terminate at the close of business on the first full business day preceding the date fixed for the payment of any amounts distributable on liquidation (or deemed liquidation under Section 2(c) hereof) to the holders of Designated Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of the Designated Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Series A Conversion Price, Series B Conversion Price or Series C Conversion Price, as the case may be. (c) Mechanics of Conversion. ----------------------- (i) In order for a holder of Designated Preferred Stock to convert shares of Designated Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Designated Preferred Stock, at the office of the transfer agent for such shares of Designated Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of Designated Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Designated Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when Designated Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of Designated Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Designated Preferred Stock. Before taking any action which would cause an adjustment reducing the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock, as the case may be, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the -7- Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Series A Conversion Price, Series B Conversion Price or the Series C Conversion Price. (iii) Upon any such conversion, no adjustment to the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price shall be made for any declared but unpaid dividends on the Series A Preferred Stock, the Series B Preferred Stock or Series C Preferred Stock, as the case may be, surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Designated Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any dividends declared but unpaid thereon. Any shares of Designated Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock accordingly. (v) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Designated Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Designated Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (d) Adjustments to Conversion Price for Diluting Issues: --------------------------------------------------- (i)Special Definitions. For purposes of this Subsection 4(d), ------------------- the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "Original Issue Date" shall mean the date on which a ------------------- share of Series A Preferred Stock was first issued. -8- (C) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of --------------------------------- Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than: (I) shares of Common Stock issued or issuable as a dividend or other distribution on Designated Preferred Stock; (II) shares of Common stock issued or issuable by reason of a dividend or other distribution on shares of common stock that is covered by subsection 4(e) or 4(f) below; (III) shares of Common Stock issued or issuable upon conversion of those shares of (1) Series A Preferred Stock sold pursuant to the Series A Preferred Stock Purchase Agreement dated as of February 19, 1998, as the same may be amended from time to time, (2) Series B Preferred Stock sold pursuant to the Series B Preferred Stock Purchase Agreement dated as of December 3, 1998, as the same may be amended from time to time and (3) Series C Preferred Stock sold pursuant to the Series C Preferred Stock Purchase Agreement dated as of February 26, 1999, as the same may be amended from time to time; (IV) up to 5,995,604 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee members of the Board of Directors of the Corporation, issued or issuable to employees or directors of, or consultants to, the Corporation; and -9- (V) shares of Common Stock issued to equipment lessors, as approved by a majority of the non-employee members of the Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. No adjustment in the --------------------------------- number of shares of Common Stock into which the Series A Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series A Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series B Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series B Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series C Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series C Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. (iii) Issue of Securities Deemed Issue of Additional Shares of -------------------------------------------------------- Common Stock. - ------------ If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options -10- therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that (x) for the purpose of adjusting the Series A Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series A Conversion Price in effect on the date of and immediately prior to such issue, or such record date, (y) for the purpose of adjusting the Series B Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series B Conversion Price in effect on the date of and immediately prior to such issue, or such record date, and (z) for the purpose of adjusting the Series C Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series C Conversion Price in effect on the date of and immediately prior to such issue, or such record date, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price shall be made upon subsequent issue of Convertible Securities or shares of Common Stock upon exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, upon the exercise, conversion or exchange thereof, the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price, as applicable, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Series A Conversion Price, the Series B Conversion Price and Series C Conversion Price, as applicable, shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price, as applicable; -11- (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Series A Conversion Price, the Series B Conversion Price and Series C Conversion Price then in effect shall forthwith be readjusted to such Series A Conversion Price, Series B Conversion Price and Series C Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to clause (B) or (D) above shall have the effect of increasing the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price, as applicable, to an amount which exceeds the lower of (i) the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price, as the case may be, on the original adjustment date, or (ii) the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. In the event the Corporation, after the Original Issue Date, amends any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date) to increase the number of shares issuable thereunder or decrease the consideration to be paid upon exercise or conversion thereof, then such Options or Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. - ---------------------- (A) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series A Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series A Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A -12- Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the ------------- purpose of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (B) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series B Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (C) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series C -13- Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series C Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series C Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series C Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this Subsection 4(d)(iv), all shares of - -------- ---- Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (v) Determination of Consideration. For purposes of this ------------------------------ Subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The ---------------------------------- consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing -14- (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Multiple Closing Dates. Notwithstanding any adjustments to ---------------------- the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price pursuant to Section 4(d) hereof, in the event the Corporation shall issue on more than one date Additional Shares of Common Stock which are comprised of shares of the same series or class of Convertible Securities, and such issuance dates occur within a period of no more than 180 days, then, upon the final such issuance, the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price, as the case may be, shall be readjusted to give effect to all such issuances as if they occurred on the date of the final such issuance (and without giving effect to any adjustments as a result of such prior issuances within such period). (e) Adjustment for Stock Splits and Combinations. If the Corporation -------------------------------------------- shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. In the event -------------------------------------------------- the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Series A Conversion Price, the -15- Series B Conversion Price and the Series C Conversion Price, as the case may be, then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price, as the case may be, then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price, as the case may be, shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price, as the case may be, shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of the applicable Designated Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of the applicable Designated Preferred Stock had been converted into Common Stock on the date of such event. (g) Adjustments for Other Dividends and Distributions. In the ------------------------------------------------- event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Designated Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Designated Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of Designated Preferred Stock; and provided further, -16- however, that no such adjustment shall be made if the holders of Designated Preferred Stock simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all outstanding shares of Designated Preferred Stock had been converted into Common Stock on the date of such event. (h) Adjustment for Reclassification, Exchange, or Substitution. ---------------------------------------------------------- If the Common Stock issuable upon the conversion of the Designated Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Designated Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Designated Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (i) Adjustment for Merger or Reorganization, etc. In case of any --------------------------------------------- consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a consolidation, merger or sale which is covered by Subsection 2(c)), each share of Designated Preferred Stock shall thereafter be convertible (or shall be converted into a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Designated Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of Designated Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series A Conversion Price, the Series B Conversion Price and Series C Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the applicable Designated Preferred Stock. (j) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good -17- faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Designated Preferred Stock against impairment. (k) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Designated Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Designated Preferred Stock furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price, the Series B Conversion Price or Series C Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of the applicable Designated Preferred Stock. (l) Notice of Record Date. In the event: --------------------- (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Designated Preferred Stock, and shall cause to be mailed to the holders of Designated Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten days prior to the date -18- specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. 5.Mandatory Conversion. -------------------- (a) Upon the earlier of (x) the closing of the sale of shares of Common Stock, at a price of at least $12.00 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of proceeds to the Corporation (net of the underwriting discounts or commissions and offering expenses) and (y) the first date on which at least 10,000,000 shares of Designated Preferred Stock have been converted into Common Stock pursuant to Section 4 above (the "Mandatory Conversion Date"), (i) all outstanding shares of Designated Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate, and (ii) all provisions hereof included under the captions "Series A Convertible Preferred Stock", "Series B Convertible Preferred Stock" and "Series C Convertible Preferred Stock" and all references herein to the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock (including all references to Designated Preferred Stock), shall be deleted and shall be of no further force or effect. (b) All holders of record of shares of Designated Preferred Stock shall be given written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Designated Preferred Stock, pursuant to this Section 5. Such notice need not be given in advance of the occurrence of a Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Designated Preferred Stock at such holder's address last shown on the records of the transfer agent for the applicable -19- Designated Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Designated Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date, all rights with respect to the Designated Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock) will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Designated Preferred Stock has been converted, and payment of any declared but unpaid dividends thereon. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Date and the surrender of the certificate or certificates for Designated Preferred Stock the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Designated Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Designated Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized Designated Preferred Stock accordingly. 6. Redemption. ---------- (a) The Corporation will, subject to the conditions set forth below, on February 26, 2004, February 26, 2005 and February 26, 2006 (each, a "Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120 days prior to the applicable Mandatory Redemption Date of written request(s) for redemption from holders of at least a majority of the shares of Designated Preferred Stock then outstanding (a "Redemption Request"), redeem from each holder of shares of Designated Preferred Stock, at a price equal to $0.91 per share in the case of the Series A Preferred Stock, $3.50 per share in the case of the Series B Preferred Stock and $8.00 per share in the case of the Series C Preferred Stock (subject to appropriate -20- adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared but unpaid dividends thereon (the "Redemption Price"), the following respective portions of the number of shares of Designated Preferred Stock held by such holder set forth opposite the applicable Redemption Date:
Portion of then Outstanding Shares of Mandatory Designated Preferred Stock Redemption Date To Be Redeemed --------------- ------------------------ February 26, 2004 33 1/3% February 26, 2005 50% February 26, 2006 All Shares then held
The Corporation shall provide notice of its redemption obligations under this Section 6, by first class or registered mail, postage prepaid, to each holder of record of Designated Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 120 nor more than 180 days prior to the applicable Mandatory Redemption Date. The Corporation shall provide notice of any Redemption Request, specifying the time and place of redemption and the Mandatory Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Designated Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 20 days prior to the Mandatory Redemption Date. (b) If the funds of the Corporation legally available for redemption of the Designated Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the number of shares of the Designated Preferred Stock required under this Section 6 to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably in proportion to the respective amounts which would otherwise be payable to the holders of Designated Preferred Stock if the funds of the Corporation legally available therefor had been sufficient to redeem all shares required to be redeemed on such date. At any time thereafter when additional funds of the Corporation become legally available for the redemption of the Designated Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem, to the extent of the available funds and in the same proportion as set forth in the preceding sentence, the balance of the shares which the Corporation was theretofore obligated to redeem. -21- (c) Unless there shall have been a default in payment of the Mandatory Redemption Price, on the applicable Mandatory Redemption Date all rights of each holder of shares of Designated Preferred Stock as a stockholder of the Corporation by reason of the ownership of such shares will cease, except the right to receive the Mandatory Redemption Price for such shares, without interest, upon presentation and surrender of the certificate representing such shares, and such shares will not from and after such Mandatory Redemption Date be deemed to be outstanding. (d) Any Designated Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Designated Preferred Stock accordingly. 7. Negative Covenants. ------------------ (a) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (b) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series B Preferred Stock so as to affect adversely the Series B Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (c) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series C Preferred Stock so as to affect adversely the Series C Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal -22- adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (d) So long as at least 5,000,000 shares of Designated Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares) are outstanding (or such lesser number of shares of Designated Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Designated Preferred Stock when such redemption was due in accordance with Section 6 above), the Corporation shall not, without the prior written consent of the holders of shares of Designated Preferred Stock representing at least a majority of the combined votes represented by the outstanding shares of Designated Preferred Stock: (i) authorize any shares of capital stock with preference or priority over the Designated Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation or with superior vesting or redemption rights; (ii) amend the Corporation's By-laws in a manner adverse to the holders of the Designated Preferred Stock; (iii) declare or pay any dividends on Common Stock other than dividends payable solely in Common Stock; (iv) redeem, repurchase or otherwise acquire (or pay into or set aside a sinking fund for such purpose) any shares of Common Stock at a price greater than the price at which they were originally issued; (v) liquidate, dissolve or wind-up the Corporation; (vi) make (or permit any subsidiary to make) any loan or advance to any person, including without limitation, any employee or director of the Corporation or any subsidiary, except (A) advances and similar expenditures in the ordinary course of business or (B) as approved by the Board of Directors; or (vii) (A) merge with or into or consolidate with any other corporation (other than a merger of consolidation in which the stockholders of the Company immediately prior thereto own at least 80% of the outstanding voting stock of the surviving or acquiring corporation), (B) sell, lease, or otherwise dispose of all or substantially all, or a Significant Portion (as defined below), of its properties or assets (for this purpose, "Significant Portion" shall mean properties or assets with a fair market value equal to more than 35% of the book value of the Company's total -23- properties or assets as of the end of the most recent fiscal quarter), or (C) acquire all or substantially all of the properties or assets of any other corporation or entity (except for consideration of less than 20% of the Corporation's consolidated net worth as of the end of the prior fiscal quarter. -24- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President this 25th day of February, 1999. Sycamore Networks, Inc. By: /s/ Daniel Smith ------------------ Daniel Smith President -25- CERTIFICATE OF CORRECTION OF CERTIFICATE OF AMENDMENT OF SYCAMORE NETWORKS, INC. ________________________________________________________________________________ Sycamore Networks, Inc., organized and existing under and by virtue of the General Corporation Law of the State of Delaware Does Hereby Certify THAT: 1. The name of the corporation is Sycamore Networks, Inc. (hereinafter called the "Corporation"). 2. A Certificate of Amendment of the Corporation (the "Certificate") was filed by the Secretary of State of the State of Delaware on February 25, 1999 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy in said Certificate is as follows: That as a result of a typographical error, the word "vesting" described in the last sentence of Section C.7(d)(i) of ARTICLE FOURTH of the Certificate setting forth the amending resolution was incorrect, and should be replaced with the word "voting." 4. That the corrected version of the resolution setting forth the amendment to be effected by the original Certificate of Amendment is as follows: RESOLVED: That Section C.7(d)(i) of ARTICLE FOURTH of the Certificate of - -------- Incorporation of the Corporation be and hereby is deleted and the following paragraph is inserted in lieu thereof: "(i) authorize any shares of capital stock with preference or priority over the Designated Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation or with superior voting or redemption rights;" IN WITNESS WHEREOF, the Corporation has caused this Certificate of Correction to be signed by its President this 4th of April, 1999. SYCAMORE NETWORKS, INC. By: /s/Daniel Smith ---------------- Daniel Smith President -2- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYCAMORE NETWORKS, INC. Sycamore Networks, Inc. (the "Corporation"), organized and existing under and by virtue of the General Law of the State of Delaware, does hereby certify as follows: The Board of Directors of the Corporation duly adopted, pursuant to Section 242 of the General Corporation Law of Delaware, a resolution setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Section 242 of the General Corporation Law of the State of Delaware by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendment. The resolution setting forth the amendment is as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of -------- the Corporation be and hereby is deleted in its entirety and the following Article FOURTH is inserted in lieu thereof: FOURTH: The total number of shares of all classes of stock which the ------ Corporation shall have authority to issue is 48,000,000 shares, consisting of (i) 32,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and (ii) 16,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), 8,975,000 shares of which have been designated as Series A Convertible Preferred Stock ("Series A Preferred Stock"), 3,625,000 shares of which have been designated as Series B Convertible Preferred Stock ("Series B Preferred Stock"), 2,500,000 shares of which have been designated as Series C Convertible Preferred Stock ("Series C Preferred Stock"), and 692,201 shares of which have been designated as Series D Convertible Preferred Stock ("Series D Preferred Stock", together with the Series A Preferred Stock, Series B Preferred Stock and the Series C Preferred Stock the "Designated Preferred Stock"). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. Common Stock. ------------ 1. General. The voting, dividend and liquidation rights of the holders of ------- the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. 3. Dividends. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of -2- the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. C. Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock ---------------------------------------------------------------------------- and Series D Preferred Stock. - ---------------------------- 1. Dividends. --------- (a) The Corporation shall not declare or pay any dividends or distributions (as defined below) on shares of Common Stock until the holders of the Designated Preferred Stock then outstanding shall have first received, or simultaneously receive, a like distribution on each outstanding share of Designated Preferred Stock, in an amount at least equal to the product of (i) the per share amount, if any, of the dividends or distributions to be declared, paid or set aside for the Common Stock, multiplied by (ii) the number of whole shares of Common Stock into which such share of Designated Preferred Stock is convertible as of the record date for such dividend or distribution. (b) For purposes of this Section 1, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock or other securities of the Corporation, or the purchase or redemption of shares of the Corporation (other than repurchases of -3- Common Stock held by employees or directors of, or consultants to, the Corporation upon termination of their employment or services pursuant to agreements approved by the Board of Directors providing for such repurchase at a price equal to the original issue price of such shares) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. 2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations ----------------------------------------------------------------------- and Asset Sales. - --------------- (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Designated Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Designated Preferred Stock, but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Designated Preferred Stock by reason of their ownership thereof, an amount equal to $0.91 per share in the case of the Series A Preferred Stock, $3.50 per share in the case of the Series B Preferred Stock, $8.00 per share in the case of the Series C Preferred Stock and $21.67 per share in the case of the Series D Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid on such shares. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Designated Preferred Stock the full amount to which they shall be entitled, the holders of shares of Designated Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Designated Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of any class or series of stock of the Corporation ranking on liquidation prior to and in preference to the Common Stock, upon the dissolution, liquidation or winding up of the Corporation, the remaining assets and funds of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock. (c) Any (i) merger or consolidation which results in the voting securities of the Corporation outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting -4- securities of the surviving or acquiring entity) less than a majority of the combined voting power of the voting securities of the Corporation or such surviving or acquiring entity outstanding immediately after such merger or consolidation, (ii) sale of all or substantially all of the assets of the Corporation or (iii) sale of shares of capital stock of the Corporation, in a single transaction or series of related transactions, representing at least 80% of the voting power of the voting securities of the Corporation, shall be deemed to be a liquidation of the Corporation, and all consideration payable to the stockholders of the Corporation (in the case of a merger or consolidation), or all consideration payable to the Corporation (net of obligations owed by the Corporation), together with all other available assets of the Corporation (in the case of an asset sale), shall be distributed to the holders of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the holders of shares of Designated Preferred Stock such information concerning the terms of such merger, consolidation or asset sale and the value of the assets of the Corporation as may reasonably be requested by the holders of Designated Preferred Stock. If applicable, the Corporation shall cause the agreement or plan of merger or consolidation to provide for a rate at which the shares of capital stock of the Corporation are converted into or exchanged for cash, new securities or other property which gives effect to this provision. The amount deemed distributed to the holders of Designated Preferred Stock upon any such merger or consolidation shall be the cash or the value of the property, rights or securities distributed to such holders by the Corporation and/or by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) Each holder of outstanding shares of the Designated Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Designated Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof) as of the record date, at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of Section 3(b) or Section 7 below or by the provisions establishing any other series of stock, holders of Designated Preferred Stock and of any other outstanding series of stock shall vote together with the holders of Common Stock as a single class. (b) For so long as at least 2,700,000 shares of Designated Preferred Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) are outstanding (or such lesser number of shares of Designated Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Series A Preferred -5- Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, as the case may be, when such redemption was due in accordance with Section 6 below), the holders of record of the shares of Designated Preferred Stock, exclusively and as a separate class, shall be entitled to elect two members of the Board of Directors of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Designated Preferred Stock then outstanding shall constitute a quorum of the Designated Preferred Stock for the purpose of electing directors by holders of Designated Preferred Stock. A vacancy in any directorship filled by the holders of Designated Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of Designated Preferred Stock. 4. Optional Conversion. The holders of Designated Preferred Stock shall ------------------- have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock ---------------- shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.91 by the Series A Conversion Price (as defined below) in effect at the time of conversion. The "Series A Conversion Price" shall initially be $0.91. Such Series A Conversion Price, and the rate at which shares of Series A Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $3.50 by the Series B Conversion Price (as defined below) in effect at the time of conversion. The "Series B Conversion Price" shall initially be $3.50. Such Series B Conversion Price, and the rate at which shares of Series B Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $8.00 by the Series C Conversion Price (as defined below) in effect at the time of the conversion. The "Series C Conversion Price" shall initially be $8.00. Such Series C Conversion Price, and the rate at which shares of Series C Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. Each share of Series D Preferred Stock shall be convertible, at the option of the holder thereof at any time and from time to time and without the payment of additional consideration by the holder thereof into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $21.67 by the Series D Conversion Price (as defined below) in effect at the time of the conversion. The -6- "Series D Conversion Price" shall initially be $21.67. Such Series D Conversion Price, and the rate at which shares of Series D Preferred Stock may be converted into shares of Common Stock shall be subject to adjustment as provided below. In the event of a notice of redemption of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the first full day preceding the date fixed for redemption, unless the redemption price is not paid when due, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation of the Corporation (or deemed liquidation under Section 2(c) hereof), the Conversion Rights shall terminate at the close of business on the first full business day preceding the date fixed for the payment of any amounts distributable on liquidation (or deemed liquidation under Section 2(c) hereof) to the holders of Designated Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of the Designated Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as the case may be. (c) Mechanics of Conversion. ----------------------- (i) In order for a holder of Designated Preferred Stock to convert shares of Designated Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Designated Preferred Stock, at the office of the transfer agent for such shares of Designated Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of Designated Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Designated Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. -7- (ii) The Corporation shall at all times when Designated Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of Designated Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Designated Preferred Stock. Before taking any action which would cause an adjustment reducing the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or the Series D Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock, as the case may be, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Series A Conversion Price, Series B Conversion Price, the Series C Conversion Price or the Series D Conversion Price. (iii) Upon any such conversion, no adjustment to the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or the Series D Conversion Price shall be made for any declared but unpaid dividends on the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, as the case may be, surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Designated Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any dividends declared but unpaid thereon. Any shares of Designated Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock, Series B Preferred Stock Series C Preferred Stock or Series D Preferred Stock accordingly. (v) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Designated Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Designated Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to -8- the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (d) Adjustments to Conversion Price for Diluting Issues: --------------------------------------------------- (i) Special Definitions. For purposes of this Subsection ------------------- 4(d), the following definitions shall apply: (A) "Option" shall mean rights, options or ------ warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "Original Issue Date" shall mean the date on ------------------- which a share of Series A Preferred Stock was first issued. (C) "Convertible Securities" shall mean any ---------------------- evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall --------------------------------- mean all shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than: (I) shares of Common Stock issued or issuable as a dividend or other distribution on Designated Preferred Stock; (II) shares of Common Stock issued or issuable by reason of a dividend or other distribution on shares of Common Stock that is covered by Subsection 4(e) or 4(f) below; (III) shares of Common Stock issued or issuable upon conversion of those shares of (1) Series A Preferred Stock sold pursuant to the Series A Preferred Stock Purchase Agreement dated as of February 19, 1998, as the same may be amended from time to time, (2) Series B Preferred Stock sold pursuant to the Series B Preferred Stock Purchase Agreement dated as of December 3, 1998, as the same may be amended from time to time, (3) Series C Preferred Stock sold pursuant to the Series C Preferred Stock Purchase Agreement dated as of February 26, 1999, as -9- the same may be amended from time to time, and (4) Series D Preferred Stock sold pursuant to the Series D Preferred Stock Purchase Agreement dated as of July 23 1999, as the same may be amended from time to time. (IV) up to 8,855,000 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee members of the Board of Directors of the Corporation, issued or issuable to employees or directors of, or consultants to, the Corporation; and (V) shares of Common Stock issued to equipment lessors, as approved by a majority of the non-employee members of the Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. No adjustment in --------------------------------- the number of shares of Common Stock into which the Series A Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series A Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series B Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant -10- to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series B Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series C Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series C Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. No adjustment in the number of shares of Common Stock into which the Series D Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Series D Conversion Price in effect on the date of, and immediately prior to, the issuance of such Additional Shares, or (b) if prior to or within 60 days subsequent to such issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series D Preferred Stock, agreeing that no such adjustment shall be made as a result of the issuance of Additional Shares of Common Stock. (iii) Issue of Securities Deemed Issue of Additional Shares of -------------------------------------------------------- Common Stock. - ------------ If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that (1) for the purpose of adjusting the Series A Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series -11- C Conversion Price in effect on the date of and immediately prior to such issue, or such record date, and (4) for the purpose of adjusting the Series D Conversion Price, Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Series D Conversion Price in effect on the date of and immediately prior to such issue, or such record date, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or Series D Conversion Price shall be made upon subsequent issue of Convertible Securities or shares of Common Stock upon exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, upon the exercise, conversion or exchange thereof, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or Series D Conversion Price, as applicable, computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price and Series D Conversion Price, as applicable, shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price and Series D Conversion Price then in effect shall forthwith be readjusted to such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and -12- (E) No readjustment pursuant to clause (B) or (D) above shall have the effect of increasing the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable, to an amount which exceeds the lower of (i) the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or Series D Conversion Price, as the case may be, on the original adjustment date, or (ii) the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price or Series D Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. In the event the Corporation, after the Original Issue Date, amends any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date) to increase the number of shares issuable thereunder or decrease the consideration to be paid upon exercise or conversion thereof, then such Options or Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. - ---------------------- (A) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series A Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series A Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any -13- adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (B) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series B Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (C) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series C Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series C Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series C Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series C -14- Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the -------- ---- purpose of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (D) In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 4(e) or upon a dividend or distribution as provided in Subsection 4(f)), without consideration or for a consideration per share less than the applicable Series D Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series D Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series D Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series D Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose -------- ---- of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 4(d)(iv), the number of shares of Common Stock deemed issuable upon conversion of such outstanding Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (v) Determination of Consideration. For purposes of this ------------------------------ Subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: -15- (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Multiple Closing Dates. Notwithstanding any adjustments to ---------------------- the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price pursuant to Section 4(d) hereof, in the event the Corporation shall issue on more than one date Additional Shares of Common Stock which are comprised of shares of the same series or class of Convertible Securities, and such issuance dates occur within a period of no more than 180 days, then, upon the final such issuance, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, as -16- the case may be, shall be readjusted to give effect to all such issuances as if they occurred on the date of the final such issuance (and without giving effect to any adjustments as a result of such prior issuances within such period). (e) Adjustment for Stock Splits and Combinations. If the Corporation -------------------------------------------- shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, and the Series D Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. In the event -------------------------------------------------- the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, as the case may be, then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, as the case may be, then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, as the case may be, shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A -17- Conversion Price, the Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as the case may be, shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of the applicable Designated Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of the applicable Designated Preferred Stock had been converted into Common Stock on the date of such event. (g) Adjustments for Other Dividends and Distributions. In the event ------------------------------------------------- the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Designated Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Designated Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of Designated Preferred Stock; and provided further, however, that no such adjustment shall be made if the holders of Designated Preferred Stock simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all outstanding shares of Designated Preferred Stock had been converted into Common Stock on the date of such event. (h) Adjustment for Reclassification, Exchange, or Substitution. If ---------------------------------------------------------- the Common Stock issuable upon the conversion of the Designated Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Designated Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Designated Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. -18- (i) Adjustment for Merger or Reorganization, etc. In case of any -------------------------------------------- consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a consolidation, merger or sale which is covered by Subsection 2(c)), each share of Designated Preferred Stock remaining outstanding after such consolidation, merger or sale, if any, shall thereafter be convertible (or shall be converted into a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Designated Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of Designated Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price) and Series D Conversion Price shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the applicable Designated Preferred Stock. (j) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Designated Preferred Stock against impairment. (k) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price or Series D Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Designated Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Designated Preferred Stock furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price or the Series D Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of the applicable Designated Preferred Stock. -19- (l) Notice of Record Date. In the event: --------------------- (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Designated Preferred Stock, and shall cause to be mailed to the holders of Designated Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten days prior to the date specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. -20- 5. Mandatory Conversion. -------------------- (a) Upon the earlier of (x) the closing of the sale of shares of Common Stock, at a price of at least $29.00 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of proceeds to the Corporation (net of the underwriting discounts or commissions and offering expenses) and (y) the first date on which at least 10,000,000 shares of Designated Preferred Stock have been converted into Common Stock pursuant to Section 4 above (the "Mandatory Conversion Date"), (i) all outstanding shares of Designated Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate, and (ii) all provisions hereof included under the captions "Series A Convertible Preferred Stock", "Series B Convertible Preferred Stock", "Series C Convertible Preferred Stock" and "Series D Convertible Preferred Stock" and all references herein to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock (including all references to Designated Preferred Stock), shall be deleted and shall be of no further force or effect. (b) All holders of record of shares of Designated Preferred Stock shall be given written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Designated Preferred Stock, pursuant to this Section 5. Such notice need not be given in advance of the occurrence of a Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Designated Preferred Stock at such holder's address last shown on the records of the transfer agent for the applicable Designated Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Designated Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date, all rights with respect to the Designated Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock) will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Designated Preferred Stock has been converted, and payment of any declared but unpaid dividends thereon. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Date and the surrender of the certificate or certificates for Designated Preferred Stock the -21- Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Designated Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Designated Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized Designated Preferred Stock accordingly. 6.Redemption. ---------- (a) The Corporation will, subject to the conditions set forth below, on February 26, 2004, February 26, 2005 and February 26, 2006 (each, a "Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120 days prior to the applicable Mandatory Redemption Date of written request(s) for redemption from holders of at least a majority of the shares of Designated Preferred Stock then outstanding (a "Redemption Request"), redeem from each holder of shares of Designated Preferred Stock, at a price equal to $0.91 per share in the case of the Series A Preferred Stock, $3.50 per share in the case of the Series B Preferred Stock, $8.00 per share in the case of the Series C Preferred Stock and $21.67 per share in the case of Series D Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared but unpaid dividends thereon (the "Redemption Price"), the following respective portions of the number of shares of Designated Preferred Stock held by such holder set forth opposite the applicable Redemption Date:
