-----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, MFdJQyFy93z2zeuGbTJpAyY3dGJPZYGRg5Bsy3LoOQ9KxC5aIRMK3iCcb8SmoRE8 Bll1/socFqg2O0lhofxpzA== 0000927016-99-003308.txt : 19990928 0000927016-99-003308.hdr.sgml : 19990928 ACCESSION NUMBER: 0000927016-99-003308 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCAMORE NETWORKS INC CENTRAL INDEX KEY: 0001092367 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 043410558 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-84635 FILM NUMBER: 99717226 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/A 1 AMENDMENT #2 As filed with the Securities and Exchange Commission on September 24, 1999 Registration No. 333-84635 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Amendment No. 2 to 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 Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification Number) incorporation or organization) --------------- 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, ESQ. WILLIAM B. ASHER, JR., JEFFREY A. STEIN, ESQ. GENERAL COUNSEL ESQ. HALE AND DORR LLP SYCAMORE NETWORKS, INC. TESTA, HURWITZ & 60 State Street 10 Elizabeth Drive THIBEAULT, LLP Boston, MA 02109 Chelmsford, MA 01824 125 High Street Telephone: (617) 526-6000 Telephone: (978) 250-2900 Boston, MA 02110 Telecopy: (617) 526-5000 Telecopy: (978) 256-3434 Telephone: (617) 248-7000 Telecopy: (617) 248-7100 --------------- 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. [_] --------------- 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 6,500,000 Shares COMMON STOCK ----------- Sycamore Networks, Inc. is offering 6,500,000 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 $18.00 and $20.00 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 7. ----------- 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 975,000 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 Gate has a center title: The Evolution of The Intelligent Optical Network. A graphic shows the progression of a transmission among various buildings through a system with our products. Below this is a horizontal line with the word "Rings" on the left and "Mesh" on the right. Two bars below that show the words Management on top and Adaptation, Transport and Switching, below. Inside front cover shows the back of a man working at a computer and Sycamore's products in the background. The following text appears over the products: The Art of Intelligent Optical Networking. TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 4 Risk Factors........................ 7 Special Note Regarding Forward- Looking Statements................. 17 Use of Proceeds..................... 18 Dividend Policy..................... 18 Capitalization...................... 19 Dilution............................ 20 Selected Financial Data............. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Page ---- Business......................... 29 Management....................... 39 Certain Transactions............. 47 Principal Stockholders........... 48 Description of Capital Stock..... 49 Shares Eligible for Future Sale.. 52 Underwriters..................... 54 Legal Matters.................... 56 Experts.......................... 56 Where You Can Find More Information..................... 56 Index to Financial Statements.... F-1
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. 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 networking products that transport voice and data traffic over wavelengths of light. Our products are designed to enable our customers to quickly and cost effectively create usable network capacity over existing fiber and thereby to create new high speed data services. Our target customers are new and established providers of local voice and data transport services, long distance carriers, Internet service providers, cable operators, foreign telephone companies and carriers who provide services to other carriers, all of which we refer to as service providers. These companies may provide such high speed data services as access to the Internet, high speed data connections between company sites, video conferencing and remote access to corporate databases. We believe that the existing public network is unable to meet the demand for high speed data transport services that are driving network growth. As data traffic on the public network continues to grow at rates that surpass available network capacity, we believe that service providers will require new solutions to relieve network congestion and create new data services. We call our products intelligent optical networking products because they are designed to transmit and manage data directly on wavelengths of light, for transmission over fiber optic cable. This will improve the efficiency of the network, because data can be moved across the network and managed entirely in the optical medium. In contrast, the existing public network is based on a transmission technology, known as SONET/SDH, which requires optical signals travelling across the network to be converted into electrical signals at each network transit point, and then re-converted into optical signals for transport to the next transit point. The multiple conversions required in a SONET/SDH network increase network complexity and cost. Our products are based on a common software architecture that we believe has a number of significant benefits, including accelerating our release of new products and enabling our customers to upgrade their networks without significant new capital equipment or retraining. Prior to May 1999, we were a development stage company principally engaged in research and development. We shipped our first product in May 1999, and all of our revenues to date have been from sales of this product to one customer, Williams Communications. We have incurred significant losses since our inception and as of July 31, 1999 we had an accumulated deficit of $20.2 million. Our products are designed to address the current and future needs of service providers by offering an end-to-end optical networking solution that provides the following benefits: . Improves Network Flexibility and Scalability. Our software-based equipment is designed to allow service providers to improve the flexibility and the ability to expand their networks without the long lead times and large initial capital investment presently required for a network buildout. . Enables Rapid Service Delivery. Our products are designed to shorten the time it takes for service providers to increase bandwidth and provide services. . Facilitates Introduction of New Data Services and Creation of New Revenue Opportunities for Service Providers. The software-based intelligence of our products allows us to rapidly introduce new features into our products, which can in turn be offered as new services by service providers to their customers. . 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 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. THE OFFERING Common stock offered............ 6,500,000 shares Common stock to be outstanding after this offering............. 77,056,337 shares 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 symbol.......................... "SCMR"