Portion of then Outstanding Shares of Mandatory Designated Preferred Stock Redemption Date To Be Redeemed --------------- ------------------------ February 26, 2004 33 1/3% February 26, 2005 50% February 26, 2006 All Shares then held
The Corporation shall provide notice of its redemption obligations under this Section 6, by first class or registered mail, postage prepaid, to each holder of record -22- of Designated Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 120 nor more than 180 days prior to the applicable Mandatory Redemption Date. The Corporation shall provide notice of any Redemption Request, specifying the time and place of redemption and the Mandatory Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Designated Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than 20 days prior to the Mandatory Redemption Date. (b) If the funds of the Corporation legally available for redemption of the Designated Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the number of shares of the Designated Preferred Stock required under this Section 6 to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably in proportion to the respective amounts which would otherwise be payable to the holders of Designated Preferred Stock if the funds of the Corporation legally available therefor had been sufficient to redeem all shares required to be redeemed on such date. At any time thereafter when additional funds of the Corporation become legally available for the redemption of the Designated Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem, to the extent of the available funds and in the same proportion as set forth in the preceding sentence, the balance of the shares which the Corporation was theretofore obligated to redeem. (c) Unless there shall have been a default in payment of the Mandatory Redemption Price, on the applicable Mandatory Redemption Date all rights of each holder of shares of Designated Preferred Stock as a stockholder of the Corporation by reason of the ownership of such shares will cease, except the right to receive the Mandatory Redemption Price for such shares, without interest, upon presentation and surrender of the certificate representing such shares, and such shares will not from and after such Mandatory Redemption Date be deemed to be outstanding. (d) Any Designated Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Designated Preferred Stock accordingly. 7. Negative Covenants. ------------------ (a) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely -23- the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (b) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series B Preferred Stock so as to affect adversely the Series B Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (c) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series C Preferred Stock so as to affect adversely the Series C Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (d) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series D Preferred Stock so as to affect adversely the Series D Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series D Preferred Stock, given in writing or by vote at a meeting, consenting or voting, as the case may be, separately as a class; provided that if any such amendment, alteration or repeal adversely affects all of the Designated Preferred Stock in the same manner, such amendment or repeal shall require only the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, acting as a single class. (e) So long as at least 5,500,000 shares of Designated Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, -24- combination or other similar recapitalization affecting such shares) are outstanding (or such lesser number of shares of Designated Preferred Stock as are then outstanding if the Corporation has, prior to such time, failed to redeem shares of Designated Preferred Stock when such redemption was due in accordance with Section 6 above), the Corporation shall not, without the prior written consent of the holders of shares of Designated Preferred Stock representing at least a majority of the combined votes represented by the outstanding shares of Designated Preferred Stock: (i) authorize any shares of capital stock with preference or priority over the Designated Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation or with superior vesting or redemption rights; (ii) amend the Corporation's By-laws in a manner adverse to the holders of the Designated Preferred Stock; (iii) declare or pay any dividends on Common Stock other than dividends payable solely in Common Stock; (iv) redeem, repurchase or otherwise acquire (or pay into or set aside a sinking fund for such purpose) any shares of Common Stock at a price greater than the price at which they were originally issued; (v) liquidate, dissolve or wind-up the Corporation; (vi) make (or permit any subsidiary to make) any loan or advance to any person, including without limitation, any employee or director of the Corporation or any subsidiary, except (A) advances and similar expenditures in the ordinary course of business or (B) as approved by the Board of Directors; or (vii) (A) merge with or into or consolidate with any other corporation (other than a merger of consolidation in which the stockholders of the Company immediately prior thereto own at least 80% of the outstanding voting stock of the surviving or acquiring corporation), (B) sell, lease, or otherwise dispose of all or substantially all, or a Significant Portion (as defined below), of its properties or assets (for this purpose, "Significant Portion" shall mean properties or assets with a fair market value equal to more than 35% of the book value of the Company's total properties or assets as of the end of the most recent fiscal quarter), or (C) acquire all or substantially all of the properties or assets of any other corporation or entity (except for consideration of less than 20% of the Corporation's consolidated net worth as of the end of the prior fiscal quarter. -25- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President this 23rd day of July, 1999. Sycamore Networks, Inc. By: /s/ Daniel Smith ------------------ Daniel Smith President -26- EX-3.3 3 BY-LAWS OF REGISTRANT Exhibit 3.3 BY-LAWS OF SYCAMORE NETWORKS, INC. BY-LAWS TABLE OF CONTENTS
Page ---- ARTICLE 1 - Stockholders............................................. 1 1.1 Place of Meetings.................................... 1 ----------------- 1.2 Annual Meeting....................................... 1 -------------- 1.3 Special Meetings..................................... 1 ---------------- 1.4 Notice of Meetings................................... 1 ------------------ 1.5 Voting List.......................................... 2 ----------- 1.6 Quorum............................................... 2 ------ 1.7 Adjournments......................................... 2 ------------ 1.8 Voting and Proxies................................... 2 ------------------ 1.9 Action at Meeting.................................... 2 ----------------- 1.10 Action without Meeting............................... 3 ---------------------- ARTICLE 2 - Directors................................................ 3 2.1 General Powers....................................... 3 -------------- 2.2 Number; Election and Qualification................... 3 ---------------------------------- 2.3 Enlargement of the Board............................. 3 ------------------------ 2.4 Tenure............................................... 3 ------ 2.5 Vacancies............................................ 4 --------- 2.6 Resignation.......................................... 4 ----------- 2.7 Regular Meetings..................................... 4 ---------------- 2.8 Special Meetings..................................... 4 ---------------- 2.9 Notice of Special Meetings........................... 4 -------------------------- 2.10 Meetings by Telephone Conference Calls............... 4 -------------------------------------- 2.11 Quorum............................................... 5 ------ 2.12 Action at Meeting.................................... 5 ----------------- 2.13 Action by Consent.................................... 5 ----------------- 2.14 Removal.............................................. 5 ------- 2.15 Committees........................................... 5 ---------- 2.16 Compensation of Directors............................ 6 ------------------------- ARTICLE 3 - Officers................................................. 6 3.1 Enumeration.......................................... 6 ----------- 3.2 Election............................................. 6 -------- 3.3 Qualification........................................ 6 ------------- 3.4 Tenure............................................... 6 ------ 3.5 Resignation and Removal.............................. 6 ----------------------- 3.6 Vacancies............................................ 7 --------- 3.7 Chairman of the Board and Vice-Chairman of the Board. 7 ----------------------------------------------------
-ii- 3.8 President............................................. 7 --------- 3.9 Vice Presidents....................................... 7 --------------- 3.10 Secretary and Assistant Secretaries................... 8 ----------------------------------- 3.11 Treasurer and Assistant Treasurers.................... 8 ---------------------------------- 3.12 Salaries.............................................. 8 -------- ARTICLE 4 - Capital Stock............................................. 9 4.1 Issuance of Stock..................................... 9 ----------------- 4.2 Certificates of Stock................................. 9 --------------------- 4.3 Transfers............................................. 9 --------- 4.4 Lost, Stolen or Destroyed Certificates................ 11 -------------------------------------- 4.5 Record Date........................................... 11 ----------- ARTICLE 5 - General Provisions........................................ 11 5.1 Fiscal Year........................................... 11 ----------- 5.2 Corporate Seal........................................ 11 -------------- 5.3 Waiver of Notice...................................... 12 ---------------- 5.4 Voting of Securities.................................. 12 -------------------- 5.5 Evidence of Authority................................. 12 --------------------- 5.6 Certificate of Incorporation.......................... 12 ---------------------------- 5.7 Transactions with Interested Parties.................. 12 ------------------------------------ 5.8 Severability.......................................... 13 ------------ 5.9 Pronouns.............................................. 13 -------- ARTICLE 6 - Amendments................................................ 13 6.1 By the Board of Directors............................. 13 ------------------------- 6.2 By the Stockholders................................... 13 -------------------
-iii- BY-LAWS OF SYCAMORE NETWORKS, INC. ARTICLE 1 - Stockholders ------------------------ 1.1 Place of Meetings. All meetings of stockholders shall be held at such ----------------- place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the -------------- election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. 1.3 Special Meetings. Special meetings of stockholders may be called at ---------------- any time by the President or by the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 Notice of Meetings. Except as otherwise provided by law, written ------------------ notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. -1- 1.5 Voting List. The officer who has charge of the stock ledger of the ----------- corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. 1.6 Quorum. Except as otherwise provided by law, the Certificate of ------ Incorporation or these By-laws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. 1.7 Adjournments. Any meeting of stockholders may be adjourned to any ------------ other time and to any other place at which a meeting of stockholders may be held under these By-laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. 1.8 Voting and Proxies. Each stockholder shall have one vote for each ------------------ share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by written proxy executed by the stockholder or his authorized agent and delivered to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 1.9 Action at Meeting. When a quorum is present at any meeting, the ----------------- holders of shares of stock representing a majority of the votes cast on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of shares of stock of that class representing a -2- majority of the votes cast on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. When a quorum is present at any meeting, any election by stockholders shall be determined by a plurality of the votes cast on the election. 1.10 Action without Meeting. Any action required or permitted to be taken ---------------------- at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 2 - Directors ---------------------- 2.1 General Powers. The business and affairs of the corporation shall be -------------- managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2.2 Number; Election and Qualification. The number of directors which ---------------------------------- shall constitute the whole Board of Directors shall be determined by resolution of the stockholders or the Board of Directors, but in no event shall be less than one. The number of directors may be decreased at any time and from time to time either by the stockholders or by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. 2.3 Enlargement of the Board. The number of directors may be increased at ------------------------ any time and from time to time by the stockholders or by a majority of the directors then in office. 2.4 Tenure. Each director shall hold office until the next annual meeting ------ and until his successor is elected and qualified, or until his earlier death, resignation or removal. -3- 2.5 Vacancies. Unless and until filled by the stockholders, any vacancy --------- in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.6 Resignation. Any director may resign by delivering his written ----------- resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.7 Regular Meetings. Regular meetings of the Board of Directors may be ---------------- held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 2.8 Special Meetings. Special meetings of the Board of Directors may be ---------------- held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in office. 2.9 Notice of Special Meetings. Notice of any special meeting of -------------------------- directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or telex, or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.10 Meetings by Telephone Conference Calls. Directors or any members of -------------------------------------- any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the -4- meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. 2.11 Quorum. A majority of the total number of the whole Board of ------ Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.12 Action at Meeting. At any meeting of the Board of Directors at which ----------------- a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.13 Action by Consent. Any action required or permitted to be taken at ----------------- any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. 2.14 Removal. Except as otherwise provided by the General Corporation Law ------- of Delaware, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except that the directors elected by the holders of a particular class or series of stock may be removed without cause only by vote of the holders of a majority of the outstanding shares of such class or series. 2.15 Committees. The Board of Directors may designate one or more ---------- committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation -5- to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-laws for the Board of Directors. 2.16 Compensation of Directors. Directors may be paid such compensation ------------------------- for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. ARTICLE 3 - Officers -------------------- 3.1 Enumeration. The officers of the corporation shall consist of a ----------- President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 Election. The President, Treasurer and Secretary shall be elected -------- annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. 3.3 Qualification. No officer need be a stockholder. Any two or more ------------- offices may be held by the same person. 3.4 Tenure. Except as otherwise provided by law, by the Certificate of ------ Incorporation or by these By-laws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. 3.5 Resignation and Removal. Any officer may resign by delivering his ----------------------- written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. -6- Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. 3.6 Vacancies. The Board of Directors may fill any vacancy occurring in --------- any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. 3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of ---------------------------------------------------- Directors may appoint a Chairman of the Board and may designate the Chairman of the Board as Chief Executive Officer. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors. 3.8 President. The President shall, subject to the direction of the Board --------- of Directors, have general charge and supervision of the business of the corporation. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. 3.9 Vice Presidents. Any Vice President shall perform such duties and --------------- possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. -7- 3.10 Secretary and Assistant Secretaries. The Secretary shall perform such ----------------------------------- duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary, (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such ---------------------------------- duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.1 Salaries. Officers of the corporation shall be entitled to such -------- salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. -8- ARTICLE 4 - Capital Stock ------------------------- 4.1 Issuance of Stock. Unless otherwise voted by the stockholders and ----------------- subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 Certificates of Stock. Every holder of stock of the corporation shall --------------------- be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of each certificate representing shares of such class or series of stock, provided that in lieu of the foregoing requirements there may be set forth on the face or back of each certificate representing shares of such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the full text of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 4.3 Transfers. Except as otherwise established by rules and regulations --------- adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or -9- accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws. -10- 4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a -------------------------------------- new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. 4.5 Record Date. The Board of Directors may fix in advance a date as a ----------- record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 10 days after the date of adoption of a record date for a written consent without a meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is properly delivered to the corporation. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - General Provisions ------------------------------ 5.1 Fiscal Year. Except as from time to time otherwise designated by the ----------- Board of Directors, the fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. 5.2 Corporate Seal. The corporate seal shall be in such form as shall be -------------- approved by the Board of Directors. -11- 5.3 Waiver of Notice. Whenever any notice whatsoever is required to be ---------------- given by law, by the Certificate of Incorporation or by these By-laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.4 Voting of Securities. Except as the directors may otherwise -------------------- designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5.5 Evidence of Authority. A certificate by the Secretary, or an --------------------- Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 Certificate of Incorporation. All references in these By-laws to the ---------------------------- Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. 5.7 Transactions with Interested Parties. No contract or transaction ------------------------------------ between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or -12- (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 5.8 Severability. Any determination that any provision of these By-laws ------------ is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-laws. 5.9 Pronouns. All pronouns used in these By-laws shall be deemed to -------- refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. ARTICLE 6 - Amendments ---------------------- 6.1 By the Board of Directors. These By-laws may be altered, amended or ------------------------- repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 By the Stockholders. These By-laws may be altered, amended or ------------------- repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. -13- EX-4.3 4 SECOND AMENDED INVESTOR RIGHTS AGREEMENT Exhibit 4.3 SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ------------------------- This Agreement, dated as of February 26, 1999, is entered into by and among Sycamore Networks, Inc., a Delaware corporation (the "Company"), the persons and entities listed on Schedule I hereto under the heading "Investors" (individually, an "Investor", and collectively, the "Investors") and the persons listed on Schedule II hereto under the heading "Founders" (individually, a "Founder" and collectively, the "Founders"). BACKGROUND ---------- WHEREAS, the Company and the Investors have entered into a Series C Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement"); WHEREAS, the Company, the Investors and others are parties to an Amended and Restated Investor Rights Agreement, dated as of December 3, 1998, (the "Prior Agreement"), which Prior Agreement the parties thereto desire to amend and restate in its entirety pursuant to the terms hereof; and WHEREAS, the parties hereto wish to provide for (i) the composition of the Board of Directors of the Company, (ii) certain arrangements with respect to the registration of shares of capital stock of the Company under the Securities Act of 1933, and (iii) a right of first refusal with respect to the sale of any securities of the Company; NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, and the consummation of the sale and purchase of the Series C Convertible Preferred Stock pursuant to the Series C Purchase Agreement, and for other valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINITIONS As used in this Agreement, the following terms shall have the following respective meanings: "Commission" means the United States Securities and Exchange ---------- Commission, or any other federal agency at the time administering the Securities Act. "Common Stock" means the common stock, $0.001 par value per share, of ------------ the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ or any similar federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. "Initial Public Offering" means the sale of shares of Common Stock in ----------------------- a firm commitment underwritten public offering pursuant to a Registration Statement at a price to the public of at least $12.00 per share (adjusted for stock splits, stock dividends and similar events) resulting in proceeds (net of the underwriting discounts or commissions and offering expenses) to the Company of at least $10,000,000. "Registration Statement" means a registration statement filed by the ---------------------- Company with the Commission for a public offering and sale of Common Stock by the Company (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registration Expenses" means the expenses described in Section 4 of --------------------- Article III below. "Registrable Shares" means (i) the shares of Common Stock issued or ------------------ issuable upon conversion of the Shares, (ii) shares of Common Stock held by Gururaj Deshpande, Richard Barry, Daniel Smith and Chikong Shue, (iii) any shares of Common Stock, and any shares of Common Stock issued or issuable upon the conversion or exercise of any other securities, acquired by the Investors pursuant to Article IV of this Agreement or pursuant to the Second Amended and Restated Right of First Refusal and Co-Sale Agreement of even date herewith, as amended, among the Company, the Investors and others, and (iv) any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, -------- however, that shares of Common Stock which are Registrable Shares shall cease to - ------- be Registrable Shares (a) upon any sale of such shares pursuant to a Registration Statement or Rule 144 under the Securities Act, (b) upon any sale of such shares in any manner to a person or entity which, by virtue of Section 2 of Article V of this Agreement, is not entitled to the rights provided by this Agreement, or (c) for purposes of Section 2 of Article III hereof, following the third anniversary of the Initial Public Offering. Wherever reference is made in this Agreement to a request or consent of holders of a certain percentage of Registrable Shares, the determination of such percentage shall include shares of Common Stock issuable upon conversion of the Shares even if such conversion has not yet been effected. -2- "Securities Act" means the Securities Act of 1933, as amended, or any -------------- similar federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. "Shares" means the shares of Series A Convertible Preferred Stock, ------ Series B Convertible Preferred Stock and Series C Convertible Preferred Stock held by Stockholders. "Stockholders" means the Investors, the Founders, and any persons or ------------ entities to whom the rights granted to Investors or Founders under this Agreement are transferred by an Investor or Founder, or their successors or permitted assigns, pursuant to Section 2 of Article V below. ARTICLE II. ELECTION OF DIRECTORS 1. Voting of Shares. In any and all elections of directors of the Company ---------------- (whether at a meeting or by written consent in lieu of a meeting), each Stockholder shall vote or cause to be voted all Voting Shares (as defined in Section 2 of Article II below) owned by him, her or it, or over which he, she or it has voting control, and otherwise use his, her or its respective best efforts, so as to fix the number of directors at five and to elect as directors (i) Gururaj Deshpande, (ii) two representatives designated by Matrix Partners V, L.P. (initially Paul J. Ferri and Timothy Barrows), (iii) the Chief Executive Officer of the Company, and (iv) one person mutually agreed upon by all of the other members of the Board of Directors. The obligation of the Stockholders under this Section 1 to elect as a director designees of Matrix Partners V, L.P. shall continue only for so long as Matrix Partners V, L.P. (together with any affiliates, within the meaning of Rule 144 under the Securities Act) owns, after giving effect to the conversion of all convertible preferred stock into Common Stock, at least 1,375,000 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares). 2. Voting Shares. "Voting Shares" shall mean and include any and all ------------- shares of the Common Stock, Shares, and/or shares of capital stock of the Company, by whatever name called, which carry voting rights (including voting rights which arise by reason of default). 3. Restrictive Legend. All certificates representing Voting Shares owned ------------------ or hereafter acquired by the Stockholders or any transferee bound by this Agreement shall have affixed thereto a legend substantially in the following form: "The shares of stock represented by this certificate are subject to certain voting agreements as set forth in a Second Amended and Restated Investor Rights Agreement by and among the registered owner of this -3- certificate, the Company and certain other stockholders of the Company, a copy of which is available for inspection at the offices of the Secretary of the Company." 4. Transfers of Voting Rights. Any transferee to whom Voting Shares are -------------------------- transferred by a Stockholder, whether voluntarily or by operation of law, shall be bound by the voting obligations imposed upon the transferor under this Agreement, to the same extent as if such transferee were a Stockholder hereunder. ARTICLE III. REGISTRATION RIGHTS 1. Required Registrations. ---------------------- (a) At any time after the earlier of February 26, 2003 or 180 days after the closing of the Company's first underwritten public offering of shares of Common Stock pursuant to a Registration Statement, Stockholders (other than the Founders) holding in the aggregate at least 35% of the Registrable Shares held by the Stockholders (other than the Founders) may request, in writing, that the Company effect the registration on Form S-1 or Form S-2 (or any successor form) of Registrable Shares owned by such Stockholders having an aggregate offering price of at least $5,000,000 (based on the market price or fair value at the time of such request). If the Stockholders initiating the registration intend to distribute the Registrable Shares by means of an underwriting, they shall so advise the Company in their request. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-1 or Form S-2 (or any successor form) of all Registrable Shares which the Company has been requested to so register. (b) At any time after the Company becomes eligible to file a Registration Statement on Form S-3 (or any successor form relating to secondary offerings), a Stockholder or Stockholders may request the Company, in writing, to effect the registration on Form S-3 (or such successor form), of Registrable Shares having an aggregate offering price of at least $1,000,000 (based on the public market price at the time of such request). Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-3 (or such successor form) of all Registrable Shares which the Company has been requested to so register. (c) The Company shall not be required to effect more than two registrations pursuant to paragraph (a) above or more than three registrations pursuant to paragraph (b) above; provided, however, that such obligation shall -------- ------- be deemed satisfied only when a registration statement covering the applicable Registrable Shares shall have (i) become effective or (ii) been withdrawn at the request of the Stockholders requesting such registration (other than as a result of information concerning the business or financial condition of the Company which is -4- made known to the Stockholders after the date on which such registration was requested). (d) If at the time of any request to register Registrable Shares pursuant to this Section 1, the Company is engaged or has plans to engage within 90 days of the time of the request in a registered public offering of securities for its own account or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of three months from the effective date of such offering or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any 12- month period. 2. Incidental Registration. ----------------------- (a) Whenever the Company proposes to file a Registration Statement at any time and from time to time, it will, prior to such filing, give written notice to all Stockholders of its intention to do so and, upon the written request of a Stockholder or Stockholders, given within 10 business days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its reasonable best efforts to cause all Registrable Shares which the Company has been requested by such Stockholder or Stockholders to register, to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of such Stockholder or Stockholders; provided, however, that the -------- ------- Company shall have the right to postpone or withdraw any registration effected pursuant to this Section 2 without obligation to any Stockholder. (b) In connection with any registration under this Section 2 involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it. If in the opinion of the managing underwriter it is desirable because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein; provided, -------- however, that no persons or entities other than the Company, the Stockholders - ------- and other persons or entities holding registration rights shall be permitted to include securities in the offering. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and -5- other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 3. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Agreement to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) file with the Commission a Registration Statement with respect to such Registrable Shares and use its best efforts to cause that Registration Statement to become effective; (b) as expeditiously as possible prepare and file with the Commission any amendments and supplements to the Registration Statement and the prospectus included in the Registration Statement as may be necessary to keep the Registration Statement effective, in the case of a firm commitment underwritten public offering, until each underwriter has completed the distribution of all securities purchased by it and, in the case of any other offering, until the earlier of the sale of all Registrable Shares covered thereby or 180 days after the effective date thereof; (c) as expeditiously as possible furnish to each selling Stockholder such reasonable numbers of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the selling Stockholder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Shares owned by the selling Stockholder; and (d) as expeditiously as possible use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities or Blue Sky laws of such states as the selling Stockholder shall reasonably request, and do any and all other acts and things that may be necessary or desirable to enable the selling Stockholder to consummate the public sale or other disposition in such states of the Registrable Shares owned by the selling Stockholder; provided, however, that the Company shall not be -------- ------- required in connection with this paragraph (d) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. If the Company has delivered preliminary or final prospectuses to the selling Stockholders and after having done so the prospectus is amended to comply with the requirements of the Securities Act, the Company shall promptly notify the selling Stockholders and, if requested, the selling Stockholder shall immediately cease -6- making offers of Registrable Shares and return all prospectuses to the Company. The Company shall promptly provide each selling Stockholder with revised prospectuses and, following receipt of the revised prospectuses, the selling Stockholder shall be free to resume making offers of the Registrable Shares. If, after a registration statement becomes effective, the Company becomes engaged in any activity which, in the good faith determination of the Company's Board of Directors, involves information that would have to be disclosed in the Registration Statement but which the Company desires to keep confidential for valid business reasons, then the Company may at its option, by notice to such Stockholders, require that the Stockholders who have included Shares in such Registration Statement cease sales of such Shares under such Registration Statement for a period not in excess of three months from the date of such notice, such right to be exercised by the Company not more than once in any 12- month period. If, in connection therewith, the Company considers it appropriate for such Registration Statement to be amended, the Company shall so amend such Registration Statement as promptly as practicable and such Stockholders shall suspend any further sales of their Shares until the Company advises them that such Registration Statement has been amended. The time periods referred to herein during which such Registration Statement must be kept effective shall be extended for an additional number of days equal to the number of days during which the right to sell shares was suspended pursuant to this paragraph. 4. Allocation of Expenses. The Company will pay all Registration ---------------------- Expenses of all registrations under this Agreement. For purposes of this Section 4, the term "Registration Expenses" shall mean all expenses incurred by the Company in complying with this Article III, including, without limitation, all registration and filing fees, exchange listing fees, printing expenses, fees and expenses of counsel for the Company to represent the selling Stockholder(s), state Blue Sky fees and expenses, and the expense of any special audits incident to or required by any such registration, but excluding underwriting discounts, selling commissions and the fees and expenses of selling Stockholders' own counsel. 5. Indemnification and Contribution. -------------------------------- (a) In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the seller of such Registrable Shares, each of such sellers', directors and officers, each underwriter of such Registrable Shares, and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act, the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) -7- arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, or arise out of or are based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Company will reimburse such seller, underwriter and each such controlling person for any legal or any other expenses reasonably incurred by such seller, underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, -------- however, that the Company will not be liable in any such case to a seller, - ------- underwriter or controlling person to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in such Registration Statement, preliminary prospectus or final prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by or on behalf of such seller, underwriter or controlling person specifically for use in the preparation thereof. (b) In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, each seller of Registrable Shares, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and officers and each underwriter (if any) and each person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities, joint or several, to which the Company, such directors and officers, underwriter or controlling person may become subject under the Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if the statement or omission was made in reliance upon and in conformity with information relating to such seller furnished in writing to the Company by or on behalf of such seller specifically for use in connection with the preparation of such Registration Statement, prospectus, amendment or supplement; provided, however, that the obligations of each such Stockholder -------- ------- hereunder shall be limited to an amount equal to the net proceeds to such Stockholder of Registrable Shares sold in connection with such registration. -8- (c) Each party entitled to indemnification under this Article III, Section 5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided, that counsel for the -------- Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld); and, provided further, that the failure of any ---------------- Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article III, Section 5, unless and except to the extent that the Indemnifying Party is prejudiced by the failure of the Indemnified Party to provide timely notice. The Indemnified Party may participate in such defense at such party's expense; provided, -------- however, that the Indemnifying Party shall pay such expense if representation of - ------- such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall consent to entry of any judgment or settle such claim or litigation without the prior written consent of the Indemnifying Party. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any holder of Registrable Shares exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Article III, Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Article III, Section 5 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Stockholder or any such controlling person in circumstances for which indemnification is provided under this Article III, Section 5; then, in each such case, the Company and such Stockholder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportions so that such holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Shares offered by the Registration Statement bears to the public offering price of all securities offered by such Registration Statement, and the Company is responsible for the remaining portion; provided, however, that, in -------- ------- any such case, (A) no such holder will be required to contribute any amount in excess of the net proceeds to it of all -9- Registrable Shares sold by it pursuant to such Registration Statement, and (B) no person or entity guilty of fraudulent misrepresentation, within the meaning of Section 11(f) of the Securities Act, shall be entitled to contribution from any person or entity who is not guilty of such fraudulent misrepresentation. 6. Indemnification with Respect to Underwritten Offering. In the event ----------------------------------------------------- that Registrable Shares are sold pursuant to a Registration Statement in an underwritten offering, the Company agrees to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of the securities being registered and customary covenants and agreements to be performed by such issuer, including without limitation customary provisions with respect to indemnification by the Company of the underwriters of such offering. 7. Information by Holder. Each Stockholder including Registrable Shares --------------------- in any registration shall furnish to the Company such information regarding such Stockholder and the distribution proposed by such Stockholder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 8. "Stand-Off" Agreement. Each Stockholder, if requested by the Company -------------------- and the managing underwriter of an offering by the Company of Common Stock or other securities of the Company pursuant to a Registration Statement, shall agree not to sell publicly or otherwise transfer or dispose of any Registrable Shares of the Company held by such Stockholder for a specified period of time (not to exceed 180 days) following the effective date of such Registration Statement; provided, that: -------- (a) such agreement shall only apply to the first Registration Statement covering Common Stock to be sold by or on behalf of the Company to the public in an underwritten offering; and (b) all officers and directors of the Company and all selling stockholders in such offering enter into similar agreements. 9. Limitations on Subsequent Registration Rights. The Company shall not, --------------------------------------------- without the prior written consent of Investors holding a majority of the Registrable Shares held by all Investors, enter into any agreement (other than this Agreement) with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include securities of the Company in any Registration Statement upon terms which are more favorable to such holder or prospective holder than the terms on which holders of Registrable Shares may include shares in such registration, or (b) to make a demand registration which could result in such registration statement being declared effective prior to February 26, 2003. -10- 10. Rule 144 Requirements. After the earliest of (a) the closing of the --------------------- sale of securities of the Company pursuant to a Registration Statement, (b) the registration by the Company of a class of securities under Section 12 of the Exchange Act, or (c) the issuance by the Company of an offering circular pursuant to Regulation A under the Securities Act, the Company agrees to: (i) comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about the Company; (ii) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (iii) furnish to any holder of Registrable Shares upon request (A) a written statement by the Company as to its compliance with the requirements of said Rule 144(c), and the reporting requirements of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), (B) a copy of the most recent annual or quarterly report of the Company, and (C) such other reports and documents of the Company as such holder may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any such securities without registration. ARTICLE IV. RIGHT OF FIRST REFUSAL 1. Right of First Refusal ---------------------- (a) The Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, (i) any shares of its Common Stock, (ii) any other equity securities of the Company, including, without limitation, shares of preferred stock, (iii) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity securities of the Company, or (iv) any debt securities convertible into capital stock of the Company (collectively, the "Offered Securities"), unless in each such case the Company shall have first complied with Article IV of this Agreement. The Company shall deliver to each Investor a written notice of any proposed or intended issuance, sale or exchange of Offered Securities (the "Offer"), which Offer shall (i) identify and describe the Offered Securities, (ii) describe the price and other terms upon which they are to be issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold or exchanged, (iii) identify the persons or entities, if known, to which or with which the Offered Securities are to be offered, issued, sold or exchanged, and (iv) offer to issue and sell to or exchange with such Investor such portion of the Offered Securities as is equal to the number of Offered Securities multiplied by a fraction, the numerator of which is the aggregate number of shares of Common Stock issued or -11- issuable upon conversion of the Shares held by such Investor and the denominator of which is the total number of shares of Common Stock then outstanding (giving effect to the assumed conversion of all outstanding shares of convertible preferred stock) (the "Pro Rata Share"). Each Investor shall have the right, for a period of 20 days following delivery of the Offer, to purchase or acquire, at the price and upon the other terms specified in the Offer, the number or amount of Offered Securities described above. The Offer by its term shall remain open and irrevocable for such 20-day period. (b) To accept an Offer, in whole or in part, an Investor must deliver a written notice to the Company prior to the end of the 20-day period of the Offer, setting forth the portion of such Investor's Pro Rata Share that such Investor elects to purchase (a "Notice of Acceptance"). (c) The Company shall have 90 days from the expiration of the 20-day period set forth in Section 1(a) to issue, sell or exchange all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by the Investors (the "Available Securities"), but only to the offerees or purchasers described in the Offer and only upon terms and conditions which are not more favorable, in the aggregate, to the acquiring person or persons or less favorable to the Company than those set forth in the Offer. (d) In the event the Company shall propose to sell less than all the Available Securities (any such sale to be in the manner and on the terms specified in Section 1(c)), then each Investor may, at its sole option and in its sole discretion, reduce the number or amount of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than the number or amount of the Offered Securities that the Investor elected to purchase pursuant to Section 1(b) multiplied by a fraction, (i) the numerator of which shall be the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including Offered Securities to be issued or sold to Investors pursuant to Article IV, Section 1(b) prior to such reduction) and (ii) the denominator of which shall be the amount of all Offered Securities. In the event that an Investor so elects to reduce the number or amount of Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the Offered Securities unless and until such securities have again been offered to the Investors in accordance with Section 1(a). (e) Upon the closing of the issuance, sale or exchange of all or less than all the Available Securities, the Investors shall acquire from the Company, and the Company shall issue to the Investors, the number or amount of Offered Securities specified in the Notices of Acceptance, as reduced pursuant to Section 1(d) if the Investors have so elected, upon the terms and conditions specified in the Offer. The purchase by the Investors of any Offered Securities is subject in all cases to the -12- preparation, execution and delivery by the Company and the Investors of a purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to the Investors and the Company. (f) Any Offered Securities not acquired by the Investors or other persons in accordance with Section 1(c) may not be issued, sold or exchanged until they are again offered to the Investors under the procedures specified in this Article. 2. Excluded Issuances. The rights of the Investors under this Article IV ------------------ shall not apply to: (a) Common Stock issued as a stock dividend to holders of Common Stock or upon any subdivision or combination of shares of Common Stock; (b) the issuance of any shares of Common Stock upon conversion of outstanding shares of convertible preferred stock; (c) shares of Series C Preferred Stock issued at Additional Closings, as defined in the Purchase Agreement; (d) up to 5,995,604 shares of Common Stock, either issued in the form of restricted stock awards or options exercisable for Common Stock (subject to appropriate adjustment for stock split, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee directors of the Company, issued or issuable to officers, directors, consultants and employees of the Company or any subsidiary pursuant to any plan, agreement or arrangement approved by the Board of Directors of the Company; (e) securities issued solely in consideration for the acquisition (whether by merger or otherwise) by the Company or any of its subsidiaries of all or substantially all of the stock or assets of any other entity; (f) shares of Common Stock sold by the Company in an underwritten public offering pursuant to an effective registration statement under the Securities Act; and (g) securities issued to equipment lessors, as approved by a majority of non-employee directors of the Company. -13- ARTICLE V. GENERAL 1. Termination. Article II and Article IV of this Agreement shall ----------- terminate in their entirety upon the earlier of (a) an Acquisition (as defined below), or (b) the closing of an Initial Public Offering, or (c) the redemption of all Shares. An "Acquisition" shall mean any (i) merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than a majority of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation, (ii) sale of all or substantially all the assets of the Company or (iii) sale of shares of capital stock of the Company, in a single transaction or series of related transactions, representing at least 80% of the voting power of the voting securities of the Company. 2. Transfer of Rights. This Agreement, and the rights and obligations ------------------ of an Investor hereunder, may be assigned by such Investor to any person or entity to which at least 100,000 Shares, as adjusted for stock splits, stock dividends, recapitalizations and similar events (or 100% of the Shares originally purchased hereunder by such Investor, if less than 100,000 Shares), are transferred by such Investor, and such transferee shall be deemed an "Investor" for purposes of this Agreement; provided that the transferee provides -------- written notice of such assignment to the Company and agrees to be bound by the terms and conditions set forth herein. The rights and obligations of a Founder under Article II hereunder may be assigned by said Founder to any spouse, child, grandchild or trust for his or her benefit and such transferee shall be deemed a "Founder" for purposes of Article II, provided that the transferee provides -------- written notice of such assignment to the Company and agrees to be bound by the terms and conditions set forth herein. 3. Severability. The provisions of this Agreement are severable, so ------------ that the invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other term or provision of this Agreement, which shall remain in full force and effect. 4. Specific Performance. In addition to any and all other remedies that -------------------- may be available at law in the event of any breach of this Agreement, the Investors and the Founders shall be entitled to specific performance of the agreements and obligations of the other parties hereunder and to such other injunctive or other equitable relief as may be granted by a court of competent jurisdiction. 5. Governing Law. This Agreement shall be governed by, and construed ------------- and enforced in accordance with, the laws of the State of Delaware (without reference to the conflicts of law provisions thereof). -14- 6. Notices. All notices, requests, consents, and other communications ------- under this Agreement shall be in writing and shall be delivered by hand, sent via a reputable nationwide overnight courier service or mailed by first class certified or registered mail, return receipt requested, postage prepaid: If to the Company, at Sycamore Networks, Inc., 10 Elizabeth Drive, Chelmsford, MA 01824, Attn: President, or at such other address or addresses as may have been furnished in writing by the Company to the Purchasers, with a copy to Hale and Dorr LLP, 60 State Street, Boston, MA 02109, Attn: Mark G. Borden, Esq.; If to an Investor, at its or his address as set forth on the signature page hereto, or at such other address or addresses as may have been furnished in writing by such Investor to the Company. If to a Founder, at his address as set forth on the signature page hereto, or at such other address or addresses as may have been furnished by such Founder to the Company and the Investors. Notices provided in accordance with this Section 6 shall be deemed delivered upon personal delivery, one business day after being sent via a reputable nationwide overnight courier service, or three business days after deposit in the mail. 7. Complete Agreement; Amendments. ------------------------------ (a) This Agreement constitutes the full and complete agreement of the parties hereto with respect to the subject matter hereof. (b) This Agreement may be amended at any time by a written instrument signed by the Company and Investors holding at least a majority of the shares of Common Stock issued or issuable upon conversion of the Shares, provided that no -------- consent shall be required for an amendment pursuant to Section 11 below and provided further that Section 8 of Article III shall not be amended to include - -------- ------- any securities of the Company other than the Registrable Shares without the consent of each Investor who would be adversely affected by such amendment. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. (c) The Prior Agreement is hereby amended and restated and superseded in all respects by this Agreement. Each of the Investors waives any right it may have had under Article IV of the Prior Agreement with respect to the issuance and sale by Company of the shares of Series C Convertible Preferred Stock pursuant to the Purchase Agreement. -15- 8. Pronouns. Whenever the content may require, any pronouns used in this -------- Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. 9. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one Agreement binding on all the parties hereto. 10. Captions. Captions of sections have been added only for convenience -------- and shall not be deemed to be a part of this Agreement. 11. Addition of Purchasers. Each purchaser of shares of Series C ---------------------- Preferred Stock of the Company under Section 2.2 of the Purchase Agreement shall become a party to and an Investor under this Agreement upon the closing of its purchase of shares of Series C Preferred Stock thereunder and its execution of a counterpart signature page to this Agreement. -16- IN WITNESS WHEREOF, this Agreement has been executed as of the date first written above. COMPANY: SYCAMORE NETWORKS, INC. By: /s/ Daniel Smith ------------------------------------- Daniel Smith President INVESTORS: Matrix Partners V, L.P. Bay Colony Corporate Center 1000 Winter Street, Suite 4500 Waltham, MA 02154 By: Matrix V Management Co., L.L.C., its General Partner By: /s/ Timothy A. Barrows ------------------------------- Matrix V Entrepreneurs Fund, L.P. Bay Colony Corporate Center 1000 Winter Street, Suite 4500 Waltham, MA 02154 By: Matrix V Management Co., L.L.C., its General Partner By: /s/ Timothy A. Barrows ------------------------------- -17- North Bridge Venture Partners II, L.P. 404 Wyman Street, Suite 365 Waltham, MA 02154 By: North Bridge Venture Partners II, L.P. its General Partner By: /s/ Edward T. Anderson ------------------------------- Integral Capital Partners IV, L.P. 2750 Sand Hill Road Menlo Park, CA 94025-7020 By: Integral Capital Management IV, LLC its General Partner By: /s/ Pamela K. Hagenah ------------------------------------ Pamela K. Hagenah a Manager Integral Capital Partners IV MS Side Fund, L.P. 2750 Sand Hill Road Menlo Park, CA 94025-7020 By: ICP MS Management, LLC its General Partner By: /s/ Pamela K. Hagenah ------------------------------------ Pamela K. Hagenah a Manager Pequot Private Equity Fund, L.P. 500 Nyala Farm Road Westport, CT 06880 -18- By: /s/ David J. Malat ------------------------------------ Pequot Offshore Private Equity Fund, Inc. 500 Nyala Farm Road Westport, CT 06880 By: /s/ David J. Malat ------------------------------------ Pequot Venture Partners, L.P. 500 Nyala Farm Road Westport, CT 06880 By: /s/ David J. Malat ------------------------------------ Spinnaker Founders Fund, L.P. 1875 South Grant Street San Mateo, CA 94402 By: Bowman Capital Management, L.L.C. its General Partner By: /s/ William J. Haggerty ----------------------------------- William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. Spinnaker Offshore Founders Fund, 1875 South Grant Street San Mateo, CA 94402 -19- By: Bowman Capital Management, L.L.C., its Investment Adviser and Attorney-in-Fact By: /s/ William J. Haggerty ----------------------------------- William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. Spinnaker Clipper Fund, L.P. 1875 South Grant Street San Mateo, CA 94402 By: Bowman Capital Management, L.L.C., its General Partner By: /s/ William J. Haggerty ----------------------------------- William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. ATGF II, a Panamanian corporation SUCRE Building Calle 48 Este Bella Vista, P.O. Box 5168 Panama S, Panama By: /s/ illegible ------------------------------------ Director /s/ Ralph H. Cechettini ---------------------------------------- The Ralph H. Cechettini 1995 Trust -20- /s/ James Stableford ------------------------------------------ James Stableford /s/ Anthony Ciulla ------------------------------------------ Anthony Ciulla /s/ William Slattery ------------------------------------------ William Slattery /s/ Marc Weiss ------------------------------------------ Marc Weiss /s/ Gururaj Deshpande ------------------------------------------ Gururaj Deshpande /s/ Daniel Smith ------------------------------------------ Daniel Smith /s/ Chikong Shue ------------------------------------------ Chikong Shue /s/ Siu Wing Li ------------------------------------------ Siu Wing Li FOUNDERS: /s/ Gururaj Deshpande ------------------------------------------ Gururaj Deshpande Address: 9 Sparta Way Andover, MA 01810 -21- /s/ Richard Barry ------------------------------------------ Richard Barry Address: 1284 Beacon Street, #815 Brookline, MA 02138 -22- Schedule I ---------- Investors --------- Matrix Partners V, L.P. Matrix V Entrepreneurs Fund, L.P. North Bridge Venture Partners II, L.P. Integral Capital Partners IV, L.P. Integral Capital Partners IV MS Side Fund, L.P. Pequot Private Equity Fund, L.P. Pequot Venture Partners, L.P. Pequot Offshore Private Equity Fund, Inc. ATGF II, a Panamanian corporation The Ralph H. Cechettini 1995 Trust James Stableford Anthony Ciulla William Slattery Marc Weiss Spinnaker Founders Fund, L.P. Spinnaker Offshore Founders Fund, Cayman Limited Spinnaker Clipper Fund, L.P. Gururaj Deshpande Daniel Smith Chikong Shue Siu Wing Li Michael Viren Steven Finn Eric MacDonald John Dowling Leif Uptegrove Scott Baker Jeannette Slaff -23- Schedule II ----------- Founders -------- Gururaj Deshpande Richard Barry -24- AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ----------------------------------------------------- This Amendment dated as of July 23, 1999 is entered into by and among Sycamore Networks, Inc., a Delaware corporation (the "Company"), Siemens Information and Communication Networks, Inc., a Delaware corporation ("Siemens"), the Investors (as defined below) and the Founders (as defined below). WHEREAS, the Company has entered into a Second Amended and Restated Investor Rights Agreement dated as of February 26, 1999 (the "Agreement") with the persons and entities listed on Schedule I thereto under the heading "Investors" (individually, an "Investor" and collectively, the "Investors") and the persons listed on Schedule II thereto under the heading "Founders" (individually, a "Founder" and collectively, the "Founders"); WHEREAS, the Company and Siemens have entered into a Series D Preferred Stock Purchase Agreement of even date herewith (the "Series D Stock Purchase Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement pursuant to this Amendment No. 1. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The definition of "Initial Public Offering" contained in Article I of the Agreement shall be deleted in its entirety and the following substituted in its place: "Initial Public Offering" means the sale of shares of Common Stock in ----------------------- a firm commitment underwritten public offering pursuant to a Registration Statement at a price to the public of at least $29.00 per share (adjusted for stock splits, stock dividends and similar events) resulting in proceeds (net of the underwriting discounts or commissions and offering expenses) to the Company of at least $10,000,000. 2. The definition of "Shares" contained in Article I of the Agreement shall be deleted in its entirety and the following substituted in its place: "Shares" means the shares of Series A Convertible Preferred Stock, ------ Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock held by the Stockholders. 3. Section 2 to Article IV of the Agreement shall be deleted in its entirety and the following substituted in its place: 2. Excluded Issuances. The rights of the Investors under this ------------------ Article IV shall not apply to: (a) Common Stock issued as a stock dividend to holders of Common Stock or upon any subdivision or combination of shares of Common Stock; (b) the issuance of any shares of Common Stock upon conversion of outstanding shares of convertible preferred stock; (c) shares of Series C Preferred Stock issued at Additional Closings, as defined in the Purchase Agreement; (d) shares of Series D Preferred Stock issued pursuant to the Series D Stock Purchase Agreement; (e) up to 9,000,000 shares of Common Stock, either issued in the form of restricted stock awards or options exercisable for Common Stock (subject to appropriate adjustment for stock split, stock dividends, combinations and other similar recapitalizations affecting such shares), plus such additional number of shares as may be approved by a majority of the non-employee directors of the Company, issued or issuable to officers, directors, consultants and employees of the Company or any subsidiary pursuant to any plan, agreement or arrangement approved by the Board of Directors of the Company; (f) securities issued solely in consideration for the acquisition (whether by merger or otherwise) by the Company or any of its subsidiaries of all or substantially all of the stock or assets of any other entity; (g) shares of Common Stock sold by the Company in an underwritten public offering pursuant to an effective registration statement under the Securities Act; and (h) securities issued to equipment lessors, as approved by a majority of non-employee directors of the Company. -2- 4. Schedule I attached to the Agreement shall be deleted in its entirety ---------- and Schedule I attached hereto shall be substituted in its place. ---------- 5. The Agreement, as supplemented and modified by this Amendment, together with the other writings referred to in the Agreement or delivered pursuant thereto which form a part thereof, contain the entire agreement among the parties with respect to the subject matter thereof and amend, restate and supersede all prior and contemporaneous arrangements or understandings with respect thereto. Siemens shall become a party to and an Investor under the Agreement, as amended, upon its execution of this Amendment. 6. Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference in the other documents entered into in connection with the Agreement, shall mean and be a reference to the Agreement, as amended hereby. Except as specifically amended above, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. 7. This Amendment shall be governed by the laws of the State of Delaware, notwithstanding the conflict-of-law doctrines of Delaware or any other jurisdiction to the contrary. 8. This Amendment may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 9. This Amendment shall be binding on all parties to the Agreement as and when executed by the Company and Investors holding at least a majority of the shares of Common Stock issued or issuable upon conversion of the Shares (as defined in the Agreement). -3- IN WITNESS WHEREOF the parties hereto have executed this Amendment on the date first above written. COMPANY: SYCAMORE NETWORKS, INC. By: /s/ Daniel Smith ------------------------------------- Daniel Smith President SIEMENS SIEMENS INFORMATION AND COMMUNICATION NETWORKS, INC. By: /s/ Illegible ------------------------------------- Address: 900 Broken Sound Parkway Boca Raton, FL 33487 For Notices: P.O. Box 58075 Santa Clara, CA 95052-8075 Attn: Bjoern Christensen Fax: (408) 492-4821 With copies to Siemens Corporation 1301 Avenue of the Americas New York, NY 10019 Attn: General Counsel Fax: (212) 258-4490 -4- Matrix Partners V, L.P. Bay Colony Corporate Center 1000 Winter Street, Suite 4500 Waltham, MA 02154 By: Matrix V Management Co., L.L.C., its General Partner By: /s/ Timothy A. Barrows ------------------------------------- Matrix V Entrepreneurs Fund, L.P. Bay Colony Corporate Center 1000 Winter Street, Suite 4500 Waltham, MA 02154 By: Matrix V Management Co., L.L.C. its General Partner By: /s/ Timothy A. Barrows ------------------------------------- -5- North Bridge Venture Partners II, L.P. 404 Wyman Street, Suite 365 Waltham, MA 02154 By: North Bridge Venture Partners II, L.P. its General Partner By: /s/ Edward T. Anderson ------------------------------------- Integral Capital Partners IV, L.P. 2750 Sand Hill Road Menlo Park, CA 94025-7020 By: Integral Capital Management IV, LLC its General Partner By: /s/ Pamela K. Hagenah ------------------------------------- Pamela K. Hagenah a Manager Integral Capital Partners IV MS Side Fund, L.P. 2750 Sand Hill Road Menlo Park, CA 94025-7020 By: ICP MS Management, LLC its General Partner By: /s/ Pamela K. Hagenah ------------------------------------- Pamela K. Hagenah a Manager Pequot Private Equity Fund, L.P. 500 Nyala Farm Road Westport, CT 06880 By: /s/ David J. Malat ------------------------------------- -6- Pequot Offshore Private Equity Fund, Inc. 500 Nyala Farm Road Westport, CT 06880 By: /s/ David J. Malat ------------------------------------ Pequot Venture Partners, L.P. 500 Nyala Farm Road Westport, CT 06880 By: /s/ David J. Malat ------------------------------------ Spinnaker Founders Fund, L.P. 1875 South Grant Street San Mateo, CA 94402 By: Bowman Capital Management, L.L.C., its General Partner By: ------------------------------------ William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. Spinnaker Offshore Founders Fund, Cayman Limited 1875 South Grant Street San Mateo, CA 94402 By: Bowman Capital Management, L.L.C., its Investment Adviser and Attorney-in-Fact By: ------------------------------------ William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. -7- Spinnaker Clipper Fund, L.P. 1875 South Grant Street San Mateo, CA 94402 By: Bowman Capital Management, L.L.C., its General Partner By: ------------------------------------ William J. Haggerty, Managing Director of Operations of Bowman Capital Management, L.L.C. ATGF II, a Panamanian corporation SUCRE Building Calle 48 Este Bella Vista, P.O. Box 5168 Panama S, Panama By: /s/ Gary A. Tanaka ------------------------------------- Director /s/ Ralph H. Cechettini --------------------------------------- The Ralph H. Cechettini 1995 Trust /s/ James Stableford ---------------------------------------- James Stableford /s/ Anthony Ciulla --------------------------------------- Anthony Ciulla --------------------------------------- William Slattery --------------------------------------- Marc Weiss -8- --------------------------------------- Chikong Shue --------------------------------------- Siu Wing Li /s/ Gururaj Deshpande --------------------------------------- Gururaj Deshpande /s/ Daniel Smith --------------------------------------- Daniel Smith FOUNDERS: /s/ Gururaj Deshpande ---------------------------------------- Gururaj Deshpande Address: 9 Sparta Way Andover, MA 01810 --------------------------------------- Richard Barry Address: 1284 Beacon Street, #815 Brookline, MA 02138 -9- Schedule I ---------- Investors --------- Matrix Partners V, L.P. Matrix V Entrepreneurs Fund, L.P. North Bridge Venture Partners II, L.P. Integral Capital Partners IV, L.P. Integral Capital Partners IV MS Side Fund, L.P. Pequot Private Equity Fund, L.P. Pequot Venture Partners, L.P. Pequot Offshore Private Equity Fund, Inc. ATGF II, a Panamanian corporation The Ralph H. Cechettini 1995 Trust James Stableford Anthony Ciulla William Slattery Marc Weiss Spinnaker Founders Fund, L.P. Spinnaker Offshore Founders Fund, Cayman Limited Spinnaker Clipper Fund, L.P. Gururaj Deshpande Daniel Smith Chikong Shue Siu Wing Li Michael Viren Steven Finn Eric MacDonald John Dowling Leif Uptegrove Scott Baker Jeannette Slaff Siemens Information and Communication Networks, Inc. -10- EX-10.1 5 1998 STOCK INCENTIVE PLAN Exhibit 10.1 SYCAMORE NETWORKS, INC. 1998 STOCK INCENTIVE PLAN ------------------------- 1. Purpose ------- The purpose of this 1998 Stock Incentive Plan (the "Plan") of Sycamore Networks, Inc., a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any of the Company's present or future subsidiary corporations of as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. Eligibility ----------- All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options, restricted stock awards, or other stock-based awards (each, an "Award") under the Plan. Each person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration, Delegation -------------------------- (a) Administration by Board of Directors. The Plan will be administered by ------------------------------------ the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award 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. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. (b) Delegation to Executive Officers. To the extent permitted by -------------------------------- applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. (c) Appointment of Committees. To the extent permitted by applicable law, ------------------------- the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards -------------------------- (a) Number of Shares. Subject to adjustment under Section 8, Awards may be ---------------- made under the Plan for up to 509,396 shares of common stock, $.001 par value per share, of the Company (the "Common Stock"). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 8, for --------------------- Awards granted after the Common Stock is registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the maximum number of shares of Common Stock with respect to which an Award may be granted to any Participant under the Plan shall be 500,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. 5. Stock Options ------------- (a) General. The Board may grant options to purchase Common Stock (each, ------- an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (b) Incentive Stock Options. An Option that the Board intends to be an ----------------------- "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. -2- The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (c) Exercise Price. The Board shall establish the exercise price at the -------------- time each Option is granted and specify it in the applicable option agreement. (d) Duration of Options. Each Option shall be exercisable at such times ------------------- and subject to such terms and conditions as the Board may specify in the applicable option agreement. (e) Exercise of Option. Options may be exercised by delivery to the ------------------ Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) Payment Upon Exercise. Common Stock purchased upon the exercise of an ---------------------- Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (3) when the Common Stock is registered under the Exchange Act, by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery; (4) to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or (5) by any combination of the above permitted forms of payment. -3- 6. Restricted Stock ---------------- (a) Grants. The Board may grant Awards entitling recipients to acquire ------ shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a "Restricted Stock Award"). (b) Terms and Conditions. The Board shall determine the terms and -------------------- conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Other Stock-Based Awards ------------------------ The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 8. Adjustments for Changes in Common Stock and Certain Other Events ---------------------------------------------------------------- (a) Changes in Capitalization. In the event of any stock split, reverse ------------------------- stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limit set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, (iv) the repurchase price per share subject to each outstanding Restricted Stock Award, and (v) the terms of each other outstanding Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 8(a) -4- applies and Section 8(c) also applies to any event, Section 8(c) shall be applicable to such event, and this Section 8(a) shall not be applicable. (b) Liquidation or Dissolution. In the event of a proposed liquidation or -------------------------- dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date. The Board may specify the effect of a liquidation or dissolution on any Restricted Stock Award or other Award granted under the Plan at the time of the grant of such Award. (c) Acquisition Events ------------------ (1) Definition. An "Acquisition Event" shall mean: (a) any merger or ---------- consolidation of the Company with or into another entity as a result of which the Common Stock is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction. (2) Consequences of an Acquisition Event on Options. Upon the ------------------------------------------------ occurrence of an Acquisition Event, or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Acquisition Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Acquisition Event, the consideration (whether cash, securities or other property) received as a result of the Acquisition Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Acquisition Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Acquisition Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Acquisition Event. Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such -5- Options, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants before the consummation of such Acquisition Event; provided, however, that in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. (3) Consequences of an Acquisition Event on Restricted Stock Awards. --------------------------------------------------------------- Upon the occurrence of an Acquisition Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company's successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Acquisition Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award. (4) Consequences of an Acquisition Event on Other Awards. The Board ---------------------------------------------------- shall specify the effect of an Acquisition Event on any other Award granted under the Plan at the time of the grant of such Award. 9. General Provisions Applicable to Awards --------------------------------------- (a) Transferability of Awards. Except as the Board may otherwise determine ------------------------- or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Award shall be evidenced by a written instrument ------------- in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each Award ---------------- may be made alone or in addition or in relation to any other Award. The -6- terms of each Award need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an --------------------- Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. (e) Withholding. Each Participant shall pay to the Company, or make ----------- provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, when the Common Stock is registered under the Exchange Act, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (f) Amendment of Award. The Board may amend, modify or terminate any ------------------ outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (g) Conditions on Delivery of Stock. The Company will not be obligated to ------------------------------- deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (h) Acceleration. The Board may at any time provide that any Options shall ------------ become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of restrictions in full or in part or that any other Awards may -7- become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 10. Miscellaneous ------------- (a) No Right To Employment or Other Status. No person shall have any claim -------------------------------------- or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. (c) Effective Date and Term of Plan. The Plan shall become effective on ------------------------------- the date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan ----------------- or any portion thereof at any time. (e) Governing Law. The provisions of the Plan and all Awards made ------------- hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. Adopted by the Board of Directors on August 19, 1998 Approved by the Stockholders on October 19, 1998 -8- SYCAMORE NETWORKS, INC. Amendment No. 1 to 1998 Stock Incentive Plan Subsection 4(a) of the 1998 Stock Incentive Plan (the "Plan) of Sycamore Networks, Inc. (the "Company), is hereby amended, subject to stockholder approval, to increase from 509,396 to 2,009,396 the number of shares of the Company's Common Stock, $0.001 par value per share, authorized for issuance under the Plan. Adopted by the Board of Directors on October 19, 1998 Approved by the Stockholders on October 19, 1998 SYCAMORE NETWORKS, INC. Amendment No. 2 to 1998 Stock Incentive Plan Subsection 4(a) of the 1998 Stock Incentive Plan (the "Plan) of Sycamore Networks, Inc. (the "Company), is hereby amended, subject to stockholder approval, to increase from 2,009,396 to 2,855,000 the number of shares of the Company's Common Stock, $0.001 par value per share, authorized for issuance under the Plan. Adopted by the Board of Directors on February 25, 1999 Approved by the Stockholders on May __, 1999 EX-10.3 6 PURCHASE AND LICENSE AGREEMENT EXHIBIT 10.3 PURCHASE AND LICENSE AGREEMENT BETWEEN SYCAMORE NETWORKS, INC. AND WILLIAMS COMMUNICATIONS, INC. Exhibit(s): Exhibit A: Additional Terms and Conditions Exhibit B: Discount Schedule Exhibit C: Insurance Terms Exhibit D: Year 2000 Statement Exhibit E: Escrow Agreement Exhibit F: Maintenance CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ----------------------- PURCHASE AND LICENSE AGREEMENT ------------------------------ THIS AGREEMENT is made effective as of the date written below by and between Sycamore Networks, Inc. ("Sycamore"), a Delaware corporation having a principal place of business at 2 Highwood Drive, Suite 202 Tewksbury, MA 01876, and Williams Communications, Inc. ("Williams") a Delaware corporation having a principal place of business at One Williams Center, Tulsa, OK 74172. Recitals of Fact 1. Sycamore sells and licenses various hardware and software products (the "Products"). 2. Williams desires to purchase and license Products from Sycamore during the term of this Agreement for its internal use only. NOW, THEREFORE, in consideration of their mutual promises and obligations contained in this Agreement, the parties agree as follows: 1. Term ---- This Agreement shall become effective as of the date written below and shall continue for a period of three (3) years, after which it shall renew automatically for successive twelve (12) month additional terms, unless otherwise terminated pursuant to the terms hereof. 2. Purchase -------- 2.1 During the term of this Agreement, and upon the terms and conditions set forth herein, Sycamore shall sell to Williams Communications, Inc., its parent Company and any parent's of its parent Company as well as any of the parents majority owned subsidiaries (hereinafter Williams), and Williams may from time to time purchase from Sycamore Products at pricing listed in Sycamore's then-current price list applicable to each such Product, as amended from time to time, less any applicable discounts. Any Williams' parent or subsidiary, may order Products under this Agreement so long as such an order references this Agreement and includes a statement whereby the ordering entity agrees to be bound by the terms and conditions contained herein. The parties hereby agree that additional terms and conditions of the Williams purchase of Sycamore's Transponder Product shall be those set forth in Exhibit A. 2.2 Shipments of the Products shall be made only against written purchase orders issued by Williams. At a minimum, each purchase order shall specify the following items: a. A complete list of the Products covered by the purchase order, specifying the quantity, model number and description of each; b. The price of each Product as set forth on the attached price list and subject to the terms of Section 6, below, and any applicable discounts, and any additional charges and costs; 2 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- c. The billing address, the destination to which the Products will be delivered, and the requested delivery date; and d. The signature of Williams employee or agent who possesses the authority to place such an order. Sycamore shall not be obligated to accept any order in which Williams fails to include the items in a through d, above. However if such order is accepted, such failure shall not cause Williams not to receive the applicable discount for such order. 2.3 Sycamore shall acknowledge Williams purchase orders in writing within five (5) days after receipt. Sycamore's acknowledgment shall note any exceptions regarding matters such as the items ordered, configuration, and Product pricing. Sycamore shall also confirm the requested delivery date or offer an alternative delivery date. In no event shall any order be binding on Sycamore's until Williams order and Sycamore's acknowledgment are in agreement as to the items ordered, configuration, pricing, delivery dates, and all other material terms. 2.4 No purchase order, acknowledgment form, or other ordering document or communication from either party shall vary the terms and conditions on this Agreement unless both parties expressly agree in writing. In the event of any conflict between the terms and conditions of this Agreement and those of any purchase order acknowledgment form or other ordering document or communication, the terms and conditions of this Agreement shall prevail. 3. Delivery -------- 3.1 All deliveries of the Products purchased pursuant to this Agreement will be made FOB Sycamore's facility. All Products will be packaged for shipment in accordance with standard industry practices. All transportation, shipping, and insurance costs shall be shipped in accordance with Williams' instructions and shall be charged to Williams' account. If Williams does not notify Sycamore of a preferred freight forwarder, Sycamore shall select a freight forwarder to be used for shipment of the Products to Williams. Risk of loss shall pass to Williams at the point of delivery. However in the event of any shipping damage, Sycamore shall be responsible for placing and administering any claims with the freight forwarder or carrier regarding any damages incurred during shipping. In addition, replacement product for Product damaged in transit shall be provided by Sycamore on a non-discriminatory first priority basis. 3.2 Title (excluding title to software Products ) shall pass to Williams at the point of delivery to the common carrier at Sycamore's facility. 3.3 Sycamore shall use reasonable efforts to ship the Products on the shipment date requested in Williams purchase order. Sycamore shall not be liable for any loss, expense or damage incurred by Williams if Sycamore fails to meet the specified delivery date. Sycamore reserves the right to allocate shipment of Products among its purchasers and to make partial shipments. Notwithstanding the foregoing, partial shipments shall only be made with previous written 3 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Material omitted and filed separately with the Securities and Exchange Commission . Asterisks denote omissions. approval by Williams. If shipment is delayed more than [**] days from the mutually agreed upon shipment date due to Sycamore's delay only, Williams may cancel an order upon prior written notice to Sycamore. For the purposes of computing Williams discount level only, shipments cancelled pursuant to the previous sentence of this sub-paragraph 3.3, shall be deemed to have shipped. 3.4 All shipments with destinations outside of the US shall be subject to Sycamore's determination that such shipments are in compliance with all applicable export and import regulations. For shipment other than in the US, Williams will be solely responsible for (i) obtaining any license that may be required to import the Products into its country (ii) clearing the Products through local customs upon their arrival to Williams country and (iii) paying all customs duties, taxes and other charges assessed on such importation's in such country. In no event shall Sycamore delay in shipping or refusal to ship due to export or import issues be deemed a default hereunder. 4. Rescheduling and Cancellation of Orders --------------------------------------- 4.1 Upon written notice to Sycamore provided at least [**] days' prior to the scheduled ship date, Williams may reschedule the delivery of any Products scheduled for shipment by up to [**] days at no charge. Orders may, however, be rescheduled only once, except that on an emergency basis, Williams may reschedule more than once so long as any subsequent rescheduled shipping date is not more than [**] days form the original scheduled shipment date. Acceptance of Williams' request to reschedule any delivery with less than [**] days' prior written notice to Sycamore shall be at the sole discretion of Sycamore. 4.2 Upon at least [**] days' written notice to Sycamore prior to the originally-scheduled shipment date of Products under this Agreement, Williams may cancel any shipment of the Products without charge. The following cancellation charges shall apply to any cancellations made by Williams less than [**] days prior to shipment as liquidated damages and not as a penalty based on the number of days prior to the scheduled delivery that written notice of cancellation is received by Sycamore: Days Notice Charge ----------- ------ (% of canceled order) Greater than [**] days [**]% [**] days [**]% [**] days [**]% 4 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Material omitted and filed separately with the Securities and Exchange Commission . Asterisks denote omissions. 5. Prices ------ 5.1 During the term of this Agreement, Williams shall be entitled to purchase the Products at the prices set forth in Sycamore then-current Price List, an example of which is attached hereto, applicable to each particular Product, less any applicable discounts based on annual purchase volume listed in Exhibit B. All prices set forth in Sycamore Price List are --------- exclusive of any applicable value added, excise, sales, use or consumption taxes, customs duties or other governmental charges except for any taxes imposed upon the income of Sycamore or upon its employment base. 5.2 (a) In the event of a Sycamore price increase, all Products ordered on or after the effective date of such price increase shall be filled at the new higher price. Sycamore will provide Williams with written notice of any price increase [**] days prior to the effective date of such price increase. Sycamore shall, however, honor all written and accepted Williams purchase orders for the Products received by Sycamore prior to the price increase effective date at the prices in effect as of the date the order was received, but only if Williams requests Sycamore to ship the Products within [**] days after the effective date of the price increase. (b) In the event of an Sycamore price decrease, all products ordered on or after the effective date of such price decrease shall be filled at the new lower price. 6. Payment ------- 6.1 Sycamore shall invoice Williams upon shipment of the Products. Williams shall pay all invoices in US dollars within [**] days of receipt. All such invoices will be payable by check or wire transfer, to the following accounts, in United States dollars: For Wire Transfers: ------------------------------------------------------- ------------------------------------------------------- In the event that Williams fails to make any payment when due, Sycamore may withhold further shipments until such time as the past-due payment is made, and may require that subsequent orders be paid in full prior to shipment 6.2 Sycamore reserves the right to impose a late payment charge of one and one- half percent (1 1/2%) per month, or the maximum allowed by law, whichever is less for each month that any payment is late, including the month in which the payment was due and not paid. 5 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Material omitted and filed separately with the Securities and Exchange Commission . Asterisks denote omissions. 6.3 Williams shall pay all municipal, state, county or federal taxes including, but not limited to, sales, use, excise, value added or other taxes which may be levied upon the sale, license or transfer, ownership or installation of the Products except for any taxes imposed upon the income of Sycamore or upon its employment base. 7. Changes / Availability of Products ---------------------------------- 7.1 Sycamore shall promptly inform Williams as soon as is reasonably practicable after Sycamore schedules discontinuance of production or modification of any hardware Product. Sycamore, in its sole discretion, may modify its price list at any time. Sycamore agrees to offer services for any discontinued product for a period of [**] from the last date of shipment of the discontinued product. Sycamore also agrees to offer a one- time buy-out of spare parts for any discontinued product for a period of [**] days following the announcement of any discontinuance. 7.2 At any time prior to delivery, Sycamore may make changes in the Products in whole or in part to be supplied to the Williams hereunder to include electrical or mechanical design refinements that Sycamore deems appropriate, or as required by law or concerns of safety, without obligation to modify or change any Product previously delivered or to supply Products in accordance with earlier specifications. 8. License of Software Products and Firmware ----------------------------------------- 8.1 Subject to the provisions of this Section, Sycamore grants to Williams a nonexclusive, nontransferable, (except for transfers in accordance with the terms herein and in conjunction with the transfer of the Products with which the software is first delivered), license to use the object code form of the software Products solely for Williams internal business purposes (including, without limitation, in conjunction with Williams' provision of services to its customers) on or in conjunction with the Product with which it was originally delivered. 8.2 Subject only to the licenses specifically granted herein, Sycamore is the sole owner of all rights, title and interest, including all copyrights, patents, trademarks, industrial designs, trade names, trade secrets and other intellectual property rights in the software Products. The software Products are copyrighted and Williams is only authorized to reproduce one copy of the software Products solely for back-up purposes. Williams is hereby prohibited from otherwise copying or translating, modifying or adapting the software Products or, incorporating in whole or any part in any other product or creating derivative works based on all or any part of the Products. Williams is not authorized to license others to reproduce any copies of the software Products, except as expressly provided in this Agreement. Williams agrees to ensure that all copyright, trademark and other proprietary notices of Sycamore affixed to or displayed on the software Products will not be removed or modified. Williams shall not decompile, disassemble or reverse engineer, the software Products or any component thereof, except as may be permitted by applicable law in which case Williams must notify Sycamore in writing and Sycamore may provide review and assistance. 6 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 8.3 The rights and licenses granted to Williams with respect to any software Product furnished by Sycamore may not be sold, licensed, sublicensed, rented, assigned or otherwise transferred to another party without the prior written consent of Sycamore except Williams may assign to an entity controlling, controlled by or under common control of Williams. Williams shall provide written notice of such assignment within a reasonable time thereafter. 8.4 Upon the effective date of a termination of this Agreement by Sycamore for Williams breach, the license granted to Williams under this Agreement shall terminate and Williams shall immediately discontinue use of the software and all copies and documentation thereof and return all copies and documentation to Sycamore. A termination of this Agreement by Williams for Sycamore's breach shall not terminate Williams license hereunder. 8.5 US Government Restricted Rights. Notice - Distribution and use of products including computer programs and any related documentation and derivative works thereof, to and by the United States Government, are subject to the Restricted Rights provisions of FAR 52.227-19, paragraph (c)(2) as applicable, except for purchases by agencies of the Department of Defense (DOD). If the Software is acquired under the terms of a Department of Defense or civilian agency contract, the Software is "commercial item" as that term is defined at 48 C.F.R. 2.101 (Oct. 1995), consisting of "commercial computer software" and "commercial computer software documentation" as such terms are used in 48 C.F.R. 12.212 of the Federal Acquisition Regulations and its successors and 48 C.F.R. 227.7202-1 through 227.7202-4 (June 1995) of the DoD FAR Supplement and its successors. All U.S. Government end users acquire the Software with only those rights set forth in this Agreement. Manufacturer is Sycamore Networks, 2 Highwood Drive, Suite 202, Tewksbury, MA 01876. Unpublished - rights reserved under the copyright laws of the United States. 8.6 Williams may transfer the rights to use the software in conjunction with the Products on which the software is first supplied, by means of an enforceable sub-license having terms with regard to Williams' sub- licensee's use which are no less restrictive than those as set forth in this paragraph 8, except that any such sub-licensee may not subsequently transfer such sub-license rights without Sycamore's written assent. 9. Support ------- Williams may elect to purchase maintenance or support services from Sycamore in connection with the Products pursuant to Sycamore's standard terms and conditions and then-current programs. The provision of all such maintenance and support services shall be governed by the applicable agreement entered into between the parties. (See Exhibit F for Maintenance options) 10. Limited Warranty ---------------- 10.1 Product Warranty: Product hardware and media are warranted to be free from defects in material and workmanship during the Warranty Period (as defined below). Product hardware and software is warranted to conform substantially to Sycamore's then current (as of the date of Sycamore's product shipment) published user documentation during the Warranty Period. The Warranty Period is [**] for Product hardware, Product software, and media. Product support beyond these periods may be available at additional cost under a Maintenance Service Agreement. The warranty shall commence upon delivery. 