The above information is based upon the number of shares of common stock outstanding as of July 31, 1999 and excludes 1,686,300 shares of common stock issuable upon exercise of outstanding options at an average exercise price of $1.36 per share and 18,638,700 shares of common stock reserved for future issuance under our stock plan as of July 31, 1999. 5 SUMMARY FINANCIAL DATA (in thousands, except per share data)
Period from Inception (February 17, 1998) Year Ended through July 31, 1998 July 31, 1999 --------------------- ------------- Statement of Operations Data: Revenues................................... $ -- $ 11,330 Total operating expenses................... 793 22,893 Loss from operations....................... (793) (20,049) Net loss................................... (693) (19,490) Pro forma basic and diluted net loss per share (unaudited)......................... $ (.04) $ (.51) Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)......................... 18,756 38,145
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 5,256,000 and 12,087,000 for the period from inception (February 17, 1998) through July 31, 1998 and year ended July 31, 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, the sale of the 6,500,000 shares of common stock in this offering at an assumed initial public offering price of $19.00, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the anticipated application of the estimated net proceeds.
As of July 31, 1999 -------------------- Pro Forma Actual as Adjusted ------- ----------- Balance Sheet Data: Cash, cash equivalents and marketable securities........... $28,989 $137,693 Working capital............................................ 40,450 150,251 Total assets............................................... 57,912 166,616 Long-term obligations, less current portion................ 4,054 -- Redeemable convertible preferred stock..................... 55,771 -- Total stockholders' equity (deficit)....................... (13,623) 156,003
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 47,283,225 shares of common stock upon the closing of the offering; . reflects a 3-for-1 stock split of the common stock effected in August 1999; 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." 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. 6 RISK FACTORS This offering and an investment in our common stock involve a high degree of risk. You should consider carefully the risks described below before you decide to buy our common stock. Risks Related to Our Business We Expect That Substantially All Of Our Revenues Will Be Generated From A Limited Number Of Customers And Our Revenues Will Not Grow If We Do Not Successfully Sell Products To These Customers We currently have 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 current or prospective customers to purchase products from us for any reason, including any determination not to install our products in their networks or downturn in their business, would seriously harm our ability to build a successful business. We Have Been In Business For A Short Period Of Time And Your Basis For Evaluating Us Is Limited We were founded in February 1998 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 July 31, 1999, we had an accumulated deficit of $20.2 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 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. 7 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 Will Not Be Successful If We Do Not Grow Our Customer Base Beyond Our Initial One Customer Our future success will depend on our attracting additional customers beyond our initial one customer. The growth of our customer base could be adversely affected by: . customer unwillingness to implement our new optical networking architecture; . any delays or difficulties that we may incur in completing the development and introduction of our planned products or product enhancements; . new product introductions by our competitors; . any failure of our products to perform as expected; or . any difficulty we may incur in meeting customers' delivery requirements. 8 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. If We Do Not Respond Rapidly To Technological Changes, Our Products Could Become Obsolete The market for intelligent optical networking products is likely to be characterized by rapid technological change, frequent new product introductions and changes in customer requirements. We may be unable to respond quickly or effectively to these developments. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products and enhancements. The introduction of new products by competitors, market acceptance of products based on new or alternative technologies or the emergence of new industry standards, could render our existing or future products obsolete. In developing our products, we have made, and will continue to make, assumptions about the standards that may be adopted by our customers and competitors. If the standards adopted are different from those which we have chosen to support, market acceptance of our products may be significantly reduced or delayed and our business will be seriously harmed. In addition, the introduction of products incorporating new technologies and the emergence of new industry standards could render our existing products obsolete. In addition, in order to introduce products incorporating new technologies and new industry standards, we must be able to gain access to the latest technologies of our customers, our suppliers and other network vendors. Any failure