7 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 10.2 Warranty Claims: Sycamore shall incur no liability under this warranty if the end user fails to provide Sycamore with notice of the alleged defect during the applicable Warranty Period. After receiving such notice, Sycamore's Technical Assistance Center ("TAC") will notify the purchaser of its designation of one of the following problem resolution methods: Return to Factory: The allegedly defective goods must be returned to Sycamore within ten days of receipt of the replacement product and in accordance with Sycamore's Return to Factory repair procedures. Other: TAC will use best efforts to deliver non-priority services to repair, correct or workaround the problem by means of telephone support, including patches, corrective software releases or other means reasonably determined by Sycamore. Sycamore shall incur no liability under this warranty if Sycamore's tests disclose that the alleged defect is due to causes not within Sycamore's reasonable control, including alteration or abuse of the goods. Under the Return to Factory alternative, if a Product is determined not to be defective or to have a defect due to causes not within Sycamore's reasonable control, Sycamore's then current repair price as listed in the price list will apply. 10.3 Sycamore warrants and represents that the software shall record, store, process, and present calendar dates falling on or after January 1, 2000, in the same manner, and with the same functionality, as such Products record, store, process and present calendar dates falling on or before December 31, 1999. Sycamore further warrants that in all other respects such software shall not lose functionality or degrade in performance as a consequence of such software operating in a date later than December 31, 1999. Sycamore shall also consult with Williams to (i) ensure that such software will lose no functionality with respect to the introduction of records containing dates falling on or after January 1, 2000, and (ii) under terms and prices mutually agreed upon, to use commercially reasonable efforts to ensure that such software will be interoperable with other software used by Williams which will interact directly with the Sycamore software in the course of processing data. Notwithstanding the foregoing, Sycamore shall have no responsibility to the extent any loss of functionality or degradation or failure to record, store, process or present calendar dates falling on or after January 1, 2000 is caused by the failure to so perform of any software of systems other than Sycamore's used by Williams or any other supplier of Williams. Sycamore will perform the above warranty obligations at no charge to Williams. 10.4. Sycamore warrants, except as stated in Sycamore's published specifications, or as otherwise agreed, that any software provided to Williams by Sycamore shall, to Sycamore's knowledge as of the date of this Agreement: (a) contain no hidden files; (b) not replicate, transmit, or activate itself without control of a person operating computing equipment on which it resides; (c) not alter, damage, or erase any data or computer programs without control of a person operating the computing equipment on which it resides; (d) contain no encrypted imbedded key unknown to 8 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks donate omissions. Williams, node lock, time-out or other function, whether implemented by electronic, mechanical or other means, which restricts or may restrict use of access to any programs or data developed under this Agreement, based on residency on a specific hardware configuration, frequency of duration of use, or other limiting criteria. 10.5 Sycamore's Liability: Sycamore's liability for breach of warranty hereunder, and end user's sole and exclusive remedy, shall be limited to the express remedies set forth in this Sycamore's Product Warranty. 10.6 Disclaimer of Warranties: SYCAMORE MAKES NO OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, REGARDING PRODUCTS. ALL OTHER WARRANTIES AS TO THE QUALITY, CONDITION, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT ARE EXPRESSLY DISCLAIMED. 10.7 Limitation of Liability: NEITHER PARTY SHALL BE RESPONSIBLE FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR PUNITIVE DAMAGE, INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO BUSINESS OR BUSINESS RELATIONS, WHETHER OR NOT ADVISED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES THE FOREGOING LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF ANY EXCLUSIVE REMEDIES. 10.8 Warranty Repair (Return to Factory): If TAC designates Return to Factory as the appropriate problem resolution method, the following provisions apply. (a) During the first [**] days of the warranty period, Sycamore may at its option provide an advance replacement of a defective Product. Sycamore will repair or replace defective Product hardware covered under warranty within[**] business days of receipt of the Product. The warranty period for the replaced product shall be [**] days or the remainder of the warranty period of the original unit, whichever is greater. Sycamore will ship surface freight. Expedited freight is at end user's expense. (b) The end user must return the defective Product to Sycamore within [**] days of receipt of the replacement product. If the defective Product is not returned within this time period, Sycamore will bill the end user for the Product at list price, less Williams' discount, if applicable. 10.9 Out-of-Warranty Repair (Hardware): Sycamore will either repair or, at its option, replace defective Product hardware not covered under warranty within [**] working days of its receipt. Repair charges are available from the Repair Facility upon request. The warranty on a serviced Product is [**] days from date of shipment of the serviced unit. Out-of-warranty repair charges are based upon the prices in effect at the time of return. 10.10 In the event that Sycamore, given full cooperation by Williams, is unable, after repeated efforts over a period of no less than [**] days, to correct significant and material non-conformances of 9 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- the Products to the specification in effect as of the sale of the Product, Sycamore agrees that after good faith negotiations to resolve the matter, Williams may elect to deem such circumstance a failure of Sycamore's obligation of tender of delivery of conforming Product and Williams may revoke its purchase. 11. Intellectual Property Rights ---------------------------- Except as described in this Agreement, Sycamore does not grant and Williams acknowledges that it shall have no right, license or interest in any of the patents, copyrights, trademarks, or trade secrets owned, used or claimed now by Sycamore. All applicable rights to such patents, copyrights, trademarks, and trade secrets are and will remain the exclusive property of Sycamore Subject to the rights expressly granted to Williams by this Agreement, title to and ownership of the intellectual property rights contained in the Products or any part of the Products or Sycamore's confidential information shall remain Sycamore's property. 12. Patent and Copyright Indemnification ------------------------------------ 12.1 Sycamore agrees to indemnify and hold Williams harmless from and against all claims and judicial or governmental determinations that the Products as delivered by Sycamore under this Agreement infringe or misappropriate any United States patent rights, copyrights, trade secrets, or trademarks. Sycamore shall assume the defense of any such claim regardless as to its ultimate validity, of infringement or misappropriation brought against Williams in the United States by counsel retained at Sycamore's own expense, provided that Williams promptly notifies Sycamore in writing of such claim or the commencement of any such suit, action, proceeding or threat covered by this Section. Sycamore shall maintain sole and exclusive control of the defense and/or settlement of any such claim and Williams shall cooperate in the defense of such claim. 12.2 In the event that the use or sale of all or any portion of the Products is enjoined, or, in Sycamore's judgment, may be enjoined, as a result of a suit based on alleged infringement or misappropriation of the third party intellectual property rights, Sycamore agrees to either: (i) procure for Williams the right to continue to use the Product, or (ii) replace or modify the infringing or misappropriating Product so that it becomes non- infringing. In the event that the foregoing alternatives cannot be reasonably accomplished by Sycamore, Sycamore shall direct Williams to return the Product to Sycamore and upon receipt of the Product(s), Sycamore shall reimburse Williams for the price originally paid by Williams. Upon Sycamore's fulfillment of the alternatives set out in this Section and Section 12.1, Sycamore shall be relieved of any further obligation or liability to Williams as a result of any such infringement or misappropriation. 12.3 Regardless of any other provisions of this Agreement, this Section shall not apply (i) to any designs, specifications or modifications originating with or requested by Williams, or (ii) to the combination of any Product with other equipment, software or products not supplied by Sycamore if such infringement or misappropriation would not have occurred but for such combination, or (iii) Williams failure to install an update provided at no additional charge, where the update would have avoided the infringement claim. 10 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 12.4 THIS SECTION 12 STATES SYCAMORE'S ENTIRE LIABILITY TO WILLIAMS AND WILLIAMS' SOLE REMEDY FOR ANY INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT RIGHTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS. 13. General Indemnity ----------------- Each party agrees to indemnify and hold harmless the other party (including their directors, officers, employees, agents, representatives, affiliates, and subcontractors) from and against any claims, damages and liabilities, including reasonable attorney's fees, asserted by any person or entity due to personal injury (including death) or tangible property damage to the extent resulting from any negligent act or omission of such party; provided, however, that such party shall not be liable for that portion of liabilities which are caused by the sole negligence of the other party. 14. Limitation of Liability ----------------------- IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, EXEMPLARY PUNITIVE DAMAGES OR LOST PROFITS, WHETHER FORESEEABLE OR UNFORESEEABLE, OF ANY KIND WHATSOEVER (INCLUDING, WITHOUT LIMITATION, LOST PROFITS, LOSS OF GOODWILL, LOSS OR DAMAGED DATA OR SOFTWARE (EXCEPT IN THE CASE OF SOFTWARE, AS STATED IN SYCAMORE'S WARRANTY FOR SOFTWARE), LOSS OF USE OF THE PRODUCTS, DOWNTIME OR COSTS OF SUBSTITUTE PRODUCTS OR EQUIPMENT) ARISING FROM THE SALE AND DELIVERY OF THE PRODUCTS OR ANY OTHER ACT OF EITHER PARTY IN CONNECTION WITH THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NO LIMITATION AS TO DAMAGES FOR PERSONAL INJURY (INCLUDING DEALTH) OR TANGIBLE PROPERTY DAMAGE IS HEREBY INTENDED. SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES AND THE ABOVE EXCLUSION OR LIMITATION MAY NOT APPLY. 15. Confidentiality --------------- 15.1 For purposes of this Agreement, "Confidential Information" shall mean all information (i) identified in written or oral format by the disclosing party as confidential, trade secret or proprietary information and, if disclosed orally, summarized in written format within ten (10) days of disclosure. 15.2 Notwithstanding the foregoing, "Confidential Information" shall not include --- any information which the receiving party can show: (a) is now or subsequently becomes legally and publicly available without breach of this Agreement by the receiving party, (b) was rightfully in the possession of the receiving party without any obligation of confidentiality prior to receiving it from the 11 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- disclosing party, (c) was rightfully obtained by the receiving party from a source other than the disclosing party without any obligation of confidentiality, (d) was developed by or for the receiving party independently and without reference to any Confidential Information and such independent development can be shown by documentary evidence, or (e) is disclosed pursuant to an order of a court or governmental agency as so required by such order, provided that the receiving party shall first notify the disclosing party of such order and afford the disclosing party the opportunity to seek a protective order relating to such disclosure. 15.3 Both Parties agree not to use such Confidential Information except in their performance under this Agreement. In addition, both parties shall treat and protect such information in the same manner as it treats its own information of like character, but with not less than reasonable care. Both parties agree to take appropriate measures by instruction and written agreement prior to disclosure of Confidential Information to their employees to prevent unauthorized use or disclosure. The obligations of this Section with regard to Confidential Information shall continue for a period of three (3) years after termination or expiration of this Agreement, except that the period with respect to any Confidential Information identified as a trade secret shall be perpetual. Confidential Information must be returned by the receiving party upon termination or expiration of this Agreement. 15.4 In the event of a breach of any of the foregoing provisions, both parties agree that the harm suffered by the disclosing party would not be compensable by monetary damages alone and, accordingly, that the disclosing party shall, in addition to other available legal or equitable remedies, be entitled to an injunction against such breach. 16. Termination ----------- 16.1 Either party may terminate this Agreement at any time, with or without cause, upon ninety (90) days prior written notice to the other party. 16.2 If Williams is in breach of this Agreement, Sycamore shall give Williams thirty (30) days' prior written notice to cure such breach. If such breach has not been cured to Sycamore's satisfaction within such thirty (30) day period, then this Agreement shall automatically terminate at the end of said thirty (30) day period without further notice to Williams. If Williams is in breach of the Section entitled License of Software Products and Firmware, and fails to cure such breach within five (5) days of notice, Sycamore shall have the right to immediately terminate this Agreement. 16.3 This Agreement may be terminated for cause by either party in the event that the other party: (i) shall become insolvent; (ii) commits an act of bankruptcy; (iii) seeks an arrangement or compromise with its creditors under any statute or otherwise; (iv) is subject to a proceeding in bankruptcy, receivership, liquidation or insolvency and same is not dismissed within thirty (30) days; (v) makes an assignment for the benefit of the creditors; (vi) admits in writing its inability to pay its debts as they mature; or (vii) ceases to function as a going concern or to conduct its operations in the normal course of business. 12 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 16.4 If Williams defaults under this Agreement, and does not cure such default within thirty (30) days of receipt of Sycamore's written notice, Sycamore shall have the right to take any or all of the following actions: (i) declare this Agreement to be in default and all amounts payable under this Agreement shall become immediately due and payable; (ii) suspend delivery to Williams until the default is cured by Williams; (iii) proceed by court action to enforce performance and/or recover damages; and/or (iv) terminate this Agreement. If Sycamore continues to make shipments after Williams default, Sycamore's action shall not constitute a waiver of any rights or remedies, or affect Sycamore's legal remedies under this Agreement. If Sycamore defaults under this Agreement, and does not cure such default within thirty (30) days of receipt of Williams' written notice, Williams shall have the right to take any or all of the following actions: (i) declare this Agreement to be in default and all amounts payable under this Agreement shall become immediately due and payable for all products delivered and services performed prior to such termination; (ii) proceed by court action to enforce performance and/or recover damages; and/or (iii) terminate this Agreement. If Williams continues to order Products after Sycamore's default, Williams' action shall not constitute a waiver of any rights or remedies, or affect Williams' legal remedies under this Agreement. 16.5 The termination or expiration of this Agreement shall in no case relieve either party from its obligation to pay to the other any sums accrued under this Agreement prior to such termination or expiration. 17. General ------- 17.1 Entire Agreement; Amendment; Authorized Personnel. This Agreement -------------------------------------------------- supersedes all prior and contemporaneous agreements, representations, warranties and understandings and contains the entire agreement between the parties. No amendment, modification, termination, or waiver of any provision of this Agreement or consent to any departure from this Agreement shall be effective unless it is in writing and signed by a duly authorized representative of each party. No failure or delay on the part of either party in exercising any right or remedy under this Agreement shall operate as a waiver of such right or remedy. 17.2 Assignment. This Agreement shall be binding upon and inure to the benefit ----------- of the parties and their respective successors and assigns, but neither party shall have the right to assign or otherwise transfer its rights under this Agreement without receiving the express prior written consent of the other party, such consent not to be unreasonably withheld.. Either party may, however, assign this Agreement in the event of a sale of all or substantially all of such party's assets or stock to which assignment the both parties consent to now. Notwithstanding the foregoing, Williams may assign this Agreement to any entity controlling, controlled by, or under common control with Williams. Williams shall notify Sycamore in writing of such assignment within a reasonable time thereafter. 17.3 Notices. All notices, requests, demands, and other communications provided -------- for under this Agreement shall be in writing and in English to be sent by registered or certified mail, postage prepaid, to the receiving party at its address as set forth in this Agreement or to any other address 13 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- that the receiving party may have provided to the sending party in writing. When feasible, any such notice, request, demand or other communication shall also be transmitted by facsimile as follows or to such other facsimile number as provided by the receiving party in writing: . Williams Facsimile Number: (918) 573-6578 ATTN: Contract Administration. . Sycamore's Facsimile Number: ___________________ ATTN: General Counsel Any notice, request, demand or other communication sent by facsimile will be deemed to have been received on the day it is sent. Any notice, request, demand or other communication sent by registered or certified mail will be deemed to have been received on the seventh (7th) business day after its date of posting, unless it is sent by facsimile prior to such seventh (7th) business day. 17.4 Governing Law. This Agreement and all acts and transactions pursuant hereto -------------- and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of New York. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. 17.5 (reserved). 17.6 Counterparts; Severability; and Headings. This Agreement may be executed ----------------------------------------- in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. The provisions of this Agreement are declared to be severable. In the event that any provision contained in this Agreement shall be held to be unenforceable or invalid, the remaining provisions shall be given full effect, and the parties agree to negotiate, in good faith, a substitute valid provision which most nearly approximates the parties' intent. The failure of either party in any one or more instances to enforce any of the terms of this Agreement shall not be construed as a waiver of future enforcement of that or any other term. Headings in this Agreement are included for reference only and shall not constitute a part of this Agreement for any other purpose. 17.7 Force Majeure. Neither party shall be held responsible for any delays or -------------- failure in performance caused in whole or in part by fires, strikes, floods, embargoes, labor disputes, delays or failures of subcontractors, acts of sabotage, riots, accidents, delays of carriers, voluntary or mandatory compliance with any governmental act, regulation or request, acts of God or by public enemy, or any other causes beyond the party's reasonable control. If such contingency shall occur, the defaulting party may elect to either (a) suspend this Agreement for the duration of the delaying cause, or (b) extend the duration of this Agreement by the length of time the contingency endured, or the non-defaulting party may terminate this Agreement upon giving ninety (90) days prior written notice. 14 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 17.8 Survival. The parties agree that the provisions of the following --------- Sections shall survive the expiration or earlier termination of this Agreement for any reason: License of Software Products and Firmware, Patent and Copyright Indemnification, Limitation of Liability, and Confidentiality. 17.9 Training Services. Sycamore will provide at no charge to Williams, two (2) one (1) - week sessions of on-site operational training of up to twenty (20) students per class. Such classes will be provided on dates mutually agreed to by the parties. 17.10 Escrow Program. Sycamore agrees to deposit Source Code, at Williams expense, into Sycamore's Escrow Program, under an Escrow Agreement mutually agreed to by the parties, upon William's notice that it wishes an escrow deposit to be made. A sample of Sycamore's Escrow Agreement is attached hereto as Exhibit D. 17.11 Insurance. Sycamore agrees to maintain, at all times during the term of this Agreement, insurance in accordance with the terms and conditions of Exhibit C hereto and incorporated herein by reference. 17.12 Prevailing Party. In any action or proceeding to enforce rights or obligations under this Agreement, the prevailing party shall be entitled to recover court costs and reasonable attorney's fees. 17.13 Time and Material Charges. If Sycamore invoices Williams time and material charges for services provided, Sycamore agrees to provide documentation to substantiate such charges. 17.14 Conflict of Interest. Sycamore will not pay any commissions, fees or rebates to any employees of Williams, nor favor any employee of Williams with gifts or entertainment. If Williams has reasonable cause to believe that one of this provision has been violated, Sycamore agrees to cooperate with Williams in its investigation. 15 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by their duly authorized representatives as of the effective date written below. SYCAMORE NETWORKS, INC. WILLIAMS COMMUNICATIONS, INC. By: /s/ Despande By: /s/ Joseph P. [illegible] ---------------------------- ------------------------------- Name: Despande Name: ---------------------------- ------------------------------- Title: Chairman Title: ---------------------------- ------------------------------- Effective Date: March 5, 1999 Date: ----------------- ------------------------------- 16 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT A to SYCAMORE PURCHASE AND LICENSE AGREEMENT ADDITIONAL TERMS AND CONDITIONS -------------------------------- a) Williams represents and agrees that Sycamore's has been chosen as an approved vendor to Williams to supply WDM Transponder Technology. The Term (the "Term") of the Definitive Agreement shall be for three (3) years. In year one of the Term, Williams agrees to a minimum purchase of [**], net invoice value, in Sycamore product. This revenue commitment is based on Williams Planning Engineering 1999 scheduled build out plans for Transponder based systems in Spur locations. b) Williams shall, have a nontransferable right to purchase shares of Sycamore in Sycamore's initial public offering (IPO) of shares on a national exchange to an upper limit, unless otherwise agreed, equal to that number of shares, which when multiplied by the IPO price as listed on the cover page of the final prospectus relating to Sycamore's IPO, equals 5% of the dollar value of Williams' accumulated purchases of products and services, (less any applicable discounts, taxes or charges for shipping, insurance, and the like), made by Williams as of the date of the IPO, but in no event more than 5% of the shares offered in such IPO. c) Sycamore, as additional discount hereunder agrees to grant to Williams a credit against future purchases by Williams under this Agreement, an amount equal to [**]% of the net purchase price of sales of Sycamore Products SN 6000/8001 made to future customers prior to December 31, 1999. This credit may be used for the purchase of Sycamore Products under this agreement only and is not redeemable in any other matter. Upon expiration or termination of this Agreement any unused portion of the credit will expire. d) Upon completing a successful implementation of Sycamore product into Williams network, Sycamore and Williams agree to engage in joint press activity to the mutual benefit of both companies. The level of activity and timing of any announcements will be by mutual agreement. e) Any adjustment of the discount to which Williams is entitled, except for corrections to mathematical or administrative errors in the computation of such discount, shall not be retroactive with regard to Products purchased and delivered prior to the adjustment of such discount. 17 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B to SYCAMORE PURCHASE AND LICENSE AGREEMENT Pricing and Discounts --------------------- Sycamore agrees, during the term of this Agreement to extended a [**] product discount on Sycamore's then-current end-user pricing in effect as of the date of Williams' orders. Sycamore represents that [**]. In the event that Sycamore [**]. 18 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- EXHIBIT C to SYCAMORE PURCHASE AND LICENSE AGREEMENT INSURANCE TERMS [NOTE: Sycamore's insurance binder to be attached.] 19 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- EXHIBIT D to SYCAMORE PURCHASE AND LICENSE AGREEMENT YEAR 2000 Statement Sycamore Year 2000 (Y2K) Compliance Corporate Statement Sycamore Networks recognizes the genuine and particular concerns of the telecommunications industry with regard to year 2000 performance issues and is committed to ensure that Sycamore's Products meet the requirements of Sycamore's customers in this critical area. Sycamore Network's commits that its Products will comply with telecommunications industry Year 2000 standards as set forth in each applicable Product specification. More specifically, to the extent that any Sycamore Software or Products report or utilize dates, all such Software and Products, will be Year 2000 compliant and will meet telecommunication industry Year 2000 standards. SYCAMORE shall ensure that any SYCAMORE provided programs or systems with which its Software communicates or integrates and which utilize dates, are Year 2000 compliant and, If requested by Sycamore's Customer, Sycamore shall provide the Customer with results of Year 2000 compliance tests previously conducted or will agree to jointly conduct mutually agreed to Year 2000 compliance tests with the Customer. In the event the Products or Software do not comply or such tests demonstrate that Sycamore's Software or Sycamore's Products are not Year 2000 compliant, as provided herein, Sycamore's obligation shall be to carry out or procure the carrying out of all necessary enhancements or upgrades to the Software or the Products at its own cost at Sycamore's manufacturing facility. Sycamore shall not be obligated to make enhancements or upgrades in the event such tests demonstrate that the Year 2000 non-compliance results from non- Sycamore supplied programs or systems, or from Sycamore's compliance with an industry standard specification in effect as of the date of manufacture. The preceding statement is made pursuant to the United States Year 2000 Information and Readiness Disclosure Act (Public Law 105-271; 112 Stat. 2386). 20 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- EXHIBIT E to SYCAMORE PURCHASE AND LICENSE AGREEMENT THREE-PARTY ESCROW AGREEMENT BETWEEN PRODUCER, FORT KNOX AND SINGLE LICENSEE This is an Example: - ------------------- This escrow agreement is intended for use by a Producer (Licensor), a single Licensee (End User) and Fort Knox Escrow Services, Inc. Any number of escrow products may be stored in escrow for the Licensee under the terms of this agreement. All parties sign the contract. Software Escrow Agreement This Escrow Agreement ("Agreement") is made as of this ___ day of _________________, 199__, by and between _____________________________________ ("Producer"), Fort Knox Escrow Services, Inc. ("Fort Knox") and ________________________________________________________________________________ ______________ (Licensee"). Preliminary Statement. Producer intends to deliver to Fort Knox a sealed --------------------- package containing magnetic tapes, disks, disk packs, or other forms of media, in machine readable form, and the written documentation prepared in connection therewith, and any subsequent updates or changes thereto (the "Deposit Materials") for the computer software products (the "System(s)"), all as identified from time to time on Exhibit B hereto. Producer desires Fort Knox to hold the Deposit Materials, and, upon certain events, deliver the Deposit Materials (or a copy thereof) to Licensee, in accordance with the terms hereof. Now, therefore, in consideration of the foregoing, of the mutual promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Delivery by Producer. Producer shall be solely responsible for -------------------- delivering to Fort Knox the Deposit Materials as soon as practicable. Fort Knox shall hold the Deposit Materials in accordance with the terms hereof. Fort Knox shall have no obligation to verify the completeness or accuracy of the Deposit Materials. 21 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 2. Duplication; Updates. -------------------- (a) Fort Knox may duplicate the Deposit Materials by any means in order to comply with the terms and provisions of this Agreement, provided that Licensee shall bear the expense of duplication. Alternatively, Fort Knox, by notice to Producer, may reasonably require Producer to promptly duplicate the Deposit Materials. (b) Producer shall deposit with Fort Knox any modifications, updates, new releases or documentation related to the Deposit Materials by delivering to Fort Knox an updated version of the Deposit Materials ("Additional Deposit") as soon as practicable after the modifications, updates, new releases and documentation have been developed by Producer. Fort Knox shall have no obligation to verify the accuracy or completeness of any Additional Deposit or to verify that any Additional Deposit is in fact a copy of the Deposit Materials or any modification, update, or new release thereof. 3. Notification of Deposits. Simultaneous with the delivery to Fort Knox ------------------------ of the Deposit Materials or any Additional Deposit, as the case may be, Producer shall deliver to Fort Knox and to Licensee a written statement specifically identifying all items deposited and stating that the Deposit Materials or any Additional Deposit, as the case may be, so deposited have been inspected by Producer and are complete and accurate. Fort Knox shall, within ten (10) business days of receipt of any Deposit Materials, send notification to Producer and Licensee that it has received from Producer such Deposit Materials. 4. Delivery by Fort Knox --------------------- 4.1 Delivery by Fort Knox to Licensee. Fort Knox shall deliver the --------------------------------- Deposit Materials, or a copy thereof, to Licensee only in the event that: (a) Producer notifies Fort Knox to effect such delivery to Licensee at a specific address, the notification being accompanied by a check payable to Fort Knox in the amount of one hundred dollars ($100.00); or (b) Fort Knox receives from Licensee: (i) the occurrence of one of the following escrow release events: (1) the making by Producer of a general assignment for the benefit of creditors and the unwillingness or inability of Producer to provide support for the licensed software; (2) any action by Producer under any federal or state insolvency or similar law for the purpose of its bankruptcy, reorganization or liquidation and the unwillingness or inability of Producer to provide support for the licensed software; (3) Producer's failure to continue in business without a successor and the unwillingness or inability of Producer to provide support for the licensed software; 22 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- (ii) evidence satisfactory to Fort Knox that Licensee has previously notified Producer of such Producer Default in writing; (iii) a written demand that the Deposit Materials be released and delivered to Licensee; (iv) a written undertaking from the Licensee that the Deposit Materials being supplied to the Licensee will be used only as permitted under the terms of the License Agreement; (v) specific instructions from the Licensee for this delivery; and (vi) an initial check payable to Fort Knox in the amount of one hundred dollars ($100.00). (c) If the provisions of paragraph 4.1(a) are satisfied, Fort Knox shall, within five (5) business days after receipt of the notification and check specified in paragraph 4.1(a), deliver the Deposit Materials in accordance with the applicable instructions. (d) If the provisions of paragraph 4.1(b) are met, Fort Knox shall, within five (5) business days after receipt of all the documents specified in paragraph 4.1(b), send by certified mail to Producer a photostatic copy of all such documents. Producer shall have thirty (30) days from the date on which Producer receives such documents ("Objection Period") to notify Fort Knox of its objection ("Objection Notice") to the release of the Deposit Materials to Licensee and to request that the issue of Licensee's entitlement to a copy of the Deposit Materials be submitted to arbitration in accordance with the following provisions: (i) If Producer shall send an Objection Notice to Fort Knox during the Objection Period, the matter shall be submitted to, and settled by arbitration by, a panel of three (3) arbitrators chosen by the Atlanta Regional Office of the American Arbitration Association in accordance with the rules of the American Arbitration Association. The arbitrators shall apply Georgia law. At least one (1) arbitrator shall be reasonably familiar with the computer software industry. The decision of the arbitrators shall be binding and conclusive on all parties involved, and judgment upon their decision may be entered in a court of competent jurisdiction. All costs of the arbitration incurred by Fort Knox, including reasonable attorneys' fees and costs, shall be paid by the party which does not prevail in the arbitration; provided, however, if the arbitration is settled prior to a decision by the arbitrators, the Producer and Licensee shall each pay 50% of all such costs. (ii) Producer may, at any time prior to the commencement of arbitration proceedings, notify Fort Knox that Producer has withdrawn the Objection Notice. Upon receipt of any such notice from Producer, Fort Knox shall reasonably promptly deliver the Deposit Materials to Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). 23 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- (e) If, at the end of the Objection Period, Fort Knox has not received an Objection Notice from Producer, then Fort Knox shall reasonably promptly deliver the Deposit Materials to Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). Both Producer and Licensee agree that Fort Knox shall not be required to deliver such Deposit Materials until all such fees then due Fort Knox have been paid. 4.2 Delivery by Fort Knox to Producer. Fort Knox shall release and --------------------------------- deliver the Deposit Materials to Producer upon termination of this Agreement in accordance with paragraph 7(a) hereof. 5. Indemnity. Producer and Licensee shall, jointly and severally, --------- indemnify and hold harmless Fort Knox and each of its directors, officers, agents, employees and stockholders ("Fort Knox Indemnities") absolutely and forever, from and against any and all claims, actions, damages, suits, liabilities, obligations, costs, fees, charges, and any other expenses whatsoever, including reasonable attorneys' fees and costs, that may be asserted against any Fort Knox Indemnitee in connection with this Agreement or the performance of Fort Knox or any Fort Knox Indemnitee hereunder. 6. Disputes and Interpleader. ------------------------- (a) Fort Knox may submit the matter to any court of competent jurisdiction in an interpleader or similar action other than a matter submitted to arbitration after Fort Knox's receipt of an Objection Notice under Section 4 and the parties under this Agreement submit the matter to such arbitration as described in Section 4 of this Agreement. Any and all costs incurred by Fort Knox in connection therewith, including reasonable attorneys' fees and costs, shall be borne 50% by each of Producer and Licensee. (b) Fort Knox shall perform any acts ordered by any court of competent jurisdiction, without any liability or obligation to any party hereunder by reason of such act. 7. Term and Renewal. ---------------- (a) The initial term of this Agreement shall be two (2) years, commencing on the date hereof (the "Initial Term"). This Agreement shall be automatically extended for an additional term of one year ("Additional Term") at the end of the Initial Term and at the end of each Additional Term hereunder unless, on or before ninety (90) days prior to the end of the Initial Term or an Additional Term, as the case may be, any party notifies the other parties that it wishes to terminate the Agreement at the end of such term. (b) In the event of termination of this Agreement in accordance with paragraph 7(a) hereof, Licensee shall pay all fees due Fort Knox and shall promptly notify Producer that this Agreement has been terminated and that Fort Knox shall return to Producer all copies of the Deposit Materials then in its possession. 8. Fees. Producer and Licensee shall pay to Fort Knox the applicable ---- fees in accordance with Exhibit A as compensation for Fort Knox's services under this Agreement. The first years fees are due upon receipt of the signed contract or Deposit Materials, whichever comes first and shall be paid in U.S. Dollars. (a) Payment. Fort Knox shall issue an invoice to Licensee following ------- execution of this Agreement ("Initial Invoice"), on the commencement of any Additional Term hereunder, and in connection 24 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- with the performance of any additional services hereunder. Payment is due upon receipt of invoice. All fees and charges are exclusive of, and Licensee is responsible for the payment of, all sales, use and like taxes. Fort Knox shall have no obligations under this Agreement until the Initial Invoice has been paid in full by Licensee. (b) Nonpayment. In the event of non-payment of any fees or charges ---------- invoiced by Fort Knox, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to the Licensee and, in such an event, the Licensee shall have the right to pay the unpaid fee within ten (10) days after receipt of notice from Fort Knox. If Licensee fails to pay in full all fees due during such ten (10) day period, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to Producer and, in such event, Producer shall have the right to pay the unpaid fee within ten (10) days of receipt of such notice from Fort Knox. Upon payment of the unpaid fee by either the Producer or Licensee, as the case may be, this Agreement shall continue in full force and effect until the end of the applicable term. Failure to pay the unpaid fee under this paragraph 8(b) by both Producer and Licensee shall result in termination of this Agreement. 9. Ownership of Deposit Materials. The parties recognize and acknowledge ------------------------------ that ownership of the Deposit Materials shall remain with Producer at all times. 10. Available Verification Services. Upon receipt of a written request ------------------------------- from Licensee, Fort Knox and Licensee may enter into a separate agreement pursuant to which Fort Knox will agree, upon certain terms and conditions, to inspect the Deposit Materials for the purpose of verifying its relevance, completeness, currency, accuracy and functionality ("Technical Verification Agreement"). Upon written request from Producer, Fort Knox will issue to Producer a copy of any written technical verification report rendered in connection with such engagement. If Fort Knox and Licensee enter into such Technical Verification Agreement, Producer shall reasonably cooperate with Fort Knox by providing its facilities, computer systems, and technical and support personnel for technical verification whenever reasonably necessary. If requested by Licensee, Producer shall permit one employee of Licensee to be present at Producer's facility during any such verification of the Deposit Materials. 11. Bankruptcy. Producer and Licensee acknowledge that this Agreement is ---------- an "agreement supplementary to" the License Agreement as provided in Section 365 (n) of Title 11, United States Code (the "Bankruptcy Code"). Producer acknowledges that if Producer as a debtor in possession or a trustee in Bankruptcy in a case under the Bankruptcy Code rejects the License Agreement or this Agreement, Licensee may elect to retain its rights under the License Agreement and this Agreement as provided in Section 365 (n) of the Bankruptcy Code. Upon written request of Licensee to Producer or the Bankruptcy Trustee, Producer or such Bankruptcy Trustee shall not interfere with the rights of Licensee as provided in the License Agreement and this Agreement, including the right to obtain the Deposit Material from Fort Knox. 25 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 12. Miscellaneous. ------------- (a) Remedies. Except for intentional misrepresentation, gross negligence -------- or intentional misconduct, Fort Knox shall not be liable to Producer or to Licensee for any act, or failure to act, by Fort Knox in connection with this Agreement. Any liability of Fort Knox regardless of the cause shall be limited to the fees exchanged under this Agreement. Fort Knox will not be liable for special, indirect, incidental or consequential damages hereunder. (b) Natural Degeneration; Updated Version. In addition, the parties ------------------------------------- acknowledge that as a result of the passage of time alone, the Deposit Materials are susceptible to loss of quality ("Natural Degeneration"). It is further acknowledged that Fort Knox shall have no liability or responsibility to any person or entity for any Natural Degeneration. For the purpose of reducing the risk of Natural Degeneration, Producer shall deliver to Fort Knox a new copy of the Deposit Materials at least once every three years. (c) Permitted Reliance and Abstention. Fort Knox may rely and shall be --------------------------------- fully protected in acting or refraining from acting upon any notice or other document believed by Fort Knox in good faith to be genuine and to have been signed or presented by the proper person or entity. Fort Knox shall have no duties or responsibilities except those expressly set forth herein. (d) Independent Contractor. Fort Knox is an independent contractor, and is ---------------------- not an employee or agent of either the Producer or Licensee. (e) Amendments. This Agreement shall not be modified or amended except by ---------- another agreement in writing executed by the parties hereto. (f) Entire Agreement. This Agreement, including all exhibits hereto, ---------------- supersedes all prior discussions, understandings and agreements between the parties with respect to the matters contained herein, and constitutes the entire agreement between the parties with respect to the matters contemplated herein. All exhibits attached hereto are by this reference made a part of this Agreement and are incorporated herein. (g) Counterparts; Governing Law. This Agreement may be executed in --------------------------- counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. (h) Confidentiality. Fort Knox will hold and release the Deposit Materials --------------- only in accordance with the terms and conditions hereof, and will maintain the confidentiality of the Deposit Materials. (i) Notices. All notices, requests, demands or other communications ------- required or permitted to be given or made under this Agreement shall be in writing and shall be delivered by hand or by commercial overnight delivery service which provides for evidence of receipt, or mailed by certified mail, return receipt requested, postage prepaid. If delivered personally or by commercial overnight delivery service, the date on which the notice, request, instruction or document is delivered shall be the date on which delivery is deemed to be made, and if delivered by mail, the date on which such notice, request, instruction or document is 26 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- received shall be the date on which deliveryis deemed to be made. Any party may change its address for the purpose of this Agreement by notice in writing to the other parties as provided herein. (j) Survival. Paragraphs 5, 6, 8, 9 and 12 shall survive any termination -------- of this Agreement. (k) No Waiver. No failure on the part of any party hereto to exercise, and --------- no delay in exercising any right, power or single or partial exercise of any right, power or remedy by any party will preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No express waiver or assent by any party hereto to any breach of or default in any term or condition of this Agreement shall constitute a waiver of or an assent to any succeeding breach of or default in the same or any other term or condition hereof. IN WITNESS WHEREOF each of the parties has caused its duly authorized officer to execute this Agreement as of the date and year first above written. Fort Knox Escrow Services, Inc. 3539A Church Street Phone: 1-800-875-5669 Clarkston, Georgia 30021-1717 Fax: 1-404-298-2010 E-mail: info@fortknoxescrow.com By:-------------------------- Title: -------------------------- Print Name:---------------------------------------------------- Producer By:-------------------------- Title: -------------------------- Print Name:---------------------------------------------------- Address:------------------------------------------------------- Phone:--------------------------------------------------------- Fax:----------------------------------------------------------- E-mail:-------------------------------------------------------- Licensee By:-------------------------- Title: -------------------------- Print Name:---------------------------------------------------- Address:------------------------------------------------------- Phone:--------------------------------------------------------- Fax:----------------------------------------------------------- E-mail:-------------------------------------------------------- 27 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- EXHIBIT A FEE SCHEDULE Fees to be paid by Licensee shall be as follows: Initialization fee (one time only) $850 ($765 for current clients) Annual maintenance/storage fee . includes two Deposit Material updates $900 . includes one cubic foot of storage space (foreign $1,000) International (outside of U.S) - $1,000/product Additional Updates $150 (above two per year) Additional Storage Space $150/cubic foot Payable by Licensee or Producer: Due Upon Licensee's or Producer's Request for Release of Deposit Materials $100 for initial 2 hrs $50/hour for additional hours A ten percent discount is credited towards the initialization fee for current Fort Knox clients. Fees due upon receipt of signed contract or Deposit Material, whichever comes first and shall be paid in U.S. Dollars. Thereafter, fees shall be subject to their current pricing, provided that such prices shall not increase by more than 10% per year. An invoice for all renewal fees will be issued on the anniversary of the initial invoice. 28 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- EXHIBIT B B1. Product Name: ____________________________________________________ Version #:________________________________________________________ Prepared and Confirmed by: ________________________________________________ Title: _________________________________________ Date: __________________ Signature: _______________________________________________________________ Type of deposit: - ---------------- ____ Initial Deposit ____ Update Deposit to replace current deposits ____ Other (pleas describe)___________________________________________ Items Deposited: - ---------------- Quantity Media Type Description of Material A) ___________ ________________ _______________________ B) ___________ ________________ _______________________ C) ___________ ________________ _______________________ (please copy page as necessary) 29 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT F to SYCAMORE PURCHASE AND LICENSE AGREEMENT MAINTENANCE OPTIONS Sycamore Support Services 7 x 24 TAC Support Contract Software Maintenance Contract Resident Support Engineer Contract Hardware Maintenance Contracts Time & Material Order Return-to-Factory Repair Service Standard Product Training Customized Product Training Support Packages: Basic: Includes: Software Maintenance Contract 7 x 24 TAC Support Contract Package Price: [**] of End User Price Standard: Includes: Software Maintenance Contract 7 x 24 TAC Support Contract Hardware Maintenance Contract (Return/Repair) Package Price: [**] of End User Price Premium: Includes: Software Maintenance Contract 7 x 24 TAC Support Contract Hardware Maintenance Contract (Advanced Exchange) Package Price: [**] of End User Price 30 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1. 7 x 24 TAC Support Contract 1.1 Service Description: A. TAC Support includes 7 x 24 priority access to Sycamore's Technical Assistance Center. Priority support calls are routed to a Sycamore Network Support Engineer within ten (10) minutes during normal business hours and within twenty (20) minutes outside normal business hours. B. Sycamore Normal Business Hours: 8:30 a.m. - 5:30 p.m. EST Monday thru Friday Excluding Sycamore Holidays C. Customers may call Sycamore's Technical Assistance Center Support toll-free number for technical support and problem diagnosis. D. Electronic access to Sycamore's bulletin board service via www.sycamorenet.com, provides Customers with: technical tips, software release notes, and problem status reports. 1.2 Service Eligibility: A. Customer must possess a valid Sycamore TAC Support Contract or Sycamore Software Maintenance Contract. B. Customer must be in good credit standing with Sycamore. 1.3 Service Pricing: A la carte: [**] of List Price 31 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 2. Hardware Maintenance Contract (Return/Repair) 2.1 Service Description: A. The Customer must make a request for return by contacting Sycamore's Technical Support Center (TAC) and requesting a Return Material Authorization (RMA). Access to the TAC is available Monday through Friday, between 8:30 a.m. and 5:30 p.m., Eastern Time. B. Sycamore shall repair or replace (at its option) the malfunctioning product and return a functioning product to the Customer's site within [**] days of Sycamore's receipt of the malfunctioning product. 2.2 Service Eligibility: A. Customer must possess a valid Sycamore Hardware Maintenance Service Contract. B. Customer must be in good credit standing with Sycamore. C. Customer must obtain a Sycamore RMA number and must externally label the product packaging with the Sycamore RMA number. Any materials returned to Sycamore without prior authorization and proper labeling will be exempt from the stated Service Description. 2.3 Service Pricing: A la carte: [**] of List Price 32 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3. Hardware Maintenance Contract (Advanced Exchange) 3.1 Service Description: A. Sycamore provides an advanced exchange replacement product upon qualification of defect by Sycamore support personnel. B. The Customer must make a request for return by contacting Sycamore's Technical Support Center (TAC) and requesting a Return Material Authorization (RMA). Access to the TAC is available Monday through Friday, between 8:30 a.m. and 5:30 p.m., Eastern Time. C. All eligible advanced exchange RMA requests for replacement products received before 3:00 p.m., Eastern Time will be shipped for arrival at the Customer site the next business day. D. All eligible RMA requests made after 3:00 p.m. will be shipped the following day for delivery at the Customer site [**] business days from the date of the RMA request. E. Customer shall return the malfunctioning product to Sycamore within [**] days of receipt of the replacement product. Malfunctioning product not returned to Sycamore within [**] days of Customer's receipt of replacement product shall be invoiced at Sycamore's then-current list price. F. The replacement products are provided to Customer at no cost provided the replacement was due to malfunction or normal wear and tear of the product and not due to causes external to the product. Otherwise, the product is provided at the then-current Sycamore list price, plus shipping and handling costs. 3.2 Service Eligibility: A. Customer must possess a valid Sycamore Hardware Maintenance Service Contract. B. Customer must be in good credit standing with Sycamore. C. Customer must obtain a Sycamore RMA number and must externally label the product packaging with the Sycamore RMA number. Any materials returned to Sycamore without prior authorization and proper labeling will be exempt from the stated Service Description. 3.3 Service Pricing: A la carte: [**] of List Price CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- 4. Return-to-Factory Repair Service Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 4.1 Service Description: A. As a per incident service, Sycamore shall repair or replace (at its option) the malfunctioning product and return a functioning product to the Customer's site within [**] days of Sycamore's receipt of the malfunctioning product. B. Beyond the Standard Hardware Warranty period, Sycamore warrants its work performed for a period of [**] days from the date of shipment from Sycamore to the Customer. 4.2 Service Eligibility: A. Customer must provide a purchase order or other form of acceptable payment (at Sycamore's discretion) prior to returning the defective product. B. Customer must be in good credit standing with Sycamore. C. Customer must obtain a Sycamore RMA number and must externally label the product packaging with the Sycamore RMA number. Any materials returned to Sycamore without prior authorization and proper labeling will be exempt from the stated Service Description. 4.3 Service Pricing: Quoted by Sycamore TAC at time of service request. 34 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 5. Software Maintenance Contract 5.1 Service Description: A. All Sycamore software releases performed during the software maintenance period will be provided to the Customer at no additional charge. B. Sycamore will notify the Customer under contract of all generally available software releases. C. Sycamore may choose to distribute all software and documentation updates either electronically (www.sycamorenet.com) or on physical media (CD, diskette, tape, etc.). D. Release Notes outlining software modifications, known deficiencies and upgrade/installation procedures are provided as part of the service. E. User Documentation updates, if applicable, is provided as part of the service. F. Sycamore will provide revision and enhancement release information as it becomes available for general release, relating to availability of code corrections, work-around procedures and limitations of Covered Products. G. Periodic software problem status reports including information concerning software enhancements, bugs and documentation updates. H. Purchase of Software Maintenance Contract also includes 7 x 24 TAC Support Services. 5.2 Service Eligibility: A. Customer must possess a valid Sycamore Software Maintenance Service Contract. B. Customer must be in good credit standing with Sycamore. 5.3 Service Pricing: A la carte: [**] of List Price 35 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 6. Resident Support Engineer Contract 6.1 Service Description: A. Sycamore provides a full-time qualified support engineer on-site at the Customer's location. B. Sycamore Resident Engineer provides technical consultation, assists in problem isolation, assists in planning and executing network activities (e.g. installations, upgrades, etc.) and manages issue resolution with Customer and Sycamore personnel. C. Standard work-hours (# of hours and time-of-day) apply. However, non-standard work hours can be scheduled on an as needed basis. 6.2 Service Eligibility: A. Customer must purchase a Sycamore Resident Support Engineer Contract. B. Customer must be in good credit standing with Sycamore. 6.3 Service Pricing: [**] / year 36 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 7. Time & Material Order 7.1 Service Description: A. Customer may contract Sycamore Support Engineer(s) for on-site installation, upgrade or problem isolation services. B. Customer must provide a description of work requested, date and time required, location and materials required. 7.2 Service Eligibility: A. Customer must provide a purchase order or other form of acceptable payment (at Sycamore's discretion) prior to receiving service. B. Customer must be in good credit standing with Sycamore. 7.3 Service Pricing: Contact Sycamore TAC for quotation based upon rates below: Hourly Labor Charges (portal-to-portal): Monday through Friday, 8:30 AM - 5:30 PM $[**] All other times $[**] $[**] Minimum Labor Charge Travel Charges (distance Sycamore must travel): 0-50 miles $[**] 51-500 $[**] 501-1,000 $[**] 1,001-1,500 $[**] 1,501-3,000 $[**] Greater than 3,000 miles [**] 37 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 8. Standard Product Training 8.1 Service Description: A. Sycamore qualified instructor provides training on product installation, configuration, operations, management and diagnosis. B. Course materials (overheads, handouts, etc.) are provided to each student. C. Hands-on laboratory exercises are provided (if applicable). All instructional equipment provided by Sycamore. D. Classes are offered at Sycamore Education facilities or can be brought directly to the customer's site (additional travel and expense charges will be applied). 8.2 Service Eligibility: A. Customer must provide a purchase order or other form of acceptable payment (at Sycamore's discretion) prior to attending training. B. Customer must be in good credit standing with Sycamore. 8.3 Service Pricing: Sycamore Facility: Training Cost (per student): $[**] per day Customer Location: Training Cost (per student): $[**] per day Travel: $[**] per course delivered Expenses: $[**] per day 38 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 9. Customized Product Training 9.1 Service Description: A. Sycamore will modify existing or create new materials to provide Customer-specified training. B. Sycamore qualified instructor provides the customized training. C. Course materials (overheads, handouts, etc.) are provided to each student. D. Hands-on laboratory exercises are provided (if applicable). All instructional equipment provided by Sycamore. E. Classes are offered at Sycamore Education facilities or can be brought directly to the customer's site (additional travel and expense charges will be applied). 9.2 Service Eligibility: A. Customer must provide a purchase order or other form of acceptable payment (at Sycamore's discretion) prior to attending training. B. Customer must be in good credit standing with Sycamore. 9.3 Service Pricing: Sycamore Facility: Course Customization: $[**] per hour ($[**] minimum) (estimate provided at time of request) Training Cost (per student): $[**] per day Customer Location: Course Customization: $[**] per hour ($[**] minimum) (estimate provided at time of request) Training Cost (per student): $[**] per day Travel: $[**] per course Expenses: $[**] per day 39 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. LegalO-Z/Whalen_Patricia/Legal/107761.117/ex_s.wpf 40 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- EX-10.4 7 LTR AGREEMENT BETWEEN SYCAMORE AND FLEET EXHIBIT 10.4 SYCAMORE NETWORKS, INC. 10 Elizabeth Drive Chelmsford, MA 01824 April 22, 1999 Fleet National Bank One Federal Street Boston, MA 02110 Gentlemen: This letter agreement will set forth certain understandings between Sycamore Networks, Inc., a Delaware corporation (the "Borrower"), and Fleet National Bank (the "Bank") with respect to Term Loans (hereinafter defined) to be made by the Bank to the Borrower. In consideration of the mutual promises contained herein and in the other documents referred to below, and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as follows: I. AMOUNTS AND TERMS ----------------- 1.1. References to Documents. Reference is made to (i) that certain ----------------------- $5,000,000 face principal amount promissory note (the "1999 Term Note") of even date herewith made by the Borrower and payable to the order of the Bank, (ii) that certain Inventory and Accounts Receivable Security Agreement and that certain Supplementary Security Agreement - Security Interest in Goods and Chattels, each of even date herewith, from the Borrower to the Bank (collectively, the "Security Agreement"), and (iii) that certain $1,000,000 face principal amount Commercial Equipment Line of Credit Term Promissory Note dated August 5, 1998 (the "1998 Term Note") made by the Borrower and payable to the order of the Bank. 1.2. The Borrowing; 1999 Term Note. Subject to the terms and conditions ----------------------------- hereinafter set forth, the Bank will make one or more loans (the "1999-2000 Term Loans") to the Borrower, as the Borrower may request, on any Business Day prior to the first to occur of (i) January 31, 2000 or (ii) the earlier termination of the within-described term loan facility pursuant to (S)5.2 or (S)6.6. Each 1999-2000 Term Loan shall be made in order to finance costs of Qualifying Equipment acquired by the Borrower within the 90 days preceding the request for such 1999-2000 Term Loan (except that the initial 1999-2000 Term Loan may be used to finance costs of Qualifying Equipment acquired by the Borrower at any time on or after November 1, 1998), each such 1999-2000 Term Loan to be in such amount as may be requested by the Borrower; provided that (i) no 1999-2000 Term Loan will be made after January 31, 2000; (ii) the aggregate original principal amounts of all 1999-2000 Term Loans will not exceed $5,000,000; and (iii) no 1999-2000 Term Loan will be in an amount in excess of 100% of the invoiced actual costs of the items of Qualifying Equipment with respect to which such 1999-2000 Term Loan is made (excluding taxes, shipping, installation charges, training fees and other "soft costs" and excluding software except as expressly permitted by the next following sentence). The Borrower may include within "Qualifying Equipment" software (not including "shrink-wrapped" software) purchased by the Borrower for use in connection with the equipment otherwise included in "Qualifying Equipment"; provided that the aggregate cost of the software so included will not exceed 20% of the aggregate principal amount of 1999-2000 Term Loans outstanding at the Full Drawing Date (hereinafter defined). If for any reason the aggregate cost of such software exceeds 20% of the aggregate principal amount of 1999-2000 Term Loans outstanding at the Full Drawing Date, the Borrower will forthwith repay those 1999-2000 Term Loans made to finance the cost of such software to the extent necessary so that the aggregate cost of software financed by 1999-2000 Term Loans (and not so prepaid) will not exceed 20% of the then aggregate outstanding principal amount of the 1999-2000 Term Loans. As used herein, "Full Drawing Date" means the earlier of: (i) January 31, 2000 or (ii) that date on which 1999-2000 Term Loans with an aggregate original principal amount of $5,000,000 shall have been advanced. Prior to the making of each 1999-2000 Term Loan, and as a precondition thereto, the Borrower will provide the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment; (ii) such evidence as the Bank may reasonably require showing that the Qualifying Equipment has been delivered to and installed at the Borrower's Chelmsford, MA premises, has become fully operational, has been paid for by the Borrower and is owned by the Borrower free of all liens and interests of any other Person (other than the security interest of the Bank pursuant to the Security Agreement); (iii) Uniform Commercial Code financing statements (if needed) reflecting the relevant Qualifying Equipment with respect to which such 1999-2000 Term Loan is being made; and (iv) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee. The 1999-2000 Term Loans will be evidenced by the 1999 Term Note. Interest on the 1999-2000 Term Loans shall be payable at the times and at the rate provided for in the 1999 Term Note. Overdue principal of any 1999-2000 Term Loan and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate otherwise payable ---- under the 1999 Term Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the 1999 Term Note or on the books of the Bank, at or following the time of making each 1999-2000 Term Loan and of receiving any payment of principal, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of the 1999-2000 Term Loans. The amount so noted shall constitute prima facie evidence as to the ----- ----- amount owed by the Borrower with respect to principal of the 1999-2000 Term Loans. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower or any right of the Bank hereunder or under the 1999 Term Note. 1.3. Principal Repayment of 1999-2000 Term Loans. The Borrower shall ------------------------------------------- repay the principal of the 1999-2000 Term Loans in 36 equal consecutive monthly installments, commencing on February 1, 2000 and continuing on the first day of each month thereafter. Each -2- such monthly installment of principal of the 1999-2000 Term Loans shall be in an amount equal to 1/36th of the aggregate principal amount of the 1999-2000 Term Loans outstanding at the close of business on January 31, 2000. In any event, the then outstanding principal balance of the 1999-2000 Term Loans and all interest accrued but unpaid thereon shall be due and payable in full on January 1, 2003. If any installment of the 1999-2000 Term Loans is prepaid prior to its regularly scheduled due date for any reason, in whole or in part, whether voluntarily or involuntarily, prior to January 1, 2003, the Borrower will forthwith pay to the Bank a fee (the "Termination Fee") in the amount of $12,500. The Borrower may prepay, at any time or from time to time, without premium or penalty (but subject to the aforesaid Termination Fee), the whole or any portion of any 1999-2000 Term Loan; provided that each such principal prepayment shall be accompanied by payment of all interest on the amount so prepaid accrued but unpaid to the date of payment, and a prepayment in whole shall be accompanied by said Termination Fee. Any partial prepayment of principal of the 1999-2000 Term Loans will be applied to installments of principal of the 1999-2000 Term Loans thereafter coming due in inverse order of normal maturity. Amounts repaid or prepaid with respect to the 1999-2000 Term Loans are not available for reborrowing. 1.4. 1998 Term Loans. Prior to the date hereof, the Bank has made certain --------------- loans (the "1998 Term Loans") to the Borrower pursuant to the 1998 Term Note. Principal of, and interest on, the 1998 Term Loans will be paid by the Borrower at the times and at the rates provided for in the 1998 Term Note. The 1998 Term Note is hereby amended: (i) by deleting from clause (c) of the first sentence of Section 8 of the 1998 Term Note the words "ninety (90) days" and by substituting in their stead the words "120 days", and (ii) by adding to clause a(iv) of the first sentence of Section 9.1 of the 1998 Term Note, at the end of such clause, the following words: "including other encumbrances specifically permitted by Section 4.2 of the letter agreement dated April 22, 1999 between the Bank and the Borrower". The 1998 Term Note is hereby further amended by deleting in their entireties Sections 9.2 - 9.14, inclusive, of the 1998 Term Note and by substituting in their stead Sections 4.2-4.13, inclusive, of the letter agreement, all such provisions of the letter agreement (and any related definitions) being deemed incorporated into the 1998 Term Note by this reference and made a part thereof, as effectively as if set forth at length therein. The 1998 Term Note is hereby further amended by deleting in its entirety Section 9.16 of the 1998 Term Note and by substituting in its stead Sections 3.7 - 3.10, inclusive, of the letter agreement, all such provisions of the letter agreement (and any related definitions) being deemed incorporated into the 1998 Term Note by this reference and made a part thereof, as effectively as if set forth at length therein. The 1998 Term Note is hereby further amended by deleting in their entireties the "Events of Default" described in clauses (a) - (l), inclusive, of Section 10 of the 1998 Term Note and by substituting in their stead, as "Events of Default" under the 1998 Term Note, the provisions of clauses (a) - (o), inclusive, of Section 5.1 of the letter agreement, all such provisions of the letter agreement (and any related definitions) being deemed incorporated into the 1998 Term Note by this reference and made a part thereof, as effectively as if set forth at length therein. For the purpose of the incorporation by reference described above, references to "the letter agreement" will be deemed to refer to the within letter agreement, as in effect at the date of execution and delivery hereof, and without regard to any subsequent termination. -3- 1.5. Advances and Payments. The proceeds of all 1999-2000 Term Loans --------------------- shall be credited by the Bank to a general deposit account maintained by the Borrower with the Bank. The proceeds of each 1999-2000 Term Loan will be used by the Borrower solely to pay (or reimburse the Borrower for) the costs of acquisition of Qualifying Equipment. The Bank may charge any general deposit account of the Borrower at the Bank with the amount of all payments of interest, principal and other sums due, from time to time, under this letter agreement, the 1998 Term Note and/or the 1999 Term Note and/or with respect to any Obligations relating to ACH transactions; and will thereafter notify the Borrower of the amount so charged. The failure of the Bank so to charge any account or to give any such notice shall not affect the obligation of the Borrower to pay interest, principal or other sums as provided herein, in the 1998 Term Note or in the 1999 Term Note or with respect to any Obligations relating to the ACH transactions. Whenever any payment to be made to the Bank hereunder, under the 1998 Term Note, under the 1999 Term Note and/or with respect to any Obligations relating to ACH transactions shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and interest payable on each such date shall include the amount thereof which shall accrue during the period of such extension of time. All payments by the Borrower hereunder and/or in respect of the 1998 Term Note or the 1999 Term Note and/or with respect to any Obligations relating to ACH transactions shall be made net of any impositions or taxes and without deduction, set-off or counterclaim, notwithstanding any claim which the Borrower may now or at any time hereafter have against the Bank. All payments of interest, principal and any other sum payable hereunder, under the 1998 Term Note and/or the 1999 Term Note and/or with respect to any Obligations relating to ACH transactions shall be made to the Bank, in lawful money of the United States in immediately available funds, at its office at One Federal Street, Boston, MA 02110 or to such other address as the Bank may from time to time direct. All payments received by the Bank after 2:00 p.m. on any day shall be deemed received as of the next succeeding Business Day. All monies received by the Bank hereunder shall (unless an Event of Default has occurred and is then continuing) be applied as designated in writing by the Borrower at the time of such payment and, failing such designation (or if an Event of Default has occurred and is then continuing), shall be applied first to fees, charges, costs and expenses payable to the Bank under this letter agreement, any Term Note and/or any of the other Loan Documents and/or with respect to any of the other Obligations, next to interest then accrued on account of any Term Loans or other Obligations and only thereafter to principal of the Term Loans and the other Obligations. All interest and fees payable hereunder and/or under any Term Note and/or with respect to any of the other Obligations shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 1.6. ACH Exposure. The Bank may from time to time, at the request of the ------------ Borrower, initiate automated clearinghouse ("ACH") transactions for the Borrower; provided that the Bank's total ACH Exposure shall not (unless otherwise agreed by the Bank in its sole discretion) exceed $200,000 at any one time. ACH transactions will bear such fees and charges as may be agreed upon by the Bank and the Borrower and will be governed by documentation to be entered into between the Bank and the Borrower in connection therewith. As used herein, "ACH -4- Exposure" as determined at any date means the sum of (i) all amounts then owed by the Borrower to the Bank in connection with any ACH transaction pursuant to which the Bank has advanced funds on behalf of the Borrower plus (ii) the ---- maximum amount which could be owed by the Borrower (assuming settlement within two (2) Business Days of each date when funds are advanced) to the Bank in connection with all ACH transactions then authorized by the Borrower. 1.7. Conditions to Advance. Prior to the making of the initial 1999-2000 --------------------- Term Loan or the initiation of any ACH transaction, the Borrower shall deliver to the Bank duly executed copies of this letter agreement, the Security Agreement, the 1999 Term Note and the documents and other items listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all of which, as well as all legal matters incident to the transactions contemplated hereby, shall be satisfactory in form and substance to the Bank and its counsel. Without limiting the foregoing, any 1999-2000 Term Loan (including the initial 1999-2000 Term Loan) and the initiation of any ACH transaction is subject to the further conditions precedent that on the date on which such 1999- 2000 Term Loan is made or such ACH transaction is initiated (and, in either event, after giving effect thereto): (a) All statements, representations and warranties of the Borrower made in this letter agreement and/or in the Security Agreement shall continue to be correct in all material respects as of the date of such 1999-2000 Term Loan or such ACH transaction, as the case may be (except for such statements, representations and warranties that expressly relate to a specific date). (b) All covenants and agreements of the Borrower contained herein and/or in any of the other Loan Documents shall have been complied with in all material respects on and as of the date of such 1999-2000 Term Loan or such ACH transaction, as the case may be. (c) No event which constitutes, or which with notice or lapse of time or both would constitute, an Event of Default shall have occurred and be continuing. (d) No material adverse change shall have occurred in the financial condition of the Borrower from that disclosed in the financial statements then most recently furnished to the Bank. Each request by the Borrower for any 1999-2000 Term Loan or any ACH transaction, and each acceptance by the Borrower of the proceeds of any 1999- 2000 Term Loan, will be deemed a representation and warranty by the Borrower that at the date of such 1999-2000 Term Loan (or such ACH transaction, as the case may be) and after giving effect thereto all of the conditions set forth in the foregoing clauses (a)-(d) of this (S)1.7 will be satisfied. II. REPRESENTATIONS AND WARRANTIES ------------------------------ 2.1. Representations and Warranties. In order to induce the Bank to enter ------------------------------ into this letter agreement and to make Term Loans hereunder and/or engage in ACH transactions for the Borrower, the Borrower warrants and represents to the Bank as follows: -5- (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Borrower has full corporate power to own its property and conduct its business as now conducted and as proposed to be conducted, to grant the security interests contemplated by the Security Agreement and to enter into and perform this letter agreement and the other Loan Documents. The Borrower is duly qualified to do business and in good standing in Massachusetts and in each other jurisdiction in which the Borrower maintains any plant, office, warehouse or other facility and in each other jurisdiction where the failure so to qualify would be reasonably likely (singly or in the aggregate with all other such failures) to have a material adverse effect on the financial condition, business or prospects of the Borrower, all such jurisdictions being listed on item 2.1(a) of the attached Disclosure Schedule. At the date hereof, the Borrower has no Subsidiaries, except as shown on said item 2.1(a) of the attached Disclosure Schedule. The Borrower is not a member of any partnership or joint venture. (b) At the date of this letter agreement, all of the outstanding equity securities of the Borrower are owned, of record and beneficially, as set forth on item 2.1(b) of the attached Disclosure Schedule. The Borrower owns 100% of the outstanding capital stock of each Subsidiary, if any. (c) The execution, delivery and performance by the Borrower of this letter agreement and each of the other Loan Documents have been duly authorized by all necessary corporate and other action and do not and will not: (i) violate any provision of, or require any filing (other than filings under the Uniform Commercial Code), registration, consent or approval under, any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower; (ii) violate any provision of the charter or by-laws of the Borrower, or result in a breach of or constitute a default or require any waiver or consent under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which the Borrower or any of its properties may be bound or affected or require any other consent of any Person; or (iii) result in, or require, the creation or imposition of any lien, security interest or other encumbrance (other than in favor of the Bank), upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. (d) This letter agreement and each of the other Loan Documents has been duly executed and delivered by the Borrower and each is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms. (e) Except as described on item 2.1(e) of the attached Disclosure Schedule, there are no actions, suits, proceedings or investigations pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any Subsidiary of the Borrower before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or -6- foreign, which could hinder or prevent the consummation of the transactions contemplated hereby or call into question the validity of this letter agreement or any of the other Loan Documents or any other instrument provided for or contemplated by this letter agreement or any action taken or to be taken in connection with the transactions contemplated hereby or thereby or which in any single case or in the aggregate would be reasonably likely to result in any material adverse change in the business, prospects, condition, affairs or operations of the Borrower or any such Subsidiary. (f) The Borrower is not in violation of any term of its charter or by-laws as now in effect. Neither the Borrower nor any Subsidiary of the Borrower is in material violation of any term of any mortgage, indenture or judgment, decree or order, or any other instrument, contract or agreement to which it is a party or by which any of its property is bound, which violation would be reasonably likely to have a material adverse effect on the financial condition, business or prospects of the Borrower. (g) The Borrower has filed (and has caused each of its Subsidiaries to file) all federal, foreign, state and local tax returns, reports and estimates required to be filed by the Borrower and/or by any such Subsidiary. All such filed returns, reports and estimates are proper and accurate and the Borrower or the relevant Subsidiary has paid all taxes, assessments, impositions, fees and other governmental charges required to be paid in respect of the periods covered by such returns, reports or estimates, other than any such taxes, assessments, impositions, fees and charges which are being contested in good faith by appropriate proceedings which serve to stay the remedies of the relevant taxing authority and as to which the Borrower has established and maintains adequate reserves. No deficiencies for any tax, assessment or governmental charge have been asserted or assessed, and the Borrower knows of no material tax liability nor any basis therefor. (h) The Borrower is in compliance with (and each Subsidiary of the Borrower is in compliance with) all requirements of law, federal, foreign, state and local, and all requirements of all governmental bodies or agencies having jurisdiction over it, the conduct of its business, the use of its properties and assets, and all premises occupied by it, failure to comply with any of which would be reasonably likely (singly or in the aggregate with all other such failures) to have a material adverse effect upon the assets, business, financial condition or prospects of the Borrower or any such Subsidiary. Without limiting the foregoing, the Borrower has all of the material franchises, licenses, leases, permits, certificates and authorizations needed for the conduct of its business and the use of its properties and all premises occupied by it, as now conducted, owned and used. (i) The management-prepared financial statements of the Borrower as at December 31, 1998, heretofore delivered to the Bank, are complete and accurate and fairly present the financial condition of the Borrower as at the date thereof and for the period covered thereby, except that said management-prepared statements do not have footnotes and thus do not present all of the information which would normally be contained in footnotes to financial statements. Neither the Borrower nor any of the Borrower's Subsidiaries has any liability, contingent or otherwise, not disclosed in the aforesaid December 31, 1998 financial statements or in any notes thereto that would be reasonably likely to materially adversely affect the financial -7- condition of the Borrower. Since December 31, 1998, there has been no material adverse development in the business, condition or prospects of the Borrower, and the Borrower has not entered into any material transaction other than in the ordinary course. (j) The principal place of business and chief executive offices of the Borrower are located at 10 Elizabeth Drive, Chelmsford, MA 01824. All of the books and records of the Borrower are located at said address. Except as described on item 2.1(j) of the attached Disclosure Schedule, none of the assets of the Borrower are located at any address other than at 10 Elizabeth Drive, Chelmsford, MA 01824; provided that laptop computers, personal computers and demonstration and testing equipment with an aggregate value not in excess of $200,000 may be kept at other locations, subject to the following conditions and limitations: (i) laptop computers and personal computers may be removed from said Chelmsford, MA premises so long as same are kept by the Borrower's salesmen and/or employees, and (ii) demonstration and testing equipment may be removed from said Chelmsford, MA premises and kept at customers' premises and/or trade shows so long as, as to each item of such demonstration and testing equipment which has been removed from the Borrower's Chelmsford, MA premises for 90 days or more, on or prior to such 90th day the Borrower informs the Bank in writing of the location of such item and delivers to the Bank all such Uniform Commercial Code financing statements, consignment agreements, waivers and other documentation as the Bank may reasonably request in order to establish and/or maintain perfection of its security interests. Said Item 2.1(j) of the attached Disclosure Schedule sets forth the names and addresses of all record owners of any premises where Collateral may be located, except Collateral located off-site pursuant to the immediately preceding sentence. (k) The Borrower owns or has a valid right to use all of the material patents, licenses, copyrights, trademarks, trade names and franchises now being used or necessary to conduct its business as presently conducted. The conduct of the Borrower's business as now operated does not conflict with valid patents, licenses, copyrights, trademarks, trade names or franchises of others in any manner that would be reasonably likely to materially adversely affect the business or assets or condition, financial or otherwise, of the Borrower. (l) Except as described on item 2.1(l) of the attached Disclosure Schedule, none of the executive officers or key employees of the Borrower is subject to any agreement in favor of anyone other than the Borrower which limits or restricts that person's right to engage in the type of business activity conducted by the Borrower or which grants to anyone other than the Borrower any rights in any inventions or other ideas susceptible to legal protection developed or conceived by any such officer or key employee. (m) The Borrower is not a party to any contract or agreement which now has or, as far as can be foreseen by the Borrower at the date hereof, is reasonably likely to have a material adverse effect on the financial condition, business, prospects or properties of the Borrower. (n) The Borrower has reviewed the material software which it uses in its business for "Year 2000" compliance and has determined that such software will continue to function in the manner intended without interruption of service or other difficulty resulting from the "Year 2000 -8- problem". The Borrower will, at the request of the Bank, provide such reports and such other information as the Bank may reasonably request in order to evidence such Year 2000 compliance. III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS ------------------------------------------------ Without limitation of any other covenants and agreements contained herein or elsewhere, the Borrower agrees that so long as the financing arrangements contemplated hereby are in effect or all or any portion of any Term Loan or any of the other Obligations shall be outstanding or any amount shall be owed by the Borrower in respect of any ACH transaction: 3.1. Legal Existence; Qualification; Compliance. The Borrower will ------------------------------------------ maintain (and will cause each Subsidiary of the Borrower to maintain) its corporate existence and good standing in the jurisdiction of its incorporation. The Borrower will remain qualified to do business and in good standing in Massachusetts. The Borrower will qualify to do business and will remain qualified and in good standing (and the Borrower will cause each Subsidiary of the Borrower to qualify and remain qualified and in good standing) in each other jurisdiction where the Borrower or such Subsidiary, as the case may be, maintains any plant, office, warehouse or other facility and in each other jurisdiction where the failure so to qualify would be reasonably likely (singly or in the aggregate with all other such failures) to have a material adverse effect on the financial condition, business or prospects of the Borrower or any such Subsidiary. The Borrower will comply (and will cause each Subsidiary of the Borrower to comply) with its charter documents and by-laws. The Borrower will comply with (and will cause each Subsidiary of the Borrower to comply with) all applicable laws, rules and regulations (including, without limitation, ERISA and those relating to environmental protection) other than (i) laws, rules or regulations the validity or applicability of which the Borrower or such Subsidiary shall be contesting in good faith by proceedings which serve as a matter of law to stay the enforcement thereof and (ii) those laws, rules and regulations the failure to comply with any of which would not (singly or in the aggregate) be reasonably likely to have a material adverse effect on the financial condition, business or prospects of the Borrower or any such Subsidiary. 3.2. Maintenance of Property; Insurance. The Borrower will maintain and ---------------------------------- preserve (and will cause each Subsidiary of the Borrower to maintain and preserve) all of its fixed assets in good working order and condition, making all necessary repairs thereto and replacements thereof. The Borrower will maintain all such insurance as may be required under the Security Agreement and will also maintain, with financially sound and reputable insurers, insurance with respect to its property and business against such liabilities, casualties and contingencies and of such types and in such amounts as shall be reasonably satisfactory to the Bank from time to time and in any event all such insurance as may from time to time be customary for companies conducting a business similar to that of the Borrower in similar locales. 3.3. Payment of Taxes and Charges. The Borrower will pay and discharge ---------------------------- (and will cause each Subsidiary of the Borrower to pay and discharge) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or property, including, without limitation, taxes, assessments, charges or levies relating to real and personal property, franchises, income, unemployment, old age benefits, withholding, or sales or use, prior to the date -9- on which penalties would attach thereto, and all lawful claims (whether for any of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon any property of the Borrower or any such Subsidiary, except any of the foregoing which is being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement thereof and for which the Borrower has established and is maintaining adequate reserves. The Borrower will pay, and will cause each of its Subsidiaries to pay, in a timely manner, all material lease obligations, material trade debt, material purchase money obligations, material equipment lease obligations and all of its other material Indebtedness. The Borrower will perform and fulfill all material covenants and agreements under any material leases of real estate, agreements relating to material purchase money debt, material equipment leases and other material contracts. The Borrower will maintain in full force and effect, and comply with the terms and conditions of, all material permits, permissions and licenses necessary or desirable for its business. 3.4. Accounts. The Borrower will maintain its primary operating accounts -------- with the Bank. 3.5. Conduct of Business. The Borrower will conduct, in the ordinary ------------------- course, the business in which it is presently engaged. The Borrower will not, without the prior written consent of the Bank, directly or indirectly (itself or through any Subsidiary) enter into any other lines of business, businesses or ventures which are not substantially related to the business conducted by the Borrower at the date of this letter agreement. If the Borrower requests such consent in writing, the Bank will, within 10 Business Days after receipt of such request (together with all such projections, historical financial information and other data as may be reasonably necessary for the Bank to make its decision), inform the Borrower as to whether such consent will or will not be given; and the failure by the Bank to respond within such 10-Business Day period will be deemed to constitute a refusal to give such consent. 3.6. Reporting Requirements. The Borrower will furnish to the Bank (or ---------------------- cause to be furnished to the Bank): (i) Within 120 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such fiscal year for the Borrower, including therein consolidated and consolidating balance sheets of the Borrower and Subsidiaries as at the end of such fiscal year and related consolidated and consolidating statements of income, stockholders' equity and cash flow for the fiscal year then ended. The annual consolidated financial statements shall be certified by independent public accountants selected by the Borrower and reasonably acceptable to the Bank, such certification to be in such form as is generally recognized as "unqualified". (ii) Within 30 days after the end of each month, consolidated and consolidating balance sheets of the Borrower and Subsidiaries and related consolidated and consolidating statements of income and cash flow, unaudited but complete and accurate and prepared in accordance with generally accepted accounting principles consistently applied fairly presenting the financial condition of the Borrower and Subsidiaries as at the dates thereof and for the periods covered thereby (except that such monthly statements -10- need not contain footnotes) and certified as accurate by the chief financial officer or chief executive officer of the Borrower, such balance sheets to be as at the end of each such month and such statements of income and cash flow to be for each such month and for the fiscal year to date, in each case together with a comparison to budget and a comparison to the results for the corresponding fiscal period of the immediately prior fiscal year. (iii) At the time of delivery of each annual or monthly financial statement of the Borrower, a certificate executed by the chief financial officer or chief executive officer of the Borrower stating that he or she has reviewed this letter agreement and the other Loan Documents and has no knowledge of any default by the Borrower in the performance or observance of any of the provisions of this letter agreement or of any of the other Loan Documents or, if he or she has such knowledge, specifying each such default and the nature thereof. Each financial statement given as at the end of any fiscal quarter of the Borrower will also set forth the calculations necessary to evidence compliance with (S)(S)3.7 - 3.9. (iv) Promptly after receipt, a copy of all audits or reports submitted to the Borrower by independent public accountants in connection with any annual, special or interim audits of the books of the Borrower and any "management letter" prepared by such accountants. (v) As soon as possible and in any event within five days after the Borrower knows of or reasonably should have known of the occurrence of any Default or Event of Default, the statement of the Borrower setting forth details of each such Default or Event of Default and the action which the Borrower proposes to take with respect thereto. (vi) Promptly after the commencement thereof, notice of the commencement of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, to which the Borrower or any Subsidiary of the Borrower is a party; provided, however, that nothing contained in this clause (vi) will be deemed to require the Borrower to give notice of any such action, suit or proceeding which seeks monetary damages only, such damages being in the amount of $100,000 or less. (vii) Promptly upon filing any registration statement or listing application, a copy of same. (viii) If the Borrower at any time has a class of securities which is publicly traded, a copy of each periodic or current report of the Borrower filed with the SEC or any successor agency and each annual report, proxy statement and other communication sent by the Borrower to shareholders or other securityholders generally or disseminated to the public, such copy to be provided to the Bank promptly upon such filing with the SEC or such communication with shareholders or securityholders or such public dissemination, as the case may be. -11- (ix) Promptly after the Borrower has knowledge thereof, written notice of any development or circumstance which would be reasonably expected to have a material adverse effect on the Borrower or its business, prospects, properties, assets, Subsidiaries or condition, financial or otherwise. (x) Promptly upon request, such other information (including budgets) respecting the financial condition, operations, prospects, receivables, inventory, machinery or equipment of the Borrower or any Subsidiary as the Bank may from time to time reasonably request. 3.7. Quick Ratio. The Borrower will maintain, as at each Determination ----------- Date (commencing with its results as at April 30, 1999), a Quick Ratio of not less than 2.0 to 1. As used herein, the "Quick Ratio", as determined at any date, is the ratio of (x) Net Quick Assets to (y) Current Liabilities then outstanding. As used herein, "Determination Date" means the last day of each fiscal quarter of the Borrower. 