to gain access to the latest technologies could impair the competitiveness of our products. Customer Requirements Are Likely To Evolve, And We Will Not Retain Customers or Attract New Customers If We Do Not Anticipate And Meet Specific Customer Requirements Our current and prospective customers may require product features and capabilities that our current products do not have. To achieve market acceptance for our products, we must effectively and timely anticipate and adapt to customer requirements and offer products and services that meet customer demands. Our failure to develop products or offer services that satisfy customer requirements would seriously harm our ability to increase demand for our products. We intend to continue to invest in product and technology development. The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. The introduction of new or enhanced products also requires that we manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Our inability to effectively manage this transition would cause us to lose current and prospective customers. Our Market Is Highly Competitive, And Our Failure To Compete Successfully Would Limit Our Ability to Increase Our Market Share Competition in the public network infrastructure market is intense. This market has historically been dominated by large companies, such as 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 9 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. We Are Likely To Face Difficulties In Obtaining And Retaining Customers If We Do Not Expand Our Sales Organization And Our Customer Service And Support Operations Our products and services require a sophisticated sales effort targeted at a limited number of key individuals within our prospective customers' organizations. This effort requires specialized sales personnel and consulting engineers. We are in the process of building our direct sales force and plan to hire additional qualified sales personnel and consulting engineers. Competition for these individuals is intense, and we might not be able to hire 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 expand our customer service and support organization and train them rapidly, we may not be able to increase sales of our products. We Depend Upon Contract Manufacturers And Any Disruption In These Relationships May Cause Us To Fail To Meet The Demands Of Our Customers And Damage Our Customer Relationships We 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 10 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. The Unpredictability Of Our Quarterly Results May Adversely Affect The Trading Price Of Our Common Stock Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: . fluctuation in demand for intelligent optical networking products; . the timing and size of sales of our products; . the length and variability of the sales cycle for our products; . the timing of recognizing revenue and deferred revenue; . new product introductions and enhancements by our competitors and ourselves; . changes in our pricing policies or the pricing policies of our competitors; . our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; . our ability to obtain sufficient supplies of sole or limited source components; . increases in the prices of the components we purchase; . our ability to attain and maintain production volumes and quality levels for our products; . the timing and level of prototype expenses; . costs related to acquisitions of technology or businesses; and . general economic conditions as well as those specific to the telecommunications, Internet and related industries. 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 11 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 Result In Delays or Loss of Market Acceptance of Our Products Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. We expect that errors will be found from time to time in new or enhanced products after we begin commercial shipments. In addition, service providers typically use our products in conjunction with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely have a material adverse effect on our business, results of operations and financial condition. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers or could damage market acceptance for our products. Our customers could also seek damages for losses from us. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly. Our Failure To Establish And Maintain Key Customer Relationships May Result In Delays In Introducing New Products Or Cause Customers To Forego Purchasing Our Products Our future success will also depend upon our ability to develop and manage key customer relationships in order to introduce a variety of new products and product enhancements that address the increasingly sophisticated 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. 12 Our Failure To Improve Our Internal Controls And Systems, And Hire Needed Personnel, Could Impair Our Future Growth We have expanded our operations rapidly since our inception. We continue to increase the scope of our operations and have grown our headcount substantially. For example, at January 31, 1999, we had a total of 48 employees and at September 1, 1999, we had a total of 173 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 and reporting systems, and will need to continue to expand, train and manage our work force worldwide. We may not be able to implement adequate control systems in an efficient and timely manner. Competition for highly skilled personnel is intense, especially in the New England area. Any failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth. We Depend On Our Key Personnel To Manage Our Business Effectively In A Rapidly Changing Market And If We Are Unable To Retain Our Key Employees, Our Ability To Compete Could Be Harmed Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing and support personnel, who have critical industry experience and relationships that we rely on to implement our business plan. None of our officers or key employees is bound by an employment agreement for any specific term. We do not have "key person" life insurance policies covering any of our employees. The loss of the services of any of our key employees could delay the development and introduction of, and negatively impact our ability to sell, our products. If We Become Subject To Unfair Hiring Claims