3.8. Capital Base. The Borrower will maintain as at each Determination ------------ Date (commencing with its results as at April 30, 1999) a consolidated Capital Base which shall not be less than $25,000,000. 3.9. Leverage. The Borrower will maintain, on a consolidated basis, as at -------- each Determination Date (commencing with its results as at April 30, 1999) a Leverage Ratio which shall not be more than 1.0 to 1. As used herein, the "Leverage Ratio", as determined at any date, means the ratio of (x) all Senior Debt of the Borrower and/or any of its Subsidiaries outstanding at such date to (y) the Borrower's consolidated Capital Base at such date. 3.10. Books and Records. The Borrower will maintain (and will cause each ----------------- of its Subsidiaries to maintain) complete and accurate books, records and accounts which will at all times accurately and fairly reflect all of its transactions in accordance with generally accepted accounting principles consistently applied. The Borrower will, at any reasonable time and from time to time upon reasonable notice and during normal business hours (and at any time and without any necessity for notice following the occurrence of an Event of Default), permit the Bank, and any agents or representatives thereof, to examine and make copies of and take abstracts from the records and books of account of, and visit the properties of the Borrower and any of its Subsidiaries, and to discuss its affairs, finances and accounts with its officers, directors and/or independent accountants, all of whom are hereby authorized and directed to cooperate with the Bank in carrying out the intent of this (S)3.10; provided that the Borrower will not be required to pay the costs of more than one inspection under this (S)3.10 per calendar year unless an Event of Default has occurred and is continuing. Each financial statement of the Borrower hereafter delivered pursuant to this letter agreement will be complete and accurate and will fairly present in all material respects the financial condition of the Borrower as at the date thereof and for the periods covered thereby. 3.11. Landlord's Waiver. Prior to the making of the first 1999-2000 Term ----------------- Loan, the Borrower will use its best efforts to obtain, and will thereafter use its best efforts to maintain in -12- effect at all times, waivers from the owners of all premises in which any Collateral is permanently located, such waivers to be in form and substance reasonably satisfactory to the Bank. IV. NEGATIVE COVENANTS ------------------ Without limitation of any other covenants and agreements contained herein or elsewhere, the Borrower agrees that so long as the financing arrangements contemplated hereby are in effect or all or any portion of any Term Loan or any of the other Obligations shall be outstanding or any amount shall be owed by the Borrower in respect of any ACH transaction: 4.1. Indebtedness. The Borrower will not create, incur, assume or suffer ------------ to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur, assume or suffer to exist any Indebtedness), except for: (i) Indebtedness owed to the Bank, including, without limitation, the Indebtedness represented by the Term Notes or in respect of any ACH transaction; (ii) Indebtedness of the Borrower or any Subsidiary for taxes, assessments and governmental charges or levies not yet due and payable; (iii) unsecured current liabilities of the Borrower or any Subsidiary (other than for money borrowed or for purchase money Indebtedness with respect to fixed assets) incurred upon customary terms in the ordinary course of business; (iv) purchase money Indebtedness (including, without limitation, Indebtedness in respect of capitalized equipment leases including any embedded software) incurred after the date hereof to equipment vendors and/or lessors for equipment purchased or leased by the Borrower for use in the Borrower's business, provided that the total of Indebtedness permitted under this clause (iv) plus presently-existing equipment financing permitted under clause (v) of this (S)4.1 will not exceed $100,000 in the aggregate outstanding at any one time; (v) other Indebtedness existing at the date hereof, but only to the extent set forth on item 4.1 of the attached Disclosure Schedule; and (vi) any guaranties or other contingent liabilities expressly permitted pursuant to (S)4.3. 4.2. Liens. The Borrower will not create, incur, assume or suffer to exist ----- (nor allow any of its Subsidiaries to create, incur, assume or suffer to exist) any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any nature (collectively, "Liens"), upon or with respect to any of its property or assets, now owned or hereafter acquired (including, without limitation, any trustee process affecting any accounts of the Borrower maintained at the Bank), except that the foregoing restrictions shall not apply to: -13- (i) Liens for taxes, assessments or governmental charges or levies on property of the Borrower or any of its Subsidiaries if the same shall not at the time be delinquent or thereafter can be paid without interest or penalty or are being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement thereof and as to which adequate reserves are maintained; (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar Liens arising in the ordinary course of business for sums not yet due or which are being contested in good faith and by appropriate proceedings which serve as a matter of law to stay the enforcement thereof and as to which adequate reserves are maintained; (iii) pledges or deposits under workmen's compensation laws, unemployment insurance, social security, retirement benefits or similar legislation; (iv) Liens in favor of the Bank; (v) Liens in favor of equipment vendors and/or lessors securing purchase money Indebtedness to the extent permitted by clause (iv) of (S)4.1; provided that no such Lien will extend to any property of the Borrower other than the specific items of equipment financed; (vi) other Liens existing at the date hereof, but only to the extent and with the relative priorities set forth on item 4.2 of the attached Disclosure Schedule; or (vii) involuntary attachments (not including any trustee process affecting an account maintained by the Borrower with the Bank) arising without the consent or acquiescence of the Borrower relating to Indebtedness not in excess of $100,000 which are discharged or bonded off within 30 days of the date of attachment. Without limitation of the foregoing, the Borrower agrees that the Borrower will not enter into any agreement (a "Restrictive Agreement") which would have the effect of prohibiting the Borrower from granting to the Bank in the future a Lien on the Borrower's trademarks, patents, copyrights and other intellectual property. The Borrower represents that it is not now a party to any such Restrictive Agreement. 4.3. Guaranties. The Borrower will not, without the prior written consent ---------- of the Bank, assume, guarantee, endorse or otherwise become directly or contingently liable (including, without limitation, liable by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in any debtor or otherwise to assure any creditor against loss) (and will not permit any of its Subsidiaries so to assume, guaranty or become directly or contingently liable) in connection with any indebtedness of any other Person, except (i) guaranties by endorsement for deposit or collection in the ordinary course of business, -14- and (ii) guaranties existing at the date hereof and described on item 4.3 of the attached Disclosure Schedule. 4.4. Dividends. The Borrower will not, without the prior written consent --------- of the Bank, make any distributions to its shareholders, pay any dividends (other than dividends payable solely in capital stock of the Borrower) or redeem, purchase or otherwise acquire, directly or indirectly any of its capital stock; provided that the Borrower may repurchase from employees, officers and consultants and former employees, officers and consultants stock issued under its restricted stock plans and stock option plans, so long as at the time of each such repurchase and after giving effect thereto there shall be no Default or Event of Default (with compliance with each of (S)(S)3.7, 3.8 and 3.9 being determined for this purpose both as at the then most recent fiscal quarter-end and as at the date of such proposed repurchase). 4.5. Loans and Advances. The Borrower will not make (and will not permit ------------------ any Subsidiary to make) any loans or advances to any Person, including, without limitation, the Borrower's directors, officers and employees, except advances to such directors, officers or employees with respect to expenses incurred by them in the ordinary course of their duties and advances against salesmen's commissions and employees' salaries, all of which loans and advances will not exceed, in the aggregate, $250,000 outstanding at any one time. 4.6. Investments. The Borrower will not, without the Bank's prior written ----------- consent (such consent not to be unreasonably withheld or delayed), invest in, hold or purchase any stock or securities of any Person (nor will the Borrower permit any of its Subsidiaries to invest in, purchase or hold any such stock or securities) except: (i) readily marketable direct obligations of, or obligations guarantied by, the United States of America or any agency thereof; (ii) other investment grade debt securities; (iii) mutual funds, the assets of which are primarily invested in items of the kind described in the foregoing clauses (i) and (ii) of this (S)4.6; (iv) deposits with or certificates of deposit issued by the Bank and any other obligations of the Bank or the Bank's parent; (v) deposits with or certificates of deposits issued by any other bank organized in the United States having capital in excess of $100,000,000; and (vi) investments in any Subsidiaries now existing or hereafter created by the Borrower pursuant to (S)4.7 below; provided that in any event the Tangible Net Worth of the Borrower alone (exclusive of its investment in Subsidiaries and any debt owed by any Subsidiary to the Borrower) will not be less than 90% of the consolidated Tangible Net Worth of the Borrower and Subsidiaries. 4.7. Subsidiaries; Acquisitions. The Borrower will not, without the prior -------------------------- written consent of the Bank, acquire any Subsidiary or make any other acquisition of all or substantially all of the stock of any other Person or of all or substantially all of the assets of any other Person. The Borrower will notify the Bank promptly if it forms any Subsidiary. The Borrower will not become a partner in any partnership. 4.8. Merger. The Borrower will not, without the prior written consent of ------ the Bank, merge or consolidate with any Person, or sell, lease, transfer or otherwise dispose of any material portion of its assets (whether in one or more transactions), other than sale of inventory in the ordinary course. The Bank agrees that it will not unreasonably withhold its consent to any merger -15- transaction pursuant to which the Term Loans and the ACH obligations will be paid in full at the date of consummation of such merger and the Bank's obligations in respect of Term Loans and ACH transactions will be terminated. 4.9. Affiliate Transactions. The Borrower will not, without the prior ---------------------- written consent of the Bank (which consent shall not be unreasonably withheld or delayed), enter into any transaction, including, without limitation, the purchase, sale or exchange of any property or the rendering of any service, with any affiliate of the Borrower, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arms'-length transaction with any Person not an affiliate; provided that nothing in this (S)4.9 shall be deemed to restrict the payment of salary or other similar payments to any officer or director of the Borrower at a level consistent with the salary and other payments being paid at the date of this letter agreement, nor to prevent the hiring of additional officers at a level of salary and other compensation consistent with industry practice, nor to prevent reasonable periodic increases in salary. For the purposes of this letter agreement, "affiliate" means any Person which, directly or indirectly, controls or is controlled by or is under common control with the Borrower; any officer or director or former officer or director of the Borrower; any Person owning of record or beneficially, directly or indirectly, 5% or more of any class of capital stock of the Borrower or 5% or more of any class of capital stock or other equity interest having voting power (under ordinary circumstances) of any of the other Persons described above; and any member of the immediate family of any of the foregoing. "Control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of any Person, whether through ownership of voting equity, by contract or otherwise. Notwithstanding the foregoing, nothing contained in this (S)4.9 will be deemed to prohibit any issuance of equity securities of the Borrower, whether or not to any affiliate of the Borrower. 4.10. Change of Address, etc. The Borrower will not change its corporate ----------------------- name or legal structure, nor will the Borrower change its chief executive offices or principal place of business from the address described in (S)2.1(j), nor will the Borrower remove any books or records from such address, nor will the Borrower keep any Collateral at any location other than the premises referred to in said (S)2.1(j) without, in each instance, giving the Bank at least 30 days' prior written notice and providing all such financing statements, certificates and other documentation as the Bank may reasonably request in order to maintain the perfection and priority of the security interests granted or intended to be granted pursuant to the Security Agreement; provided that laptop computers and personal computers may be kept at other locations for the use of salesmen and other employees of the Borrower and demonstration and testing equipment may be kept off-site at customers' premises and trade shows (all such laptop computers, personal computers and demonstration and testing equipment to have an aggregate value not in excess of $200,000), subject to the condition that, as to each item of testing or demonstration equipment which is away from the Borrower's Chelmsford, MA premises for 90 days or more, on or prior to such 90th day the Borrower informs the Bank in writing of the location of such item and delivers to the Bank all such Uniform Commercial Code financing statements, consignment agreements, waivers and other documentation as the Bank may reasonably request in order to establish and/or maintain perfection of its security interests. The Borrower will not change its fiscal year or methods of -16- financial reporting unless, in each instance, prior written notice of such change is given to the Bank and prior to such change the Borrower enters into amendments to this letter agreement in form and substance reasonably satisfactory to the Bank in order to preserve unimpaired the rights of the Bank and the obligations of the Borrower hereunder. 4.11. Hazardous Waste. Except as provided below, the Borrower will not --------------- dispose of or suffer or permit to exist any hazardous material or oil on any site or vessel owned, occupied or operated by the Borrower or any Subsidiary of the Borrower, nor shall the Borrower store (or permit any Subsidiary to store) on any site or vessel owned, occupied or operated by the Borrower or any such Subsidiary, or transport or arrange the transport of, any hazardous material or oil (the terms "hazardous material", "oil", "site" and "vessel", respectively, being used herein with the meanings given those terms in Mass. Gen. Laws, Ch. 21E or any comparable terms in any comparable statute in effect in any other relevant jurisdiction). The Borrower shall provide the Bank with written notice of (i) the intended storage or transport of any hazardous material or oil by the Borrower or any Subsidiary of the Borrower, (ii) any potential or known release or threat of release of any hazardous material or oil at or from any site or vessel owned, occupied or operated by the Borrower or any Subsidiary of the Borrower, and (iii) any incurrence of any expense or loss by any government or governmental authority in connection with the assessment, containment or removal of any hazardous material or oil for which expense or loss the Borrower or any Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the Borrower and its Subsidiaries may use, store and transport, and need not notify the Bank of the use, storage or transportation of, (x) oil and other combustible materials in reasonable quantities, as fuel for heating of their respective facilities or for vehicles or machinery used in the ordinary course of their respective businesses and (y) hazardous materials that are solvents, cleaning agents or other materials used in the ordinary course of the respective business operations of the Borrower and its Subsidiaries, in reasonable quantities, as long as in any case the Borrower or the Subsidiary concerned (as the case may be) has obtained and maintains in effect any necessary governmental permits, licenses and approvals, complies with all requirements of applicable federal, state and local law relating to such use, storage or transportation, follows the protective and safety procedures that a prudent businessperson conducting a business the same as or similar to that of the Borrower or such Subsidiary (as the case may be) would follow, and disposes of any hazardous wastes (not consumed in the ordinary course) only through licensed providers of hazardous waste removal services. 4.12. No Margin Stock. No proceeds of any Term Loan shall be used --------------- directly or indirectly to purchase or carry any margin security. 4.13. Subordinated Debt. The Borrower will not directly or indirectly ----------------- make any optional or voluntary prepayment or purchase of Subordinated Debt or modify, alter or add any provisions with respect to payment of Subordinated Debt without the prior written consent of the Bank (the Bank agreeing that it will not unreasonably withhold or delay its consent to any modification or amendment of Subordinated Debt documentation which does not affect the subordination provisions). In any event, the Borrower will not make any payment of any principal of or interest on any Subordinated Debt at any time when there exists, or if there would result therefrom, any Default or Event of Default hereunder. -17- V. DEFAULT AND REMEDIES -------------------- 5.1. Events of Default. The occurrence of any one of the following events ----------------- shall constitute an Event of Default hereunder: (a) The Borrower shall fail to make any payment of principal of or interest on any Term Note or with respect to any ACH transaction on or before the date when due; or (b) Any representation or warranty of the Borrower contained herein shall at any time prove to have been incorrect in any material respect when made or any representation or warranty made by the Borrower in connection with any Term Loan or with respect to any ACH transaction shall at any time prove to have been incorrect in any material respect when made; or (c) The Borrower shall default in the performance or observance of any agreement or obligation under any of (S)(S)3.1, 3.3, 3.6, 3.7, 3.8 or 3.9 or any provision of Article IV; or (d) The Borrower shall default in the performance of any other term, covenant or agreement contained in this letter agreement and such default shall continue unremedied for 30 days after written notice thereof shall have been given to the Borrower; or (e) Any default on the part of the Borrower or any Subsidiary of the Borrower shall exist, and shall remain unwaived or uncured beyond the expiration of any applicable notice and/or grace period, under any other contract, agreement or undertaking now existing or hereafter entered into with or for the benefit of the Bank (or any affiliate of the Bank); or (f) Any default shall exist and remain unwaived or uncured with respect to any Subordinated Debt of the Borrower or with respect to any instrument evidencing, guaranteeing or otherwise relating to any such Subordinated Debt, or any such Subordinated Debt shall not have been paid when due, whether by acceleration or otherwise, or shall have been declared to be due and payable prior to its stated maturity, or any event or circumstance shall occur which permits, or with the lapse of time or the giving of notice or both would permit, the acceleration of the maturity of any Subordinated Debt by the holder or holders thereof; or (g) Any default shall exist and remain unwaived or uncured with respect to any other Indebtedness of the Borrower or any Subsidiary of the Borrower (for borrowed money) in excess of $50,000 in aggregate principal amount or with respect to any instrument evidencing, guaranteeing, securing or otherwise relating to any such Indebtedness, or any such Indebtedness for borrowed money in excess of $50,000 in aggregate principal amount shall not have been paid when due, whether by acceleration or otherwise, or shall have been declared to be due and payable prior to its stated maturity, or any event or circumstance shall occur which permits, or with the lapse of time or the giving of notice or both would permit, the acceleration of the maturity of any such Indebtedness by the holder of holders thereof; or -18- (h) The Borrower shall be dissolved, or the Borrower or any Subsidiary of the Borrower shall become insolvent or bankrupt or shall cease paying its debts as they mature or shall make an assignment for the benefit of creditors, or a trustee, receiver or liquidator shall be appointed for the Borrower or any Subsidiary of the Borrower or for a substantial part of the property of the Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement, insolvency or similar proceedings shall be instituted by or against the Borrower or any such Subsidiary under the laws of any jurisdiction (except for an involuntary proceeding filed against the Borrower or any Subsidiary of the Borrower which is dismissed within 60 days following the institution thereof); or (i) Any execution or similar process relating to Indebtedness in excess of $100,000 shall be issued or levied against any property of the Borrower or any Subsidiary and such execution or similar process shall not be paid, stayed, released, vacated or fully bonded within 30 days after its issue or levy; or (j) Any uninsured judgment in excess of $100,000 shall be entered against the Borrower or any Subsidiary of the Borrower by any court of competent jurisdiction and same shall not have been paid in full or satisfied within 30 days after such judgment has become final upon the expiration of all applicable appeal periods; or (k) The Borrower or any Subsidiary of the Borrower shall fail to meet its minimum funding requirements under ERISA with respect to any employee benefit plan (or other class of benefit which the PBGC has elected to insure) or any such plan shall be the subject of termination proceedings (whether voluntary or involuntary) and there shall result from such termination proceedings a liability of the Borrower or any Subsidiary of the Borrower to the PBGC which, in each case, in the reasonable opinion of the Bank would be reasonably likely to have a material adverse effect upon the financial condition of the Borrower or any such Subsidiary; or (l) The Security Agreement or any other Loan Document shall for any reason (other than due to payment in full of all amounts secured or evidenced thereby or due to discharge in writing by the Bank) not remain in full force and effect; or (m) The security interest and liens of the Bank in and on any of the Collateral described in the Security Agreement shall for any reason (other than written release by the Bank) not be fully perfected liens and security interests; or (n) If, at any time, more than 50% of any class of voting stock of the Borrower shall be held, of record and/or beneficially, by any Person or by any "group" (as defined in the Securities Exchange Act of 1934, as amended, and the regulations thereunder) other than by one or more of the Persons listed on item 5.1(n) of the attached Disclosure Schedule or a group consisting of such Persons; or (o) If, for any reason, either or both of Gururaj Deshpande and/or Daniel Smith ceases to be an executive officer of the Borrower actively involved in the management of the Borrower, unless any such individual who ceases to be such an executive officer is replaced, within 30 days -19- of such cessation, by another equally qualified individual selected by the Borrower's Board of Directors (and the provisions of this clause (o) will become applicable in turn to each successive replacement executive officer). 5.2. Rights and Remedies on Default. Upon the occurrence of any Event of ------------------------------ Default, in addition to any other rights and remedies available to the Bank hereunder or otherwise, the Bank may exercise any one or more of the following rights and remedies (all of which shall be cumulative): (a) Declare the entire unpaid principal amount of each Term Note then outstanding, all interest accrued and unpaid thereon and all other amounts payable under this letter agreement, and all other Indebtedness of the Borrower to the Bank, to be forthwith due and payable, whereupon the same shall become forthwith due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. (b) Terminate the arrangements for 1999-2000 Term Loans provided for by this letter agreement, as well as terminating the within-described facility for ACH transactions. (c) Exercise all rights and remedies hereunder, under the Security Agreement, under each Term Note and under each and any other agreement with the Bank; and exercise all other rights and remedies which the Bank may have under applicable law. 5.3. Set-off. In addition to any rights now or hereafter granted under ------- applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default, the Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, all of which are hereby expressly waived, to set off and to appropriate and apply any and all deposits and any other Indebtedness at any time held or owing by the Bank or any affiliate thereof to or for the credit or the account of the Borrower against and on account of the obligations and liabilities of the Borrower to the Bank under this letter agreement or otherwise, irrespective of whether or not the Bank shall have made any demand hereunder and although said obligations, liabilities or claims, or any of them, may then be contingent or unmatured and without regard for the availability or adequacy of other collateral. As security for the Obligations, the Borrower grants to the Bank a security interest with respect to all its deposits and all securities or other property in the possession of the Bank or any affiliate of the Bank from time to time, and, upon the occurrence of any Event of Default, the Bank may exercise all rights and remedies of a secured party under the Uniform Commercial Code. ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 5.4. Cash Collateralization. If the within-described facility for ACH ---------------------- transactions expires or is terminated by the Bank at any time, the Borrower will forthwith deposit with the Bank, in cash, the amount of the then outstanding ACH Exposure, which cash will be pledged to -20- the Bank to secure the Borrower's obligations with respect to ACH transactions. The cash so pledged will (unless theretofore applied in payment of the ACH obligations) be released to the Borrower pro tanto as the outstanding ACH --- ----- obligations are reduced. VI. MISCELLANEOUS ------------- 6.1. Costs and Expenses. The Borrower agrees to pay, on demand, all ------------------ reasonable costs and expenses (including, without limitation, reasonable legal fees) incurred by the Bank in connection with the preparation, execution and delivery of this letter agreement, the Security Agreement, the Term Notes and all other instruments and documents to be delivered in connection with any Term Loan or in connection with any other Obligations and any amendments or modifications of any of the foregoing, as well as the reasonable costs and expenses (including, without limitation, the reasonable fees and expenses of legal counsel) incurred by the Bank in connection with preserving, enforcing or exercising, upon default, any rights or remedies under this letter agreement, the Security Agreement, each Term Note and/or any of the other Obligations and all other instruments and documents delivered or to be delivered hereunder or in connection herewith, all whether or not legal action is instituted. In addition, the Borrower shall be obligated to pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this letter agreement, the Security Agreement, any Term Note and all other instruments and documents to be delivered in connection with any Obligation. Any fees, expenses or other charges which the Bank is entitled to receive from the Borrower under this Section shall bear interest from the date of any demand therefor until the date when paid at a rate per annum equal to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate otherwise payable under ---- the 1999-2000 Term Note (but in no event in excess of the maximum rate permitted by then applicable law). 6.2. Capital Adequacy. If the Bank shall have determined that the ---------------- adoption or phase-in after the date hereof of any applicable law, rule or regulation regarding capital requirements for banks or bank holding companies, or any change therein after the date hereof, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive of such entity regarding capital adequacy (whether or not having the force of law) has or would have the effect of reducing the return on the Bank's capital with respect to any of the Term Loans and/or the within-described term loan facilities and/or any of the other Obligations to a level below that which the Bank could have achieved (taking into consideration the Bank's policies with respect to capital adequacy immediately before such adoption, phase-in, change or compliance and assuming that the Bank's capital was then fully utilized) but for such adoption, phase- in, change or compliance by any amount deemed by the Bank to be material: (i) the Bank shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay forthwith to the Bank as an additional fee such amount as the Bank certifies to be the amount that will compensate it for such reduction with respect to the any of Term Loans and/or the within-described term loan facilities and/or any of the other Obligations. -21- A certificate of the Bank claiming compensation under this Section shall be conclusive in the absence of manifest error; provided that the Bank will not claim compensation under this Section unless the Bank is seeking similar compensation generally from other similar borrowers whose loan documents contain similar provisions. Such certificate shall set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder and the method by which such amounts were determined. In determining such amounts, the Bank may use any reasonable averaging and attribution methods. No failure on the part of the Bank to demand compensation on any one occasion shall constitute a waiver of its right to demand such compensation on any other occasion and no failure on the part of the Bank to deliver any certificate in a timely manner shall reduce any obligation of the Borrower to the Bank under this Section. 6.3. Other Agreements. The provisions of this letter agreement are not in ---------------- derogation or limitation of any obligations, liabilities or duties of the Borrower under any of the other Loan Documents or any other agreement with or for the benefit of the Bank. No inconsistency in default provisions between this letter agreement and any of the other Loan Documents or any such other agreement will be deemed to create any additional grace period or otherwise derogate from the express terms of each such default provision. No covenant, agreement or obligation of the Borrower contained herein, nor any right or remedy of the Bank contained herein, shall in any respect be limited by or be deemed in limitation of any inconsistent or additional provisions contained in any of the other Loan Documents or any such other agreement. 6.4. Governing Law. This letter agreement and each of the Term Notes ------------- shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. 6.5. Addresses for Notices, etc. All notices, requests, demands and other --------------------------- communications provided for hereunder shall be in writing and shall be mailed or delivered to the applicable party at the address indicated below: If to the Borrower: Sycamore Networks, Inc. 10 Elizabeth Drive Chelmsford, MA 01824 Attention: Daniel Smith, Chief Executive Officer -22- If to the Bank: Fleet National Bank High Technology Division Mail Stop: MA OF D07A One Federal Street Boston, MA 02110 Attention: Lucie Burke, Vice President or, as to each of the foregoing, at such other address as shall be designated by such Person in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed delivered on the earlier of (i) the date received or (ii) the date of delivery, refusal or non-delivery indicated on the return receipt if deposited in the United States mails, sent postage prepaid, certified or registered mail, return receipt requested, addressed as aforesaid. If any such notice, request, demand or other communication is hand-delivered, same shall be effective upon receipted delivery. 6.6. Binding Effect; Assignment; Termination. This letter agreement shall --------------------------------------- be binding upon the Borrower and the Bank and their respective successors and assigns and shall inure to the benefit of the Borrower and the Bank and their respective permitted successors and assigns. The Borrower may not assign this letter agreement or any rights hereunder without the express written consent of the Bank. The Bank may, in accordance with applicable law, from time to time assign or grant participations in this letter agreement, any Term Loans and/or any Term Notes. Without limitation of the foregoing generality, (i) The Bank may at any time pledge all or any portion of its rights under the Loan Documents (including any portion of any Term Note) to any of the 12 Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall release the Bank from its obligations under any of the Loan Documents. (ii) The Bank shall have the unrestricted right at any time and from time to time, and without the consent of or notice to the Borrower, to grant to one or more banks or other financial institutions (each, a "Participant") participating interests in the Bank's obligation to lend hereunder and/or any or all of the Term Loans held by the Bank hereunder. In the event of any such grant by the Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, the Bank shall remain responsible for the performance of its obligations hereunder and the Borrower shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations hereunder. The Bank may furnish any information concerning the Borrower in its possession from time to time to prospective assignees and Participants; provided that the Bank shall require any such prospective assignee or Participant to agree in writing to maintain the confidentiality of such information to the same extent as the Bank would be required to maintain such confidentiality. -23- The Borrower may terminate this letter agreement and the financing arrangements made herein by giving written notice of such termination to the Bank; provided that no such termination will release or waive any of the Bank's rights or remedies or any of the Borrower's obligations under this letter agreement or any of the other Loan Documents unless and until the Borrower has paid in full the Term Loans and all interest thereon and all fees and charges payable in connection therewith. 6.7. Consent to Jurisdiction. The Borrower irrevocably submits to the ----------------------- non-exclusive jurisdiction of any Massachusetts court or any federal court sitting within The Commonwealth of Massachusetts over any suit, action or proceeding arising out of or relating to this letter agreement and/or any Term Note. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. The Borrower agrees that final judgment in any such suit, action or proceeding brought in such a court shall be enforced in any court of proper jurisdiction by a suit upon such judgment, provided that service of process in such action, suit or proceeding shall have been effected upon the Borrower in one of the manners specified in the following paragraph of this (S)6.7 or as otherwise permitted by law. The Borrower hereby consents to process being served in any suit, action or proceeding of the nature referred to in the preceding paragraph of this (S)6.7 either (i) by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to it at its address set forth in (S)6.5 (as such address may be changed from time to time pursuant to said (S)6.5) or (ii) by serving a copy thereof upon it at its address set forth in (S)6.5 (as such address may be changed from time to time pursuant to said (S)6.5). 6.8. Severability. In the event that any provision of this letter ------------ agreement or the application thereof to any Person, property or circumstances shall be held to any extent to be invalid or unenforceable, the remainder of this letter agreement, and the application of such provision to Persons, properties or circumstances other than those as to which it has been held invalid and unenforceable, shall not be affected thereby, and each provision of this letter agreement shall be valid and enforced to the fullest extent permitted by law. 6.9. Replacement Note. Upon receipt of an affidavit of an officer of the ---------------- Bank as to the loss, theft, destruction or mutilation of any Term Note or of any other Loan Document which is not of public record and upon the Bank providing reasonable indemnification for the Borrower (the Borrower agreeing that the Bank's unsecured agreement of indemnity will be sufficient for this purpose) and, in the case of any such mutilation, upon surrender and cancellation of such Term Note or other Loan Document, the Borrower will issue, in lieu thereof, a replacement Term Note or other Loan Document in the same principal amount (as to any Term Note) and in any event of like tenor. 6.10. Usury. All agreements between the Borrower and the Bank are hereby ----- expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of any Term Note or otherwise, shall the amount paid or agreed to be paid to the Bank -24- for the use or the forbearance of the Indebtedness represented by any Term Note exceed the maximum permissible under applicable law. In this regard, it is expressly agreed that it is the intent of the Borrower and the Bank, in the execution, delivery and acceptance of the Term Notes, to contract in strict compliance with the laws of The Commonwealth of Massachusetts. If, under any circumstances whatsoever, performance or fulfillment of any provision of any of the Term Notes or any of the other Loan Documents at the time such provision is to be performed or fulfilled shall involve exceeding the limit of validity prescribed by applicable law, then the obligation so to be performed or fulfilled shall be reduced automatically to the limits of such validity, and if under any circumstances whatsoever the Bank should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced by the Term Notes and not to the payment of interest. The provisions of this (S)6.10 shall control every other provision of this letter agreement and of the Term Notes. 6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY, -------------------- VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER AGREEMENT, ANY TERM NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS LETTER AGREEMENT AND TO MAKE TERM LOANS AS CONTEMPLATED HEREIN. VII. DEFINED TERMS ------------- 7.1. Definitions. In addition to terms defined elsewhere in this letter ----------- agreement, as used in this letter agreement, the following terms have the following respective meanings: "ACH" - As defined in (S)1.6. "ACH Exposure" - As defined in (S)1.6. "Business Day" - Any day which is not a Saturday, nor a Sunday nor a public holiday under the laws of the United States of America or The Commonwealth of Massachusetts applicable to a national bank. "Capital Base" - At any time, the sum of (i) the consolidated Tangible Net Worth of the Borrower and Subsidiaries then existing plus (ii) the principal ---- amount of Subordinated Debt of the Borrower then outstanding (nothing contained herein being deemed to authorize the incurrence of any additional Subordinated Debt). "Collateral" - All property now or hereafter owned by the Borrower or in which the Borrower now or hereafter has any interest which is now or hereafter described as "Collateral" in the Security Agreement or in Subsection 7.2(b) below. -25- "Current Liabilities" - All liabilities of the Borrower and/or any Subsidiary of the Borrower which would properly be shown as current liabilities on a consolidated balance sheet of the Borrower prepared in accordance with generally accepted accounting principles consistently applied. "Current Liabilities" will in any event be deemed to include current maturities of the Term Loans. "Default" - Any event or circumstance which, with the passage of time or the giving of notice or both, could become an Event of Default under this letter agreement. "Determination Date" - As defined in (S)3.7. "ERISA" - The Employee Retirement Income Security Act of 1974, as amended. "Indebtedness" - All obligations of a Person, whether current or long-term, senior or subordinated, which in accordance with generally accepted accounting principles would be included as liabilities upon such Person's balance sheet at the date as of which Indebtedness, is to be determined, and shall also include guaranties, endorsements (other than for collection in the ordinary course of business) or other arrangements whereby responsibility is assumed for the obligations of others, whether by agreement to purchase or otherwise acquire the obligations of others, including any agreement, contingent or otherwise, to furnish funds through the purchase of goods, supplies or services for the purpose of payment of the obligations of others. "Loan Documents" - Each of this letter agreement, the 1999 Term Note, the 1998 Term Note, the Security Agreement and each other instrument, document or agreement evidencing, securing, guaranteeing or relating in any way to any of the Term Loans or to any ACH transaction, all whether now existing or hereafter arising or entered into. "Net Income" (or "Net Loss") - The book net income (or book net loss, as the case may be) of a Person for any period, after all taxes actually paid or accrued and all expenses and other charges determined in accordance with generally accepted accounting principles consistently applied. "Net Quick Assets" - Such current assets of the Borrower as consist of cash, cash-equivalents and Receivables (less an allowance for bad debt consistent with the Borrower's prior experience). "1998 Term Loans" - As defined in (S)1.4. "1998 Term Note" - As defined in (S)1.4. "1999-2000 Term Loans" - As defined in (S)1.2. "1999 Term Note" - As defined in (S)1.1. -26- "Obligations" - All Indebtedness, covenants, agreements, liabilities and obligations, now existing or hereafter arising, made by the Borrower with or for the benefit of the Bank or owed by the Borrower to the Bank, whether or not relating to any of the Term Loans. "Obligations" includes, without limitation, obligations with respect to ACH transactions. "PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto. "Person" - An individual, corporation, partnership, limited liability company, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Qualifying Equipment" - Items of computer and engineering equipment (not including software, except as provided in the next following sentence) purchased by the Borrower within the 90 days prior to the date of the advance of the relevant 1999-2000 Term Loan (after November 1, 1998 with respect to the initial 1999-2000 Term Loan), all of which items of equipment must meet all of the following criteria: (i) such items of equipment are shown on the Equipment List heretofore delivered by the Borrower to the Bank or have otherwise been approved by the Bank for use in supporting a 1999-2000 Term Loan, (ii) each item of such equipment has been delivered to and installed at the Borrower's Chelmsford, MA premises and has become fully operational, (iii) the Borrower has paid in full for each item of such equipment (or is paying for same out of the proceeds of the relevant 1999-2000 Term Loan substantially simultaneously with the receipt of such proceeds) and holds title to same, free of all interests and claims of any other Person (other than the security interest of the Bank), and (iv) the Bank has a fully perfected first security interest in such equipment. Notwithstanding the provisions of the immediately preceding sentence, the Borrower may include within "Qualifying Equipment" any software (not including "shrink-wrapped" software) which meets all of the conditions and criteria set forth in the immediately preceding sentence to be Qualifying Equipment (other than the exclusion of software contained therein) and which is purchased by the Borrower for use in connection with its tangible Qualifying Equipment; provided that the aggregate costs of the software so included will be limited as set forth in (S)1.2. "Receivables" - As to any Person, all of such Person's present and future accounts receivable for goods sold or for services rendered. "SEC" - The Securities and Exchange Commission or any successor thereto. "Senior Debt" - All Indebtedness of the Borrower and/or any of its Subsidiaries which is not Subordinated Debt. "Subordinated Debt" - Any Indebtedness of the Borrower which is expressly subordinated, pursuant to a subordination agreement in form and substance satisfactory to the Bank, to all Indebtedness now or hereafter owed by the Borrower to the Bank. "Subsidiary" - Any corporation or other entity of which the Borrower and/or any of its Subsidiaries, directly or indirectly, owns, or has the right to control or direct the voting of, fifty -27- (50%) percent or more of the outstanding capital stock or other ownership interest having general voting power (under ordinary circumstances). "Tangible Net Worth" - An amount equal to the total assets of any Person (excluding (i) the total intangible assets of such Person, (ii) any minority interests in Subsidiaries and (iii) any assets representing amounts due from any officer or employee of such Person or from any Subsidiary of such Person) minus the total liabilities of such Person. Total intangible assets shall be deemed to include, but shall not be limited to, the excess of cost over book value of acquired businesses accounted for by the purchase method, formulae, trademarks, trade names, patents, patent rights and deferred expenses (including, but not limited to, unamortized debt discount and expense, organizational expense, capitalized software costs and experimental and development expenses). "Term Loans" - Collectively, the 1998 Term Loans and the 1999-2000 Term Loans. "Term Notes" - Collectively, the 1998 Term Note and the 1999 Term Note. "Termination Fee" - As defined in (S)1.3. Any defined term used in the plural preceded by the definite article shall be taken to encompass all members of the relevant class. Any defined term used in the singular preceded by "any" shall be taken to indicate any number of the members of the relevant class. 7.2. Security Agreement. (a) The Borrower acknowledges and agrees that ------------------ the "Obligations" described in and secured by the Security Agreement include, without limitation, all of the obligations of the Borrower under each Term Note and/or this letter agreement, as well as all ACH transactions. (b) The Security Agreement is hereby modified to provide as follows: (i) That the "Collateral" subject thereto includes, without limitation and in addition to the Collateral described therein, all of the Borrower's files, books and records (including, without limitation, all electronically recorded data) all whether now owned or existing or hereafter acquired, created or arising, but excluding any of the foregoing items in this clause (i) which constitute or relate to intellectual property. The Borrower hereby grants to the Bank a security interest in all such Collateral in order to secure the full and prompt payment and performance of all of the Obligations. (ii) That, upon the occurrence and during the continuance of any Event of Default (as defined in (S)5.1 of this letter agreement), the Bank may, at any time, notify account debtors that the Collateral has been assigned to the Bank and that payments by such account debtors shall be made directly to the Bank, without prior notice to the Borrower but with written notice of such notification to be given to the Borrower promptly after such notification is given to account debtors. At any time after the occurrence and during the continuance of an Event of Default, the Bank may collect the -28- Borrower's Receivables, or any of same, directly from account debtors and may charge the reasonable collection costs and expenses to the Borrower. -29- This letter agreement is executed, as an instrument under seal, as of the day and year first above written. Very truly yours, SYCAMORE NETWORKS, INC. By /s/ Daniel Smith -------------------------- Name: Daniel Smith Title: President Accepted and agreed: FLEET NATIONAL BANK By /s/ Lucie Burke ----------------- Name: Lucie burke Title: Vice President -30- DISCLOSURE SCHEDULE Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries Item 2.1 (b) Stock Ownership Item 2.1(e) Litigation Item 2.1 (j) Collateral locations; record owner of each location Item 2.1(l) Non-competition Agreements Item 4.1 Existing Indebtedness Item 4.2 Existing Liens Item 4.3 Existing Guaranties Item 5.1(n) Permitted 50% stockholders EX-10.5 8 INVENTORY AGREEMENT [Fleet Bank Logo] Exhibit 10.5 Inventory and Accounts Receivable Security Agreement (Short Form) April 22, 1999 To secure the due payment and performance of all of the liabilities and obligations hereunder of the undersigned, herein called "Borrower", to Fleet National Bank, hereinafter called "Bank", and all other liabilities and obligations of Borrower to Bank of every name and nature whatsoever, direct or indirect, absolute or contingent, now existing or hereafter arising or acquired, including, without limitation, the due payment and performance of all liabilities and obligations under any and all notes, all hereinafter called "Obligations", the Borrower hereby grants to Bank a continuing security interest in: (a) All accounts, contracts, contract rights (provided that, as used herein, "contracts" and "contract rights" shall not be deemed to include any of the Borrower's leases of real estate or any rights of the Borrower under such leases), notes, bills, drafts, acceptances, general intangibles (excluding, however, patents, trademarks, copyrights and other similar items of intellectual property), choses in action, and all other debts, obligations and liabilities, in whatever form, owing to Borrower from any person, firm or corporation, or any other legal entity, whether now existing or hereafter arising, now or hereafter received by or belonging or owing to Borrower, for goods sold by it or for services rendered by it or however otherwise same may have been established or created, all guarantees and securities therefor, all right, title and interest of Borrower in the merchandise or services which gave rise thereto, including the rights of reclamation and stoppage in transit, all rights of an unpaid seller of merchandise or services, and in the proceeds thereof, including, without limitation, all proceeds of credit, fire or other insurance, and any tax refunds. (b) All goods, merchandise, raw materials, goods and work in process, finished goods and other tangible personal property, now owned or hereafter acquired and held for sale or lease, or furnished or to be furnished under contract of service, or used or consumed in Borrower's business and in the products and proceeds thereof, including, without limitation, all proceeds of fire or other insurance. This portion of the collateral being sometimes referred to as "Inventory". All of the accounts and other property as set forth in (a) above and inventory as set forth in (b) above are hereinafter referred to collectively as "Collateral". The Collateral and all proceeds and products thereof shall be security for all Obligations. Until all Obligations have been fully satisfied, Bank's security interest in the Collateral and all proceeds and products thereof, shall continue in full force and effect and Bank will at all times after the occurrence and during the continuance of an Event of Default (as defined in the Letter Agreement of even date between Bank and Borrower) have the right to take physical possession of the Inventory and to maintain such possession on Borrower's premises or to remove the inventory or any part thereof to such other places as Bank may desire. If Bank exercises Bank's right to take possession of the Inventory, Borrower shall, upon Bank's demand, assemble the Inventory and make it available to Bank at a place reasonably convenient to Bank. If Borrower shall fail to pay, when due, any of the Obligations which failure continues uncured beyond the expiration of any applicable notice and/or grace period or shall fail to observe or perform any of the provisions of this Agreement or any other agreement now or hereafter entered into between Bank and Borrower which failure continues uncured beyond the expiration of any applicable notice and/or grace period, Borrower shall be in default hereunder. In the event of such default all Obligations of Borrower to Bank shall, at the option of the Bank, and without notice to or demand upon Borrower become and be immediately due and payable and thereupon Bank may exercise any and all rights and remedies of a secured party available under the Uniform Commercial Code and all other applicable law. Borrower represents, warrants and covenants that all Inventory is and will be owned by Borrower, free of all other liens and encumbrances, and shall be kept by Borrower at 10 Elizabeth Drive, Chelmsford, MA 01824 or other locations as contemplated by (S) 4.10 of the Letter Agreement and that Borrower shall not (without Bank's prior written approval) remove the Inventory therefrom except for the purposes of sale in the ordinary course of business. Except for sales made in the ordinary course of business, Borrower shall not sell, encumber, grant a security interest in or dispose of or permit the sale, encumbrance or disposal of any Collateral without Bank's prior written consent. A sale in the ordinary course of business shall not include a transfer in total or partial satisfaction of a debt. Borrower shall perform any and all steps requested by Bank to perfect Bank's security interest in the Collateral, such as leasing warehouses to Bank or its designee, placing and maintaining signs, appointing custodians, executing and filing financing or continuation statements in form and substance satisfactory to Bank. If any Inventory is in the possession or control of any of Borrower's agents or processors, Borrower shall notify such agents or processors of Bank's interest therein, and upon request instruct them to hold all such Inventory for Bank's account and subject to Bank's instructions. A physical listing of all Inventory, wherever located, shall be taken by Borrower whenever requested by Bank, and a copy of each such physical listing shall be supplied to Bank. Bank may examine and inspect the Inventory at any time, at the times and upon the notice provided for in the aforesaid Letter Agreement. 2 Borrower agrees to keep all the Inventory insured with coverage and amounts not less than that usually carried by one engaged in a like business and in any event not less than that reasonably required by Bank with loss payable to the Bank and Borrower, as their interests may appear, hereby appointing Bank (effective after the occurrence and during the continuance of any Event of Default) as attorney for Borrower in obtaining, adjusting, settling and cancelling such insurance and endorsing any drafts. All premiums on such insurance shall be paid by Borrower and the policies delivered to Bank. If Borrower fails to do so, Bank may procure such insurance and charge the cost to Borrower's loan account. As further assurance for the payment and performance of the Obligations, Borrower hereby assigns to Bank as further collateral for the Obligations all sums including returned or unearned premiums, which may become payable under any policy of insurance on the Collateral and Borrower hereby directs each insurance company issuing any such policy to make payment of such sums directly to Bank. So long as no Event of Default (as defined in the Letter Agreement) has occurred and is then continuing, the Bank will promptly release to the Borrower insurance proceeds actually received by the Bank to the extent that same are used by the Borrower for the repair and/or replacement of any Collateral damaged or destroyed by any insured casualty. If in the event of the sale of the Collateral the proceeds thereof are insufficient to pay all amounts to which Bank is legally entitled, Borrower will be liable for the deficiency, together with interest thereon and the reasonable fees of any attorney employed by Bank to collect such deficiency. Bank shall have the right to enforce any remedies hereunder alternatively, successively or concurrently. A waiver of any default of Borrower shall not be a waiver of any subsequent, similar or other default. No delay in the exercise of any of Bank's rights or remedies hereunder shall constitute a waiver of such right or remedy or of any other right or remedy. This Agreement shall not be construed to be in limitation of or in substitution for any other grant of security interest from Borrower to Bank made prior to or contemporaneously herewith, and no other such grant of a security interest made subsequent to or contemporaneously herewith shall be construed to be in limitation of or in substitution for this Agreement unless expressly and specifically provided therein. This Agreement shall take effect as a sealed instrument, shall be governed by and construed according to the laws of the Commonwealth of Massachusetts, shall be binding upon the heirs, executors, administrators, successors and assigns of Borrower and shall inure to the benefit of the successors and assigns of Bank. 3 Witnessed by: Sycamore Networks, Inc. --------------------------------------------- BORROWER ________________________________ By: /s/ Dan Smith ----------------------------------------- Its President TITLE Address: 10 Elizabeth Drive ------------------------------------- FLEET NATIONAL BANK NUMBER AND STREET Chelmsford, MA 01824 --------------------------------------------- By: /s/ Illegible CITY, COUNTRY AND STATE ----------------------------- Its: 4 RIDER TO INVENTORY AND ACCOUNTS RECEIVABLE SECURITY AGREEMENT FROM SYCAMORE NETWORKS, INC. TO FLEET NATIONAL BANK The foregoing Inventory and Accounts Receivable Security Agreement (the "IAR Security Agreement") is modified as follows: 1. Clause (a) of the first grammatical paragraph of the IAR Security Agreement is modified by inserting therein, immediately after the words "contract rights", the following: "(provided that, as used herein, 'contracts' and 'contract rights' shall not be deemed to include any of the Borrower's leases of real estate or any rights of the Borrower under such leases)" 2. The first sentence of the fourth grammatical paragraph of the IAR Security Agreement is modified by inserting therein, immediately after the words "any of the Obligations", the following: "which failure continues uncured beyond the expiration of any applicable notice and/or grace period" 3. The first sentence of the fourth grammatical paragraph of the IAR Security Agreement is further modified by inserting therein, immediately after the words "Bank and Borrower", the following: "which failure continues uncured beyond the expiration of any applicable notice and/or grace period" 4. The fifth grammatical paragraph of the IAR Security Agreement is modified by inserting therein, immediately after the words "Chelmsford, MA 01824", the following: "or other locations as contemplated by (S)4.10 of the Letter Agreement" 5. The period at the end of the seventh grammatical paragraph of the IAR Security Agreement is deleted and the following is substituted in its stead: ", at the times and upon the notice provided for in the aforesaid Letter Agreement." 5 6. The first sentence of the eighth grammatical paragraph of the IAR Security Agreement is modified by inserting therein, immediately after the words "appointing Bank", the following: "(effective after the occurrence and during the continuance of any Event of Default)" 7. The last sentence of the eighth grammatical paragraph of the IAR Security Agreement is modified by inserting therein, immediately after the words "assigns to Bank", the following: "as further collateral for the Obligations" 8. The eighth grammatical paragraph of the IAR Security if further modified by adding, at the end of such paragraph, the following: "So long as no Event of Default (as defined in the Letter Agreement) has occurred and is then continuing, the Bank will promptly release to the Borrower insurance proceeds actually received by the Bank to the extent that same are used by the Borrower for the repair and/or replacement of any Collateral damaged or destroyed by any insured casualty." 6 EX-10.6 9 SUPP SECURITY AGREEMENT BETWEEN SYCAMORE AND FLEET Exhibit 10.6 Supplementary Security Agreement Security Interest in Goods and Chattels April 22, 1999 To: Fleet National Bank Gentlemen: This is a supplement to our Inventory and Accounts Receivable Security Agreement (the "Agreement") with you bearing the effective date of even date herewith. It is hereby incorporated into said Agreement, shall have a term concurrent therewith and is a part thereof. 1. In addition to your other security, we hereby grant you a continuing security interest in all machinery, equipment and other goods (as defined in Article 9 of the Uniform Commercial Code) whether now owned or hereafter acquired by us and wherever located, all replacements and substitutions therefor or accessions thereto and all proceeds thereof (all herein referred to collectively as "Collateral") and including, also without limitation, all proceeds of fire or other insurance covering the aforesaid property. 2. The Collateral shall be security for all Obligations (as defined in the Agreement). Until all Obligations have been fully satisfied, your security interest in the Collateral shall continue in full force and effect and you will at all times after the occurrence of any Event of Default under the letter agreement described below have the right to the physical possession of the Collateral and to maintain such possession on our premises or to remove the Collateral or any part thereof to such other places as you may desire. If you exercise your right to take possession of the Collateral, we shall, upon your demand, assemble the Collateral and make it available to you at a place reasonably convenient to you. In addition, with respect to all Collateral, you shall have all of the rights and remedies set forth in the Agreement and all of the rights and remedies provided in the Uniform Commercial Code. 3. [taken out] 4. We represent, warrant the covenant that (a) the Collateral is in our possession at 10 Elizabeth Drive, Chelmsford, County of Middlesex, Commonwealth of Massachusetts or other locations as contemplated by Section 4.10 of the letter agreement; (b) we are the lawful owners of the Collateral and have the sole right and lawful authority to deliver this instrument; (c) the Collateral and every part thereof is and will be free and clear of all security interests, liens and encumbrances of every kind, nature and description except as follows: purchase money security interests and other exceptions permitted by letter agreement of even date herewith between the Borrower and the Bank and we will warrant and defend the Collateral against the claims and demands of all persons; (d) we will keep the Collateral free and clear of all attachments, levies, taxes, liens, security interests and encumbrances of every kind and nature, except as listed above, and we will at our own cost and expense, keep the Collateral in a good state of repair and will not waste or destroy the same or any part thereof except for items disposed of in the ordinary course to the extent expressly permitted by the aforesaid letter agreement and will not be negligent in the care and use thereof; (e) we will not without your prior written consent as provided in the letter agreement, sell, assign, mortgage, lease or otherwise dispose of the Collateral except for obsolete or worn out items disposed of in the ordinary course and except for liens permitted by the aforesaid letter agreement; (f) we will insure the Collateral in your name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as you shall specify, in amounts and under policies by insurers acceptable to you, and if we fail to do so, you may procure such insurance and charge the cost to our loan account; (g) as further assurance for the payment and performance of the Obligations, we hereby assign to you (as further collateral for the Obligations) all sums, including returned or unearned premiums, which may become payable under any policy of insurance on the Collateral and we hereby direct each insurance company issuing any such policy to make payment of such sums directly to you; provided that so long as no Event of Default (as defined in the aforesaid letter agreement) has occurred and is then continuing, the Bank will promptly release to the Borrower insurance proceeds actually received by the Bank to the extent that same are used by the Borrower for the repair and/or replacement of any Collateral damaged or destroyed by any insured casualty; (h) except for items disposed of in the ordinary course to the extent expressly permitted by the aforesaid letter agreement, we will not remove the Collateral from its present location without your prior written consent (other than removal to other locations as contemplated by Section 4.10 of the letter agreement) and we will at all times, allow you or your representatives free access to and right of inspection of the Collateral (subject to the terms of the aforesaid letter agreement); (i) we will comply with the material terms and conditions of any leases covering the premises wherein the Collateral is located and any orders, ordinances, laws or statutes of any city, state or other governmental department having jurisdiction with respect to such premises or the conduct of business thereon, and, when requested by you, we will execute any written instruments and do any other acts reasonably necessary to effectuate more fully the purposes and provisions of the Agreement; (j) we will indemnify and save you harmless from all loss, cost, damage, liability or expenses including reasonable attorneys' fees that you may sustain or incur by reason of defending or protecting your security interest or the priority thereof or enforcing the Obligations, or in the prosecution or defense of any action or proceeding concerning any matter growing out of or connected with the Agreement, the Obligations or the Collateral. 5. You may, at your option, discharge any taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and not permitted 2 by the letter agreement and you may pay for the maintenance and preservation of the Collateral and we will reimburse you on demand for any payment made or any reasonable expense incurred by you pursuant to the foregoing authority, with interest at the rate provided in the Agreement. Witnessed by: Very truly yours, SYCAMORE NETWORKS, INC. _______________________________ By: /s/ Daniel Smith ----------------------------------------- Its: President Accepted at Boston, Massachusetts 4/27/99 FLEET NATIONAL BANK By: /s/ Illegible ----------------------------------------- Its: Vice President 3 RIDER TO SUPPLEMENTARY SECURITY AGREEMENT FROM SYCAMORE NETWORKS, INC. TO FLEET NATIONAL BANK The foregoing Supplementary Security Agreement - Security Interest in Goods and Chattels (the "Supplementary Security Agreement") is modified as follows: 1. By inserting into clause (a) of Section 4 of the Supplementary Security Agreement, immediately after the words "Commonwealth of Massachusetts", the following: "or other locations as contemplated by Section 4.10 of the letter agreement" 2. By inserting into clause (e) of Section 4 of the Supplementary Security Agreement, immediately after the words "written consent", the following: "as provided in the letter agreement" 3. By inserting into clause (g) of Section 4 of the Supplementary Security Agreement, immediately after the words "assign to you", the following: "(as further collateral for the Obligations)" 4. By adding to clause (g) of Section 4 of the Supplementary Security Agreement, as the end of such clause (g), the following: "; provided that so long as no Event of Default (as defined in the aforesaid letter agreement) has occurred and is then continuing, the Bank will promptly release to the Borrower insurance proceeds actually received by the Bank to the extent that same are used by the Borrower for the repair and/or replacement of any Collateral damaged or destroyed by any insured casualty." 5. By inserting into clause (h) of Section 4 of the Supplementary Security Agreement, immediately after the words "written consent", the following: "(other than removal to other locations as contemplated by Section 4.10 of the letter agreement)" 6. By inserting into clause (h) of Section 4 of the Supplementary Security Agreement, immediately after the words "inspection of the Collateral", the following: "(subject to the terms of the aforesaid letter agreement)" 4 EX-10.7 10 LEASE DATED DECEMBER 21, 1998 EXHIBIT 10.7 LEASE LANDLORD: BerCar II LLC, a Massachusetts limited liability company TENANT: Sycamore Networks, Inc., a Delaware Corporation PREMISES: 10 Elizabeth Drive Chelmsford, Massachusetts DATED: DECEMBER 21, 1998 GARY BUCKMAN 244 1550 __________________ TABLE OF CONTENTS
Page ---- ARTICLE I - REFERENCE DATA............................................ 1 (A) SUBJECTS REFERRED TO...................................... 1 (B) EXHIBITS.................................................. 2 ARTICLE II - PREMISES................................................. 2 ARTICLE III - TERM AND CONSTRUCTION................................... 3 (A) TERM 3 (B) LANDLORD'S REQUIRED WORK.................................. 3 (C) TENANT'S WORK............................................. 4 (D) GENERAL CONSTRUCTION PROVISIONS........................... 4 ARTICLE IV - LANDLORD'S COVENANTS..................................... 4 (A) LANDLORD'S COVENANTS DURING THE TERM: .................... 4 (B) INTERRUPTIONS............................................. 5 ARTICLE V - RENT...................................................... 5 (A) FIXED RENT................................................ 5 (C) ADDITIONAL RENT - OPERATING COSTS......................... 7 (D) ADDITIONAL RENT - ELECTRICITY AND GAS..................... 9 ARTICLE VI - TENANT'S COVENANTS....................................... 9 ARTICLE VII - DEFAULT................................................. 14 (A) EVENTS OF DEFAULT......................................... 14 (B) OBLIGATIONS THEREAFTER.................................... 15 ARTICLE VIII - CASUALTY AND TAKING.................................... 16 (A) CASUALTY AND TAKING....................................... 16 (B) RESERVATION OF AWARD...................................... 17 ARTICLE IX - MORTGAGEE................................................ 17 (A) SUBORDINATION TO MORTGAGES................................ 17 (B) LIMITATION ON MORTGAGEE'S LIABILITY....................... 18 (C) NO RELEASE OR TERMINATION................................. 19 ARTICLE X - GENERAL PROVISIONS........................................ 19 (A) CAPTIONS.................................................. 19 (B) SHORT FORM LEASE.......................................... 19 (C) RELOCATION................................................ 19 (D) NOTICES................................................... 20
(E) SUCCESSORS AND ASSIGNS.................................... 20 (F) NO SURRENDER.............................................. 21 (G) WAIVERS AND REMEDIES...................................... 21 (H) SELF-HELP................................................. 22 (I) ESTOPPEL CERTIFICATE...................................... 22 (J) WAIVER OF SUBROGATION..................................... 22 (K) BROKERS................................................... 23 (L) LANDLORD'S DEFAULTS....................................... 23 (M) EFFECTIVENESS OF LEASE.................................... 24 (N) HAZARDOUS MATERIALS....................................... 24 ARTICLE XI - SECURITY DEPOSIT......................................... 25 ARTICLE XII - MODIFICATION............................................ 25
EXHIBIT A PLAN SHOWING TENANT'S SPACE EXHIBIT B INTENTIONALLY OMITTED EXHIBIT C INTENTIONALLY OMITTED EXHIBIT D LANDLORD'S SERVICES EXHIBIT E RULES AND REGULATIONS EXHIBIT F LEGAL DESCRIPTION OF LOT EXHIBIT G SIGN CRITERIA Lease dated as of the 21st day of December, 1998, by and between BerCar II LLC, a Massachusetts limited liability company, as landlord ("Landlord"), and Sycamore Networks, Inc., a Delaware corporation, as tenant ("Tenant"). ARTICLE I REFERENCE DATA 1. (A) SUBJECTS REFERRED TO: Each reference in this lease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section 1(A): LANDLORD'S ADDRESS: c/o Altid Enterprises 17 Monsignor O'Brien Highway Cambridge, Massachusetts 02141-1877 TENANT'S ADDRESS: Prior to Commencement Date: 2 Highwood Drive Tewksbury, MA 01876 After Commencement Date: 10 Elizabeth Drive Chelmsford, MA BUILDING: That certain building known or to be known as and numbered 10 Elizabeth Drive, Chelmsford, Massachusetts RENTABLE FLOOR AREA OF TENANT'S SPACE: APPROXIMATELY 34,579 SQUARE FEET TOTAL RENTABLE FLOOR AREA OF THE BUILDING: 113,280 SQUARE FEET DELIVERY DATE: JANUARY 4, 1999 TERM: THREE (3) YEARS FROM THE COMMENCEMENT DATE FIXED RENT: DURING THE FIRST (1ST) YEAR OF THE TERM -- $224,763.50 PER ANNUM/$18,730.00 PER MONTH; AND DURING EACH YEAR OF THE BALANCE OF THE TERM -- $319,855.75 PER ANNUM/$26,654.65 PER MONTH SECURITY DEPOSIT: $92,000.00 REDUCED TO $46,000.00 PURSUANT TO ARTICLE XI GUARANTOR: N/A PERMITTED USE: OFFICE, LIGHT MANUFACTURING AND RESEARCH AND DEVELOPMENT PUBLIC LIABILITY INSURANCE LIMITS: BODILY INJURY: $2,000,000 PROPERTY DAMAGE: $ 500,000 (B) EXHIBITS The exhibits listed below in this Section are incorporated in this lease by reference and are to be construed as part of this lease: EXHIBIT A Plan Showing Tenant's Space EXHIBIT B Intentionally Omitted EXHIBIT C Intentionally Omitted EXHIBIT D Landlord's Services EXHIBIT E Rules and Regulations EXHIBIT F Legal Description Of Lot EXHIBIT G Sign Criteria ARTICLE II PREMISES 2. PREMISES Subject to and with the benefit of the provisions of this lease, Landlord hereby leases to Tenant, and Tenant leases from Landlord, Tenant's space in the Building, excluding exterior faces of exterior walls, all common facilities of the Building and all building service fixtures and equipment serving (exclusively or in common) other parts of the Building. Tenant's space, with such exclusions, is hereinafter referred to as "the demised premises". Tenant shall have, as appurtenant to the demised premises, the right to use in common with others entitled thereto, subject to reasonable rules from time to time made by Landlord of which Tenant is given notice: (a) the common facilities from time to time included in the Building or on the parcel of land on which the Building is located (said parcel being more particularly described in Exhibit F and being hereafter referred to as "the Lot"), to the extent from -2- time to time designated by Landlord; (b) the building service fixtures and equipment serving the demised premises; and (c) the common facilities from time to time serving the Lot in common with other parcels of land, such as any so- called access roads, retention ponds, sewer and utility lines and the like, all to the extent from time to time designated by Landlord. Landlord reserves the right from time to time (a) to install, repair, replace, use, maintain and relocate for service to the demised premises and to other parts of the Building or either, building service fixtures and equipment wherever located in the Building, (b) to alter, relocate or eliminate any other common facility, and (c) to increase and/or decrease the size of the Lot by the acquisition of adjacent land and/or the disposition of any portions thereof. No such increase or decrease shall be deemed to have occurred until Landlord shall give Tenant notice thereof. Landlord warrants that there shall always be parking for at least three and one half (3 1/2) cars per 1,000 square feet of rentable floor area, subject, however, to takings by eminent domain. Landlord agrees that in exercising its rights hereunder, it shall not unreasonably interfere with the conduct of Tenant's business in the demised premises. ARTICLE III TERM AND CONSTRUCTION 3. (A) TERM To have and to hold for a period of three (3) years ("the Term") commencing on January 4, 1999 (being hereafter referred to as "the Commencement Date") and, unless sooner terminated as provided herein, ending at the end of the Approximate Term; provided that if the Term (calculated as aforesaid) would expire prior to the last day of a calendar month, the Term shall be extended so as to expire on the last day of such calendar month. (B) LANDLORD'S REQUIRED WORK Tenant acknowledges that it has inspected the demised premises, and it is understood and agreed that Tenant will accept the demised premises in their existing physical condition, and Landlord shall be under no obligation to make any repairs, alterations or improvements to the demised premises prior to or at the commencement of the Term hereof or at any time thereafter, except as herein specifically provided otherwise. Landlord shall place the mechanical equipment serving the demised premises (including the heating, ventilating and air conditioning system) into good operating condition prior to delivery of the demised premises to Tenant. Landlord shall make all repairs necessary to the demised premises to place same into compliance with law as of the delivery date. Tenant shall be obligated to make all repairs necessary as a result of Tenant's work in the demised premises or which may be required for Tenant to obtain a certificate of occupancy. -3- (C) TENANT'S WORK Tenant shall perform, at its own cost and expense, any work required to prepare the demised premises for Tenant's occupancy (pursuant to plans and specifications approved by Landlord), and Tenant shall equip the demised premises with all trade fixtures and personal property suitable or appropriate to the regular and normal operation of the type of business in which Tenant is engaged. All such trade fixtures and personal property shall be of first-class quality, consistent with the quality of existing improvements. As an inducement for Tenant to execute this lease and prepare the demised premises for Tenant's occupancy, Landlord shall pay to Tenant the sum of $172,895.00. So long as Tenant shall not then be in default in the performance of its agreements contained in this lease, Landlord shall pay said sum to Tenant upon the last to occur of: (a) the tenth (10th) day after the receipt by Landlord of the rent payable hereunder for the first full month of the Term of this lease; and (b) the receipt by Landlord of waivers of liens from all contractors and subcontractors supplying labor and/or material for Tenant's work. It is expressly understood and agreed that except for Tenant's signs and movable trade fixtures, all of Tenant's work shall be the property of Landlord whether or not the actual cost thereof shall exceed said sum. (D) GENERAL CONSTRUCTION PROVISIONS All construction work required or permitted by this lease, whether by Landlord or by Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authorities and insurance rating or inspection bureaus having jurisdiction over the Building. Either party may inspect the work of the other at reasonable times and shall promptly give notice of observed defects. ARTICLE IV LANDLORD'S COVENANTS 4. (A) LANDLORD'S COVENANTS DURING THE TERM: Landlord covenants during the Term: (1) To furnish, through Landlord's employees or independent contractors, the services listed in Exhibit D; and (2) Except and otherwise provided in this lease, to make such repairs to the roof, exterior walls (but not any windows, doors, window frames or door frames), and common facilities of the Building and the Lot as may be necessary to keep them in Serviceable condition. -4- (B) INTERRUPTIONS Landlord shall not be liable to Tenant for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from (a) power losses or shortages, or (b) the necessity of Landlord's entering the demised premises for any of the purposes in this lease authorized, including without limitation, for repairing or altering the demised premises or any portion of the building or for bringing materials into and/or through the demised premises in connection with the making of repairs or alterations. In case Landlord is prevented or delayed from making any repairs, alterations or improvements or furnishing any service or performing any other covenant or duty to be performed on Landlord's part, by reason of any cause reasonably beyond Landlord's control, Landlord shall not be liable to Tenant therefor, nor, except as expressly otherwise provided in Article VIII, shall Tenant be entitled to any abatement or reduction of rent by reason thereof, nor shall the same give rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial, eviction from the demised premises. Landlord reserves the right to stop any service or utility system when necessary in Landlord's opinion by reason of accident or emergency or until necessary repairs have been completed. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and, in any event, Landlord will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. Landlord agrees that if there is a stoppage of such service or utility system for more than ten (10) business days, and if Tenant cannot reasonably conduct its business in the demised premises as a result thereof, Fixed Rent shall thereafter abate until such service or utility system is restored, or Tenant is again able reasonably to conduct its business in the demised premises. ARTICLE V RENT 5. (A) FIXED RENT Tenant agrees to pay, without any offset or reduction whatever (except as made in accordance with the express provisions of this lease), fixed monthly rent equal to 1/12th of the Fixed Rent, such rent to be paid in equal installments in advance on the first day of each calendar month included in the Term commencing on February 1, 1999; and for any portion of a calendar month at the end of the Term, a portion of such fixed monthly rent, prorated on a per diem basis. All payments of Fixed and additional rent shall be made in lawful money of the United States and shall be made to Landlord and sent to Landlord c/o Altid Enterprises, 17 Monsignor O'Brien Highway, Cambridge, Massachussetts 02141-1877, or to such other person and/or at such other address as Landlord may from time to time designate. -5- If any payment or rent or any other payment hereunder by Tenant to Landlord shall not be paid within the applicable cure period, the same shall bear Interest from the date when the Same was payable until the date paid at the lesser of (a) the prime rate" then charged its most favored customers by Fleet Bank, plus four percent (4%) per annum, or (b) the highest lawful rate of interest which Landlord may charge to Tenant without violating any applicable law ("the Lease Interest Rate"). Such interest shall constitute additional rent payable hereunder. (B) ADDITIONAL RENT - TAXES (1) For the purposes of this Section, "Tax Year" shall mean the twelve- month period in use in the Town of Chelmsford, Massachusetts for the purpose of imposing ad valorem taxes upon real property. In the event that said town of Chelmsford changes the period of its tax year, "Tax Year" shall mean a twelve- month period commencing on the first day of such new tax year, and each twelve- month period commencing on an anniversary of such date during the Term of this lease. For purposes of this Section "the Property" shall mean the Lot and all improvements thereon from time to time, including the Building; and "the Factor" shall mean a fraction the numerator of which is the Rentable Floor Area of Tenant's Space and the denominator of which is the Total Rentable Floor Area of The Building. (2) During the Term Tenant shall pay to Landlord, as additional rent, an amount equal to the real estate taxes imposed with respect to the Property for each Tax Year multiplied by the Factor, such amount to be apportioned on a per diem basis for any fraction of a Tax Year contained within the Term. Payment on account of real estate taxes shall be paid, as part of Tenant's total rent, monthly, and at the times and in the fashion herein provided for the payment of Fixed Rent. For an initial period from the Commencement Date until the end of the first full Tax Year in which the Term shall commence ("the full assessment year"), the amount so to be paid shall be $2,478.17 per month being the monthly payment fixed by Landlord on or about the Commencement Date. Promptly after the end of each Tax Year, Landlord shall make a determination of Tenant's share of the real estate taxes upon the Property, and if the aforesaid payments theretofore made for such Tax Year by Tenant exceed Tenant's share of such real estate taxes, such overpayment shall be credited against the payments thereafter to be made by Tenant pursuant to this Section (B) or refunded to tenant at the end of the Term; and if Tenant's share of such real estate taxes for such Tax Year is greater than such payments theretofore made on account for such Tax year, tenant shall make a suitable payment to Landlord. After the full assessment year, the initial monthly payment on account of such real estate taxes shall be replaced each year by a payment which is one-twelfth (1/12) of Tenant's share of such real estate taxes for the immediately preceding Tax Year. Appropriate adjustments shall be made in said monthly payment if the real estate taxes upon the Property for the current Tax year shall be known prior to the end of said Tax Year and/or if real estate taxes shall be payable to the taxing authority in -6- installments, all to the end that as each payment of real estate taxes shall become payable Landlord shall have received from Tenant payments sufficient in amount to pay Tenant's share of the real estate tax payment then payable by Landlord. Landlord shall within sixty (60) days following the end of any Tax Year forward to Tenant a copy of the real estate tax bill together with Landlord's computation of Tenant's share thereof. (3) If Landlord shall receive any tax refund or rebate or sum in lieu thereof with respect to any Tax Year, then out of any balance remaining thereof, after deducting Landlord's expenses incurred in obtaining such refund, rebate or other sum, Landlord shall pay to Tenant, provided that Tenant is not then in default beyond any applicable cure period in the performance of any of its obligations hereunder, an amount equal to such balance multiplied by the Factor for such Tax Year; but in no event shall Landlord pay to Tenant out of such refund, rebate or other sum for any Tax Year more than the amount paid by Tenant to Landlord pursuant to this Section (B) for such Tax Year. (4) Any betterment assessment, so-called "rent tax" or any other tax levied or imposed by any governmental authority in addition to, in lieu of or as a substitute for real estate taxes shall nevertheless be deemed to be real estate taxes for the purpose of this Section (B). Furthermore, to the extent that any equipment installed as part of the Property (e.g. heating or air conditioning equipment) shall be classified as personal property for purposes of taxation, any personal property taxes thereon shall be deemed to be real estate taxes for purposes of this Section (B). Real estate taxes shall not include any franchise, estate, inheritance, succession, capital levy or transfer tax of Landlord, or any income tax of Landlord. (5) In the event of any taking of the Building under circumstances whereby this lease shall not terminate, the Factor shall be adjusted in order to reflect any change in the Rentable Floor Area of Tenant's Space and/or the Total Rentable Floor Area of The Building. (C) ADDITIONAL RENT - OPERATING COSTS (1) For the purposes of this Section, the following terms shall have the following respective meanings: Operating Year: Each successive fiscal year (as adopted by Landlord) in which any part of the Term of this lease shall fall. Operating Expenses: All expenses reasonably necessary and incurred by Landlord in operating and maintaining the Building, the Lot and their appurtenances, including but without limitation, premiums for insurance; compensation and all fringe benefits, workmen's compensation insurance premiums and payroll taxes paid -7- by Landlord to, for or with respect to all persons at or below the level of building manager engaged in maintenance of the Building and Lot; steam, water, sewer, electric, gas, telephone, and other utility charges not billed directly to tenants by Landlord or the utility company; cost of repairs and replacements to the Building and the Lot; cost of sweeping and cleaning the paved areas of the Lot; cost of snow plowing or removal, or both, and care of landscaping; payments to independent contractors under service contracts for any of the foregoing services (which payments may be to affiliates of Landlord provided the same are at competitive rates); all other reasonable and necessary expenses paid in connection with the operation, maintenance, repair and replacement of the Building and Lot, or either; and a supervisory fee equal to twenty-five percent of all of the Operating Expenses for the Operating Year in question. Operating Expenses shall also include the Building's share (as reasonably determined by Landlord) of costs incurred by Landlord in operating maintaining, repairing, insuring and paying real estate taxes upon any common facilities of the sort described in clause (c) of the third sentence of Article II hereof. Operating Expenses shall not include principal and interest payments on any loans of Landlord, the cost of repairs covered by insurance proceeds, or brokerage fees or attorneys' fees incurred in negotiating leases for empty space at the Building. Further, whenever Landlord shall make any necessary repair or replacement which shall be deemed to be a "capital item" pursuant to generally accepted accounting principals, then the cost thereof shall be amortized on a straight line basis over such item's useful life as determined by generally accepted accounting principles and, the costs and expenses to which Tenant shall contribute each year shall include only such year's allocable portion of the amount of said capital item. The Factor: As defined in Section (B) above. (2) During the Term Tenant shall pay to Landlord, as additional rent, an amount equal to the Operating Expenses for each Operating Year multiplied by the Factor, such amount to be apportioned on a per diem basis for any fraction of an Operating Year contained within the Term. Payment on account of Tenant's share of Operating Expenses shall be paid, as part of Tenant's total rent, monthly, and at the times and in the fashion herein provided for the payment of Fixed Rent. For an initial period from the Commencement Date until the end of the Operating Year during which the Term shall commence, the amount so to be paid shall be $2,190.00 per month being the monthly payment fixed by Landlord on or about the Commencement Date. Promptly after the end of said partial Operating Year and promptly after the end of each Operating Year thereafter, Landlord shall make a determination of Tenant's share of said Operating Expenses; and if the aforesaid payments theretofore made for such period by Tenant exceed Tenant's share, such overpayment shall be credited against the payments thereafter to be made by Tenant pursuant to this Section (C) or refunded to Tenant at the expiration of the Term; and if Tenant's share is greater than such payments theretofore made on account for such period, Tenant shall make a suitable payment to Landlord. The initial monthly -8- payment on account of Operating Expenses shall be replaced after Landlord's determination of Tenant's share thereof for the preceding Operating Year by a payment which is one-twelfth (1/12) of Tenant's actual share thereof for the immediately preceding Operating Year, with adjustments as appropriate where such Operating Year is less than a full twelve-month period. Landlord agrees that upon the request of Tenant it will give Tenant a copy of the invoices evidencing said Operating Expenses together with a statement in reasonable detail computing Tenant's share thereof. (3) In the event of any taking of the Building under circumstances whereby this lease shall not terminate, the Factor shall be appropriately adjusted to reflect any change in the Rentable Floor Area of Tenant's Space and/or the Total Rentable Floor Area of The Building. (D) ADDITIONAL RENT - ELECTRICITY AND GAS (1) The demised premises shall have an electric meter measuring the electricity consumed in the demised premises and a gas meter measuring the gas consumed therein. Commencing upon Tenant's entry into the demised premises to perform Tenant's work, Tenant shall pay to the utility companies furnishing such electricity and gas, promptly upon the receipt of bills therefor, the cost of all electricity and gas consumed in the demised premises. (2) Tenant's use of electricity in the demised premises shall not at any time exceed the capacity of any of the electrical conductors or equipment in or otherwise serving the demised premises. ARTICLE VI TENANT'S COVENANTS 6. TENANT'S COVENANTS DURING THE TERM. Tenant covenants during the Term and such other time as Tenant occupies any part of the demised premises: (1) To pay when due (a) all Fixed Rent and additional rent, (b) all taxes which may be imposed on Tenant's personal property in the demised premises (including, without limitation, Tenant's fixtures and equipment) regardless to whomever assessed, and (c) all charges by any public utility for telephone and other utility services rendered to the demised premises but which are not made Landlord's responsibility in Section (D) of Article V hereof. Tenant shall provide adequate heat to the demised premises to prevent the freezing and/or bursting of any pipes or duct work therein; -9- (2) Except as otherwise provided in Article VIII and Subsection (2) of Section (A) of Article IV, to keep the demised premises in good order, repair and condition, reasonable wear only excepted; and at the expiration or termination of this lease peaceably to yield up the demised premises and all changes and additions therein in such order, repair and condition, first removing all goods and effects of Tenant and those claiming under Tenant and any items the removal of which is required by any agreement between Landlord and Tenant (or specified therein to be removed at Tenant's election and which Tenant elects to remove), and repairing all damage caused by such removal and restoring the demised premises and leaving them clean and neat. Notwithstanding anything to the contrary contained herein, Tenant shall forthwith remove from the demised premises (repairing any damage caused by such removal) any installations, alterations, additions or improvements made by Tenant or Landlord including, without limitation, any installations, alterations, additions or improvements made as part of Landlord's Required Work or as part of Tenant's work, and which Landlord requests Tenant to remove at the time Tenant obtains Landlord's approval for the installation of same, such removal to include returning the previously modified portions of the demised premises to their condition prior to the making of such installations, alterations, additions or improvements. Tenant's obligations hereunder shall survive the expiration or termination of the term of this lease. For purposes of this Section (2) the word "repairs" includes the making of replacements when necessary. (3) To use and occupy the demised premises only for the Permitted Use; and not to injure or deface the demised premises, Building, or Lot; and not to permit in the demised premises any auction sale, nuisance, or the emission from the demised premises of any objectionable noise or odor; nor any use thereof which is improper, offensive, contrary to law or ordinances, or liable to invalidate or increase the premiums for any insurance on the Building (or any portion thereof) or its contents, or liable to render necessary any alteration or addition to the Building; (4) To comply with the rules and regulations set forth in Exhibit E and all other reasonable rules and regulations hereafter made by Landlord (but only after copies thereof have been delivered to Tenant) for the care and use of the Building and Lot and their facilities and approaches, it being expressly understood, however, that Landlord shall not be liable to Tenant for the failure of other tenants of the Building to conform to such rules and regulations. Landlord agrees that it shall not discriminate against Tenant in enforcing said rules and regulations; (5) To keep the demised premises equipped with all safety appliances required by law or ordinance or any other regulation of any public authority and/or any insurance inspection or rating bureau having jurisdiction, and to procure all licenses and permits required because of any use made by Tenant and, if requested by Landlord, to do any work required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way the Permitted -10- Use. Landlord agrees that the demised premises shall be delivered in compliance with applicable law. If any work is required in order for Tenant to obtain a building permit and as a direct consequence of Tenant's work, Tenant shall perform all such work at Tenant's cost and expense; (6) Not without the prior written consent of Landlord to assign, hypothecate, pledge or otherwise encumber this lease, to make any sublease or to permit occupancy of the demised premises or any part thereof by anyone other than Tenant, voluntarily or by operation of law, and as additional rent, to reimburse Landlord promptly upon demand for reasonable legal and other expenses incurred by Landlord in connection with any request by Tenant for consent to assignment or subletting. Without intending to limit Landlord's discretion in granting or withholding such consent, it is agreed that if Tenant requests Landlord's consent to assign this lease or sublet more than thirty five percent (35%) of the demised premises, Landlord shall have the option, exercisable by written notice to Tenant given within sixty days after receipt of such request, to terminate this lease as of a date specified in such notice which shall be not less than thirty or more than sixty days after the date of such notice. If Landlord shall so terminate this lease, rent shall be apportioned as of the date of termination, and Landlord may lease the demised premises or any part thereof to any person or entity (including without limitation, Tenant's proposed assignee or subtenant, as the case may be) without any liability whatsoever to Tenant by reason thereof. If Landlord shall consent to any assignment of this lease by Tenant or a subletting of the whole of the demised premises by Tenant at a rent which exceeds the rent payable hereunder by Tenant, or if Landlord shall consent to a subletting of a portion of the demised premises by Tenant at a rent in excess of the subleased portion's pro rata share of the rent payable hereunder by Tenant, then Tenant shall pay to Landlord, as additional rent forthwith upon Tenant's receipt of each installment of any such excess rent, half (1/2) the amount of any such excess rent. Each request by Tenant for permission to assign this lease or to sublet the whole or any part of the demised premises shall be accompanied by a warranty by Tenant as to the amount of rent to be paid to Tenant by the proposed assignee or sublessee. For purposes of this Section (6), the term "rent" shall mean all fixed rent, additional rent or other payments and/or consideration payable by one party to another for the use and occupancy of premises. Tenant agrees, however, that neither it nor anyone claiming under it shall enter into any sublease, license, concession or other agreement for use, occupancy or utilization -11- of space in the demised premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or in part, on the net income or profits derived by any person or entity from the space leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and Tenant agrees that any such purported sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy, or utilization of any part of the demised premises. Tenant further agrees that any sublease, license, concession or agreement for use, occupancy or utilization of space in the demised premises entered into by it or by anyone claiming under it shall contain the provisions set forth in the immediately preceding sentence. Landlord hereby agrees, however, that Tenant may assign its interest in this lease or sublet the whole of the demised premises to (a) an entity which owns all of the outstanding stock of Tenant ("Tenant's Parent"); (b) an entity wholly owned by Tenant or by Tenant's Parent ("a Subsidiary"); (c) an entity resulting from the consolidation or merger of Tenant with any other entity; or (d) an entity to whom Tenant shall sell all or substantially all of Tenant's assets or stock. Notwithstanding the foregoing provisions, if the assignment or subletting is to a Subsidiary, said assignment or subletting shall be valid only for such period of time as said Subsidiary is wholly owned by Tenant or Tenant's Parent. In the event that Tenant or Tenant's Parent shall ever sell or otherwise transfer any interest in said Subsidiary to another person or entity, unless Landlord shall have specifically assented thereto the same shall be deemed to be a material breach of this lease. (7) To defend Landlord with counsel reasonably acceptable to Landlord, save Landlord harmless from, and indemnify Landlord against any liability for injury, loss, accident or damage to any person or property and from any claims, actions, proceedings and expenses and costs in connection therewith (including, without implied limitation, reasonable counsel's fees): (i) arising from the omission, fault, wilful act, negligence or other misconduct of Tenant or anyone claiming under Tenant, or from any use made or thing done or occurring upon or about the demised premises but not due to the omission, fault, willful act, negligence or other misconduct of Landlord, or (ii) resulting from the failure of Tenant to perform and discharge its covenants and obligations under this lease; (8) To maintain public liability insurance upon the demised premises in amounts which shall, at the beginning of the Term, be at least equal to $2,000,000.00 for bodily injury or death to one or more individuals and $500,000.00 for damage to property, and from time to time during the Term, shall be for such higher limits, if any, as are customarily carried in the area in which the demised premises are located upon property similar in type and use to the demised premises. Such insurance shall name Landlord as an additional insured. Tenant shall deliver to Landlord the policies of such insurance, or certificates thereof, at least fifteen (15) days prior to the Commencement Date, and each renewal policy or certificate thereof, at least fifteen (15) days prior to the expiration of the policy it renews. Each such policy shall be written by a responsible insurance company authorized to do business in the state in which the Building is located and shall provide that the same shall not be modified or terminated without at least twenty (20) days' prior written notice to each named insured; (9) To keep all employees working in the demised premises covered by workmen's compensation insurance in amounts required by law, and to furnish Landlord with certificates thereof; -12- (10) To permit Landlord and its agents entry upon reasonable prior notice and during normal business hours (except in the case of an emergency, when Landlord may enter at any time), to examine the demised premises at reasonable times and, if Landlord shall so elect, to make repairs, alterations and replacements; to remove, at Tenant's expense, any changes, additions, signs, curtains, blinds, shades, awnings, aerials, flagpoles, or the like not consented to in writing; and to show the demised premises to prospective tenants during the twelve (12) months preceding the expiration of the Term and to prospective purchasers and mortgagees at all reasonable times; (11) Not to place a load upon any part of the floor of the demised premises exceeding that for which said floor was designed or in violation of what is allowed by law; and not to move any safe, vault or other heavy equipment in, about or out of the demised premises except in such manner and at such times as Landlord shall approve in writing in each instance. Tenant's business machines and mechanical equipment which cause vibration or noise that may be transmitted to the Building structure or to any other space in the Building shall be placed and maintained by Tenant in settings of cork, rubber, spring, or other types of vibration eliminators sufficient to confine such vibration or noise to the demised premises; (12) All the furnishings, fixtures, equipment, effects and property of every kind, nature and description of Tenant and of all persons claiming by, through or under Tenant which, during the continuance of this lease or any occupancy of the demised premises by Tenant or anyone claiming under Tenant, may be on the demised premises or elsewhere in the Building or on the Lot shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft, or from any other cause, no part of said loss or damage is to be charged to or to be borne by Landlord, unless caused by negligence or willful misconduct of Landlord, its agents, servants, contractors or employees; (13) To pay promptly when due the entire cost of any work done on the demised premises by Tenant and those claiming under Tenant; not to cause or permit any liens for labor or material performed or furnished in connection therewith to attach to the demised premises; and to discharge within thirty (30) days any such liens which may so attach; (14) Not to make any alterations, improvements, changes or additions to the demised premises without Landlord's prior written consent. Landlord hereby approves the making by Tenant of interior alterations to the demised premises provided same (i) do not affect the structure of the demised premises or the Building which contains the demised premises; and (ii) do not affect the common utility lines or other mechanical systems of the Building which includes the demised premises; -13- (15) To pay to Landlord two (2) times the total of the Fixed Rent and additional rent then applicable for each month or portion thereof that Tenant shall retain possession of the demised premises or any part thereof after the termination this lease, whether by lapse of time or otherwise, and also to pay all damages sustained by Landlord on account thereof; however, the provisions of this subsection shall not operate as a waiver by Landlord of any right of re- entry provided in this lease or as a matter of law; (16) To insure the contents, equipment, and improvements of Tenant and those claiming under Tenant, under policies covering at least fire and the standard extended coverage risks, in amounts equal to the replacement cost thereof, the terms of which policies shall provide that such insurance shall not be canceled without at least twenty (20) days' prior written notice to Landlord. Copies of such insurance policy or policies, or certificates there of, shall be delivered to Landlord at least fifteen (15) days prior to the Commencement Date and each renewal policy or certificate thereof, at least fifteen (15) days prior to the expiration of the policy it renews; (17) The losing party shall pay the other party's expenses, including reasonable attorney's fees, incurred in enforcing any obligation of the losing party in this lease; and (18) To obtain and maintain in full force and effect a heating and air conditioning equipment service contract which shall provide for the periodic inspection and maintenance of the heating and air conditioning equipment servicing the demised premises. Said contract shall be made with a reputable contractor and shall be subject to Landlord's approval, which approval Landlord agrees not unreasonably to withhold. Copies of said contract and any renewals and/or replacements thereof shall be delivered to Landlord. ARTICLE VII DEFAULT 7. (A) EVENTS OF DEFAULT (1) If Tenant shall default in the payment of Fixed Rent, additional rent or other payments required of Tenant, and if Tenant shall fail to cure said default within ten (10) days after receipt of notice of said default from Landlord, or (2) if Tenant shall default in the performance or observance of any other agreement or condition on its part to be performed or observed and if Tenant shall fail to cure said default within thirty (30) days after receipt of notice of said default from Landlord (but if longer than thirty (30) days shall be reasonably required to cure said default, then if Tenant shall fail to commence the curing of such default within thirty (30) days after receipt of said notice and diligently prosecute the curing thereof to completion), or (3) -14- if any persons shall levy upon, or take this leasehold interest or any part thereof upon execution, attachment or other process of law, or (4) if Tenant or Guarantor shall make an assignment of its property for the benefit of creditors, or (5) if Tenant or Guarantor shall be declared bankrupt or insolvent according to law, or (6) if any bankruptcy or insolvency proceedings shall be commenced by or against Tenant or Guarantor and, if against, if not discharged within sixty (60) days, (7) if a receiver, trustee or assignee shall be appointed for the whole or any part of Tenant's or Guarantor's property, or (8) if the letter of credit is not renewed, and not replaced within five (5) days of notification of nonrenewal, then in any of said cases, Landlord lawfully may immediately, or at any time thereafter, and without any further notice or demand, enter into and upon the demised premises or any part thereof in the name of the whole, by force or otherwise, and hold the demised premises as if this lease had not been made, and expel Tenant and those claiming under it and remove its or their property (forcibly, if necessary) without being taken or deemed to be guilty of any manner of trespass (or Landlord may send written notice to Tenant of the termination of this lease), and upon entry as aforesaid (or in the event that Landlord shall send Tenant notice of termination as above provided, on the fifth day next following the date of the sending of the notice), the term of this lease shall terminate. Notwithstanding the provisions of clauses (1) and (2) of the immediately preceding sentence, if Landlord shall have rightfully given Tenant notice of default pursuant to either or both of said clauses twice during any twelve-month period, and if Tenant shall thereafter default in the payment of Fixed Rent, additional rent or other payments and/or the performance or observance of any other agreement or condition required of Tenant, then Landlord may exercise the right of termination provided for it in said immediately preceding sentence without first giving Tenant notice of such default and the opportunity to cure the same within the time provided in said clause (1) and/or clause (2), as the case may be. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event Landlord terminates this lease as provided in this Article. (B) OBLIGATIONS THEREAFTER In case of any such termination, Tenant will indemnify Landlord each month against all loss of Fixed Rent and additional rent and against all obligations which Landlord may incur by reason of any such termination between the time of termination and the expiration of the Term; or at the election of Landlord, exercised at the time of termination or at any time thereafter, Tenant will indemnify Landlord each month until the exercise of the election against all loss of Fixed Rent and additional rent and against all obligations which Landlord may incur by reason of such termination during the period between the time of the termination and the exercise of the election, and upon the exercise of the election Tenant will pay to Landlord as damages such amount as at the time of the exercise of the election represents the amount by which the rental value of the demised premises for the -15- period from the exercise of the election until the expiration of the Term shall be less than the amount of rent and other payments provided herein to be paid by Tenant to Landlord during said period. It is understood and agreed that at the time of the termination or at any time thereafter Landlord may rent the demised premises, and for a term which may expire before or after the expiration of the Term, without releasing Tenant from any liability whatsoever, that Tenant shall be liable for any expenses incurred by Landlord in connection with obtaining possession of the demised premises, with removing from the demised premises property of Tenant and persons claiming under it (including warehouse charges), with putting the demised premises into good condition for reletting, and with any reletting, including, but without limitation, reasonable attorneys' fees and brokers fees, and that any monies collected from any reletting shall be applied first to the foregoing expenses and then to the payment of Fixed Rent, additional rent and all other payments due from Tenant to Landlord. Landlord agrees that it shall use reasonable efforts to mitigate its damages. For purposes of the foregoing, "reasonable efforts" shall mean only the listing of the demised premises for lease with at least one (1) broker in the area in which the demised premises are located. ARTICLE VIII CASUALTY AND TAKING 8. (A) CASUALTY AND TAKING In case during the Term all or any substantial part of the demised premises, the Building, or Lot or any one or more of them, are damaged by fire or any other casualty or by action of public or other authority or are taken by eminent domain, this lease shall terminate at Landlord's election, which may be made notwithstanding Landlord's entire interest may have been divested, by notice given to Tenant within thirty days after the occurrence of the event giving rise to the election to terminate. Said notice shall, in the case of damage as aforesaid, specify the effective date of termination which shall be not less than thirty nor more than sixty days after the date of notice of such termination. In the case of any such taking by eminent domain, the effective date of the termination shall be the day on which the taking authority shall take possession of the taken property. Fixed Rent and additional rent shall be apportioned and adjusted as of the effective date of any such termination. If in any such case the demised premises are rendered unfit for use and occupation and this lease is not so terminated, Landlord shall use due diligence to put the demised premises, or, in the case of a taking, what may remain thereof (excluding any items which Tenant may be required or permitted to remove from the demised premises at the expiration of the Term) into proper condition for use and occupation, but Landlord shall not be required to spend more than the net proceeds of insurance or award of damages it receives therefor, and a just proportion of the Fixed Rent and additional rent according to the nature and extent of the injury to the demised premises shall be abated until the demised premises or such remainder shall have -16- been put by Landlord in such condition; and in case of a taking which permanently reduces the area of the demised premises, a just proportion of the Fixed Rent shall be abated for the remainder of the Term. If there shall be damage or destruction to the demised premises by fire or other casualty which shall not be repaired or restored by Landlord within a period of nine (9) months after the date of such damage or destruction, then Tenant, as Tenant's sole remedy, may terminate the Term of this lease by a notice to Landlord within sixty (60) days after the expiration of such nine (9) month period; provided that said repair or restoration shall not have been completed prior to the receipt by Landlord of said notice. (B) RESERVATION OF AWARD Landlord reserves to itself any and all rights to receive awards made for damage to the demised premises, Building or Lot and the leasehold hereby created, or any one or more of them, accruing by reason of any exercise of the right of eminent domain or by reason of anything done in pursuance of public or other authority. Tenant hereby releases and assigns to Landlord all of Tenant's rights to such awards, and covenants to deliver such further assignments and assurances thereof as Landlord may from time to time request. It is agreed and understood, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for (1) movable equipment installed by Tenant or anybody claiming under Tenant at its own expense or (ii) relocation expenses, but in each case only if and to the extent that such damages are recoverable by Tenant from such authority in a separate action and without reducing Landlord's award of damages. ARTICLE IX MORTGAGEE 9. (A) SUBORDINATION TO MORTGAGES It is agreed that the rights and interest of Tenant under this lease shall be: (i) subject and subordinate to the lien of any present or future first mortgage and to any and all advances to be made thereunder, and to the interest thereon, upon the demised premises or any property of which the demised premises are a part, if the holder of such mortgage shall elect, by notice to Tenant, to subject and subordinate the rights and interest of Tenant under this lease to the lien of its mortgage; or (ii) prior to the lien of any present or future first mortgage, if the holder of such mortgage shall elect, by notice to Tenant, to give the rights and interest of Tenant under this lease priority to the lien of its mortgage. It is understood and agreed that the holder of such mortgage may also elect, by notice to Tenant, to make some provisions hereof subject and subordinate to the lien of its mortgage while granting other provisions hereof priority to the lien of its mortgage. In the event of any of such elections, and upon notification by the holder of such mortgage to that effect, -17- the rights and interest of Tenant under this lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the lien of said mortgage, irrespective of the time of execution or time of recording of any such mortgage. Tenant agrees that it will, upon request of Landlord, execute, acknowledge and deliver any and all instruments deemed by Landlord necessary or desirable to evidence or to give notice of such subordination or priority. The word "mortgage" as used herein includes mortgages, deeds of trust or other similar instruments and modifications, consolidations, extensions, renewals, replacements and substitutes thereof. Whether the lien of any mortgage upon the demised premises or any property of which the demised premises are a part shall be superior or subordinate to this lease and the lien hereof, Tenant agrees that it will, upon request, attorn to the holder of such mortgage or anyone claiming under such holder and their respective successors and assigns in the event of foreclosure of or similar action taken under such mortgage. Tenant further agrees that it shall not subordinate its interest in this lease to the lien of any junior mortgage, security agreement or lease affecting the demised premises, unless the holder of the first mortgage upon the demised premises or property which includes the demised premises shall consent thereto. Notwithstanding anything to the contrary contained in this Article 9, Tenant shall not be required to subordinate this lease and the lien hereof to the lien of any mortgage unless the holder of such mortgage shall enter into an agreement with Tenant, recordable in form, to the effect that in the event of foreclosure of, or similar action taken under, such mortgage, Tenant's possession of the demised premises shall not be terminated or disturbed by such mortgage holder or anyone claiming under such mortgage holder so long as Tenant shall not be in default under this lease. Landlord agrees that it shall use its best efforts to obtain such an agreement from the present mortgagee of the Building. Best efforts shall not require Landlord to expend any money. (B) LIMITATION ON MORTGAGEE'S LIABILITY Upon entry and taking possession of the mortgaged premises for any purpose, the holder of a mortgage shall have all rights of Landlord, and during the period of such possession Landlord, not such mortgage holder, shall have the duty to perform all of Landlord's obligations hereunder. No such holder shall be liable, either as a mortgagee or as holder of a collateral assignment of this lease, to perform, or be liable in damages for failure to perform, any of the obligations of Landlord unless and until such holder shall succeed to Landlord's interest herein through foreclosure of its mortgage or the taking of a deed in lieu of foreclosure, and thereafter such mortgage holder shall not be liable for the performance of any of Landlord's obligations hereunder, except for the performance of those obligations which arise during the period of time that such mortgage holder holds Landlord's right, title and interest in this lease, such liability to be limited to the same extent as Landlord's liability is limited pursuant to Section 10(E) hereof. -18- (C) NO RELEASE OR TERMINATION No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this lease, or by law, to be relieved of any of Tenant's obligations hereunder or to terminate this lease, shall result in a release or termination of such obligations or a termination of this lease unless (i) Tenant shall have first given written notice of Landlord's act or failure to act to Landlord's mortgagees of which Tenant has been given notice, if any, specifying the act or failure to act on the part of Landlord which could or would be the basis of Tenant's rights and (ii) such mortgagees, after receipt of such notice, have failed or refused to correct or cure the condition complained of within a reasonable time thereafter, but nothing contained in this Section (C) shall be deemed to impose any obligation on any such mortgagee to correct or cure any such condition. "Reasonable time" as used above means and includes a reasonable time to obtain possession of the mortgaged premises, if the mortgagee elects to do so, and a reasonable time to correct or cure the condition. Finally, Tenant agrees that so long as any present or future mortgage shall remain in effect Tenant shall not alter, modify, amend, change, surrender or cancel this lease nor pay the rent due hereunder in advance for more than thirty (30) days, except as may be required herein, without the prior written consent of the holder thereof, and Tenant will not seek to be made an adverse or defendant party in any action or proceeding brought to enforce or foreclose such mortgage. ARTICLE X GENERAL PROVISIONS 10. (A) CAPTIONS The captions of the Articles are for convenience and are not to be considered in construing this lease. (B) SHORT FORM LEASE Upon request of either party both parties shall execute and deliver a short form of this lease in form appropriate for recording, and if this lease is terminated before the Term expires, an instrument in such form acknowledging the date of termination. No such short form lease shall contain any indication of the amount of the rentals payable hereunder by Tenant. (C) RELOCATION Intentionally Omitted. -19- (D) NOTICES All notices and other communications authorized or required hereunder shall be in writing and shall be given by mailing the same by certified or registered mail, return receipt requested, postage prepaid, by mailing the same by Express Mail or by having the same delivered by a commercial delivery service such as Federal Express, UPS, Purolator Courier and the like. If given to Tenant the same shall be directed to Tenant at Tenant's Address or to such other person or at such other address as Tenant may hereafter designate by notice to Landlord; and if given to Landlord the same shall be directed to Landlord at Landlord's Address, or to such other person or at such other address as Landlord may hereafter designate by notice to Tenant. In the event the notice directed as above provided shall not be received upon attempted delivery thereof to the proper address and shall be returned by the Postal Service or delivery service to the sender because of a refusal of receipt, the absence of a person to receive, or otherwise, the time of the giving of such notice shall be the first business day on which delivery was so attempted. After receiving notice from Landlord or from any person, firm or other entity that such person, firm or other entity holds a mortgage which includes the demised premises as part of the mortgaged premises, no notice from Tenant to Landlord shall be effective unless and until a copy of the same is given by certified or registered mail to such holder, and the curing of any of Landlord's defaults by such holder shall be treated as performance by Landlord, it being understood and agreed that such holder shall be afforded a reasonable period of time after the receipt of such notice in which to effect such cure. (E) SUCCESSORS AND ASSIGNS The obligations of this lease shall run with the land, and this lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns, except that the Landlord named herein and each successive owner of Landlord's interest in this lease shall be liable only for the obligations of Landlord accruing during the period of its ownership. Whenever Landlord's interest in this lease is owned by a trustee or trustees, the obligations of Landlord shall be binding upon Landlord's trust estate, but not upon any trustee, beneficiary or shareholder of the trust individually. Without limiting the generality of the foregoing, and whether or not Landlord's interest in this lease is owned by a trustee or trustees, Tenant specifically agrees to look solely to Landlord's interest in the Building and Lot for recovery of any judgment from Landlord, it being specifically agreed that neither Landlord, any trustee, beneficiary or shareholder of any trust estate for which Landlord acts nor any person or entity claiming by, through or under Landlord shall ever otherwise be personally liable for any such judgment. -20- (F) NO SURRENDER The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof shall not operate as a termination of this lease or a surrender of the demised premises. (G) WAIVERS AND REMEDIES The failure of Landlord or of Tenant to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease, or, with respect to such failure of Landlord, any of the rules and regulations referred to in Section 6(4), whether heretofore or hereafter adopted by Landlord, shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation, nor shall the failure of Landlord to enforce any of said rules and regulations against any other tenant in the Building be deemed a waiver of any such rules or regulations as far as Tenant is concerned. Landlord agrees it shall not discriminate against Tenant in enforcing said rules or regulations. The receipt by Landlord of Fixed Rent or additional rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach by Landlord unless such waiver be in writing signed by Landlord. No consent or waiver express or implied, by Landlord or Tenant to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. No acceptance by Landlord of a lesser sum than the Fixed Rent and additional rent then due shall be deemed to be other than on account of the earliest installment of such rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed as accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy available to it. The specific remedies to which Landlord may resort under the terms of this lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by Tenant of any provisions of this lease. In addition to the other remedies provided in this lease, Landlord shall be entitled to the restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions or provisions of this lease or to a decree compelling specific performance of any such covenants, conditions or provisions. If any term of this lease, or the application thereof to any person or circumstances shall be held, to any extent, to be invalid or unenforceable, the remainder of this lease, or the application of such term to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby, and each term of this lease shall be valid and enforceable to the fullest extent permitted by law. If any interest to be paid by Tenant hereunder shall exceed the highest lawful rate which -21- Landlord may recover from Tenant, such interest shall be reduced to such highest lawful rate of interest. (H) SELF-HELP If Tenant shall at any time default in the performance of any obligation under this lease, Landlord shall have the right, but shall not be obligated, to enter upon the demised premises and to perform such obligation, notwithstanding the fact that no specific provision for such performance by Landlord is made in this lease with respect to such default. In performing such obligation, Landlord may make any payment of money or perform any other act. All sums so paid by Landlord (together with interest, from the time paid by Landlord until the time Tenant repays the same to Landlord, at the Lease Interest Rate), shall be deemed to be additional rent and shall be payable to Landlord immediately on demand. Landlord may exercise the foregoing right without waiving any other of its rights or releasing Tenant from any of its obligations under this lease. (I) ESTOPPEL CERTIFICATE Tenant and Landlord agree from time to time after the Commencement Date, upon not less than five days' prior written request by either party, to execute, acknowledge and deliver to the other a statement in writing certifying that this lease is unmodified and in full force and effect; that Landlord and Tenant have completed their required work; that Tenant has no defenses, offsets or counterclaims against its obligations to pay the Fixed Rent and additional rent and to perform its other covenants under this lease; that there are no uncured defaults of Landlord or Tenant under this lease (or, if there have been any modifications, that this lease is in full force and effect as modified and stating the modifications, and, if there are any defenses, offsets, counterclaims, or defaults, setting them forth in reasonable detail); and the dates to which the Fixed Rent, additional rent and other charges have been paid. Any such statement delivered pursuant to this Section (I) may be relied upon by any prospective purchaser or mortgagee of premises which include the demised premises or any prospective assignee of any such mortgagee. (J) WAIVER OF SUBROGATION (1) Tenant hereby releases Landlord to the extent of Tenant's insurance coverage, from any and all liability for any loss or damage caused by fire or any of the extended coverage casualties or any other casualty insured against, even if such fire or other casualty shall be brought about by the fault or negligence of Landlord or its agents, provided, however this release shall be in force and effect only with respect to loss or damage occurring during such time as Tenant's policies covering such loss or damage shall contain a clause to the effect that this release shall not affect said policies or the right of Tenant to recover thereunder. Tenant agrees that -22- its fire and other casualty insurance policies will include such a clause so long as the same is includable without extra cost, or if extra cost is chargeable therefor, so long as Landlord pays such extra cost. If extra cost is chargeable therefor, Tenant will advise Landlord thereof and of the amount thereof. Landlord at its election, may pay the same, but shall not be obligated to do so. (2) Landlord hereby releases Tenant, to the extent of the Landlord's insurance coverage, from any and all liability for any loss or damage caused by fire or any of the extended coverage casualties or any other casualty insured against, even if such fire or other casualty shall be brought about by the fault or negligence of Tenant or its agents, provided, however, this release shall be in force and effect only with respect to loss or damage occurring during such time as Landlord's policies covering such loss or damage shall contain a clause to the effect that this release shall not affect said policies or the right of Landlord to recover thereunder. Landlord agrees that its fire and other casualty insurance policies will include such a clause so long as the same is includable without extra cost, or if extra cost is chargeable therefor, so long as Tenant pays such extra cost. If extra cost is chargeable therefor, Landlord will advise Tenant thereof and of the amount thereof. Tenant at its election may pay the same, but shall not be obligated to do so. (K) BROKERS Tenant and Landlord hereby represent and warrant to the other that other than Lynch, Murphy, Walsh & Partners and Boston Real Estate Partners ("the Brokers") they have dealt with no other broker in connection with this lease and there are no other brokerage commissions or other finders' fees payable in connection herewith. Tenant hereby agrees to hold Landlord harmless from, and indemnified against, all loss or damage (including without limitation, the cost of defending the same) arising from any claim by any broker claiming to have dealt with Tenant. Landlord hereby agrees to hold Tenant harmless from, and indemnified, against all loss or damage (including without limitation, the cost of defending the same) arising from any claim by any broker claiming to have dealt with Landlord. Landlord shall pay the commission due the Brokers by separate agreement. (L) LANDLORD'S DEFAULTS Landlord shall not be deemed to have committed a breach of any obligation to make repairs or alterations or perform any other act unless: (1) it shall have made such repairs or alterations or performed such other act negligently; or (2) it shall have received notice from Tenant designating the particular repairs or alterations needed or the other act of which there has been failure of performance and shall have failed to make such repairs or alterations or performed such other act within a reasonable time after the receipt of such notice; and in the latter event Landlord's liability shall -23- be limited to the cost of making such repairs or alterations or performing such other act. (M) EFFECTIVENESS OF LEASE The submission of this lease for examination does not constitute a reservation of, or option for, the demised premises, and this lease becomes effective as a lease only upon execution and unconditional delivery thereof by both Landlord and Tenant. (N) HAZARDOUS MATERIALS Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Lot any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional rent if Tenant caused such release, or if Landlord has a reasonable basis to believe that Tenant caused a release of hazardous materials. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlords' request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the demised premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this lease from any release of hazardous materials on the demised premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the term of this lease. Landlord agrees that it shall indemnify, defend and hold Tenant harmless from and against any claims, suits, causes of action, costs and fees, including attorneys' fees, arising from or connected with any contamination, claim of contamination, loss or damage, including without limitation the cost of treating in order to confirm the presence, containment and/or removal of such oil, materials or waste brought onto the Lot or into the Building prior to the date of this lease. -24- ARTICLE XI SECURITY DEPOSIT 11. Simultaneously with the execution of this lease, Tenant shall deliver to Landlord as security for the payment of the rents and the performance and observance of the agreements and conditions in this lease combined on the part of Tenant to be performed and observed, an irrevocable letter of credit from a bank approved by Landlord, such letter of credit to initially be in the amount of $92,000.00, and to expire not earlier than the thirtieth (30th) day after the expiration of the Term of this lease. Said letter of credit shall expressly state that it is assignable by landlord to any subsequent holder of the landlord's interest in this lease (including, without limitation, the holder of any mortgage upon the Shopping Center). Said letter of credit shall provide that Landlord may draw against the same upon the presentation to the bank of Landlord's draft and a certification on behalf of Landlord that Tenant is in default in the payment of any rents and/or the performance and observance of any of the agreements and conditions in this lease contained on the part of Tenant to be performed and observed. There shall be no other conditions whatsoever to Landlord's right to draw against said letter of credit. Landlord agrees that provided Tenant is not in default beyond any applicable cure period in the payment of rents and the performance and observance of the agreements and conditions in this lease contained on the part of Tenant to be performed and observed, said letter of credit may be replaced, commencing on the thirteenth (13th) month of the Term by a letter of credit in the amount of Sixty Nine Thousand Dollars ($69,000.00); and provided Tenant is not in default, as aforesaid, beyond any applicable cure period, said replacement letter of credit may also be replaced, commencing with the twenty fifth (25th) month of the Term, by a letter of credit in the amount of Forty-Six Thousand Dollars ($46,000.00). Each replacement letter of credit shall be in the form of the original letter of credit. It is understood and agreed that Landlord shall always have the right to draw down on said letter of credit, or any part thereof, as aforesaid in the event of any such default or defaults, without prejudice to any other remedy or remedies which Landlord may have, or Landlord may pursue any other such remedy or remedies in lieu of drawing down on the letter of credit. If Landlord shall draw down on said letter of credit or any part thereof as aforesaid, Tenant shall upon demand replace the letter of credit with a letter of credit in the original amount. ARTICLE XII MODIFICATION 12. In the event that any holder or prospective holder of any mortgage which includes the demised premises as part of the mortgaged premises, shall request any modification of any of the provisions of this lease, other than a provision which unreasonably modifies Tenant's rights hereunder or which are directly related to the rents or other charges payable hereunder, the duration of the Term hereof, or -25- the size, use or location of the demised premises, Tenant agrees that Tenant will enter into an amendment of this lease containing each such modification so requested. EXECUTED as a sealed instrument in two or more counterparts as of the day and year first above written. LANDLORD: BerCar II LLC, BY ITS MANAGERS: ALTID ENTERPRISES LIMITED PARTNERSHIP By /s/ Raymond A. Carye ---------------------------- Raymond A. Carye, General Partner By /s/ Barbara F. Carye ---------------------------- Barbara F. Carye, General Partner BERKELEY INVESTMENTS, INC. By /s/ Young K. Park ---------------------------- Young K. Park, President TENANT: SYCAMORE NETWORKS, INC. By /s/ Daniel Smith ---------------------------- ATTEST: By /s/ John Dowling ---------------------------- (Corporate Seal) -26- EXHIBIT A PLAN EXHIBIT B INTENTIONALLY OMITTED EXHIBIT C INTENTIONALLY OMITTED EXHIBIT D LANDLORD'S SERVICES Landlord shall cause the paved portions of the Lot and sidewalks to be kept reasonably free and clear of snow, ice and refuse and shall cause the landscaped areas (if any) of the Lot to be maintained in a reasonably attractive appearance. EXHIBIT E RULES AND REGULATIONS 1. The sidewalks, paved and/or landscaped areas shall not be obstructed or encumbered by Tenant or used for any purpose other than ingress and egress to and from the demised premises. 2. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the demised premises or Building so as to be visible from outside the demised premises without the prior written consent of Landlord. All such signs shall comply with the sign criteria set forth in Exhibit G attached to this lease and made a part hereof. In the event of the violation of this paragraph, Landlord may remove same without any liability, and may charge the expense incurred in such removal to Tenant, as additional rent. 3. No awnings, curtains, blinds, shades, screens or other projections shall be attached to or hung in, or used in connection with, any window of the demised premises or any outside wall of the Building without the prior written consent of Landlord. Such awnings, curtains, blinds, shades, screens or other projections must be of a quality, type, design and color, and attached in the manner, approved by Landlord. If any portion of the demised premises which is not used for office purposes shall have windows, such windows shall be equipped with curtains, blinds or shades approved by Landlord, and said curtains, blinds or shades shall be kept closed at all times. 4. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed and constructed, and no sweepings, rubbish, rags, acids, chemicals, process water, cooling water or like substances shall be deposited therein. Said plumbing fixtures and the plumbing system of the Building shall be used only for the discharge of so-called sanitary waste. All damage resulting from any misuse of said fixtures and/or plumbing system by Tenant or anyone claiming under Tenant shall be borne by Tenant. 5. Tenant must, upon the termination of its tenancy, return to Landlord all locks, cylinders and keys to the demised premises and any offices therein. 6. Tenant shall keep any sidewalks and planters in front of the demised premises reasonably free and clear of litter and refuse regardless of the source thereof, in the event that litter and/or refuse shall be deposited thereon between the times of Landlord's regularly scheduled maintenance of said sidewalks and planters. 7. Tenant shall, at Tenant's expense, provide artificial light and electric current for the employees of Landlord and/or Landlord's contractors while making repairs or alterations in the demised premises. 8. Tenant shall not make, or permit to be made, any unseemly or disturbing odors or noises or disturb or interfere with occupants of the Building or those having business with them, whether by use of any musical instrument, radio, machine, or in any other way. 9. Canvassing, soliciting, and peddling in the Building are prohibited and Tenant shall cooperate to prevent the same. 10. Tenant shall keep the demised premises free at all times of pests, rodents and other vermin, and Tenant shall keep all trash and rubbish stored in containers of a type approved by Landlord, such containers to be kept at locations designated by Landlord. Tenant shall cause such containers to be emptied whenever necessary to prevent them from overflowing or from producing any objectionable odors. 11. Landlord reserves the right to rescind, alter, waive and/or establish any rules and regulation, which, in its judgment, are necessary, desirable or proper for its best interests and the best interests of the occupants of the Building. 12. The access roads, driveways, entrances and exits shall not be obstructed or encumbered by Tenant or used for any purpose other than ingress and egress. EXHIBIT F LEGAL DESCRIPTION OF LOT Beginning at an iron rod at the northeasterly corner of the herein described premises, which point is the southeasterly corner of the land described in a deed given by Orion L. Woodbury et al to New England Power Company, dated May 28, 1954, and recorded with Middlesex North District Deeds, Book 1257, Page 510; thence running south 78 degrees 30 feet west by land of said New England Power Company, sixteen hundred ninety-seven and 72/100 (1,697.72) feet to a stone bound; July 29, 1999 thence running south 80 degrees 15 feet west by said New England Power Company land, four hundred ninety-seven and 1/10 (497.1) feet to a pipe at land now or formerly of Edward B. Russell; thence running southerly by said Russell land, five hundred forty-six and 6/10 (546.6) feet to a stone bound at land now or formerly of Frank A. P. Coburn; thence running easterly along said Coburn land to a stake and stones; thence running south 15 degrees east, two hundred forty-seven and 5/10 (247.5) feet to a stone bound; thence running south 65 1/2 degrees east, ninety and 75/100 (90.75) feet to a stone bound; thence running north 60 degrees east, seventeen hundred thirty-two and 5/10 (1,732.5) feet to said Mill Road; thence running northerly along said Road to the point of beginning. EXHIBIT G SIGN CRITERIA EX-23.1 11 CONSENT OF PRICE WATERHOUSE Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated July 29, 1999, relating to the financial statements of Sycamore Networks, Inc., which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts August 5, 1999 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 1,000 7-MOS 9-MOS JUL-31-1998 JUL-31-1999 FEB-17-1998 AUG-01-1998 JUL-31-1998 MAY-01-1999 1,197 23,406 3,082 2,931 0 0 0 0 0 6,220 4,479 32,904 527 4,822 27 431 5,081 37,502 138 6,178 0 666 5,621 40,771 0 0 2 5 (680) (10,118) 5,081 37,502 0 0 0 0 0 0 0 0 793 10,591 0 0 0 0 (693) (10,103) 0 0 (693) (10,103) 0 0 0 0 0 0 (693) (10,103) (1.66) (15.66) (1.66) (15.66)
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