We Could Incur Substantial Costs In Defending Ourselves Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We cannot assure you that we will not receive claims of this kind in the future as we seek to hire qualified personnel or that those claims will not result in material litigation. We could incur substantial costs in defending ourselves or our employees against such claims, regardless of their merits. In addition, defending ourselves 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 Ability To Compete Could Be Jeopardized If We Are Unable To Protect Our Intellectual Property Rights From Third-Party Challenges We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. If Necessary Licenses Of Third-Party Technology Are Not Available To Us Or Are Very Expensive, Our Products Could Become Obsolete From time to time we may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third party licenses will be available to us on commercially 13 reasonable terms, if at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm the competitiveness of our products. We Could Become Subject To Litigation Regarding Intellectual Property Rights, Which Could Seriously Harm Our Business And Require Us To Incur Significant Costs In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Although we have not been involved in any intellectual property litigation, we may be a party to litigation in the future to protect our intellectual property or as a result of an allegation that we infringe others' intellectual property. Any parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following: . stop selling, incorporating or using our products that use the challenged intellectual property; . obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or . redesign those products that use such technology. If we are forced to take any of the foregoing actions, our business may be seriously harmed. We May Face Risks Associated With Our International Expansion That Could Impair Our Ability To Grow Our Revenues Abroad We intend to 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. 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 That Could Result In Claims Against Us Or Impair The Use Of Our Products By Our Customers The year 2000 computer issue creates a variety of risks for us. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This 14 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. 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; 15 . 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. 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. 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 65% of our outstanding common stock following the completion of this 16 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. 17 USE OF PROCEEDS We estimate that our net proceeds from the sale of the 6,500,000 shares of common stock will be approximately $113,855,000 assuming an initial public offering price of $19.00 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 $131,083,250. 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. Other than the amounts necessary to repay the outstanding indebtedness, no specific amounts have been allocated to any particular purpose. Our 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 .5% (8.5% at July 31, 1999) 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 .5% (8.5% at July 31, 1999) 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. 18 CAPITALIZATION The following table sets forth our capitalization as of July 31, 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 6,500,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $19.00 per share and the application of the estimated net proceeds we expect to receive from this offering. The outstanding share information excludes: (1) 1,686,300 shares of common stock issuable upon exercise of outstanding options as of July 31, 1999, and (2) 18,638,700 shares of common stock reserved for future issuance under our 1998 Stock Incentive Plan as of July 31, 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 July 31, 1999 ------------------------------- Pro Pro Forma Actual Forma as Adjusted -------- -------- ----------- (in thousands, except share data) (unaudited) Long-term debt, less current portion.......... $ 4,054 $ 4,054 $ -- -------- -------- -------- Redeemable convertible preferred stock, $.01 par value; 15,792,201 authorized, 15,761,075 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted.................... 55,771 -- -- -------- -------- -------- Stockholders' equity (deficit): Preferred Stock, $.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding on a pro forma basis............. -- -- -- Common stock, $.001 par value; 91,000,000 shares authorized, 23,273,112 shares issued and outstanding, actual; 70,556,337 shares issued and outstanding, on a pro forma basis; 250,000,000 shares authorized, 77,056,337 shares issued and outstanding, on a pro forma as adjusted basis............................ 23 71 77 Additional paid-in capital.................... 31,010 86,733 200,582 Accumulated deficit........................... (20,183) (20,183) (20,183) Notes receivable.............................. (360) (360) (360) Deferred compensation......................... (24,113) (24,113) (24,113) -------- -------- -------- Total stockholders' equity (deficit)........ (13,623) 42,148 156,003 -------- -------- -------- Total capitalization...................... $ 46,202 $ 46,202 $156,003 ======== ======== ========
19 DILUTION Sycamore's pro forma net tangible book value as of July 31, 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 $42.1 million, or $.60 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 70,556,337 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 $19.00 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 July 31, 1999 would have been $156.0 million, or $2.02 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $1.42 per share and an immediate dilution to new investors of $16.98 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share $19.00 Pro forma net tangible book value per share before this offering....................................................... $ .60 Increase in pro forma net tangible book value per share attributable to new investors.................................. 1.42 ----- Pro forma net tangible book value per share after this offering... 2.02 ------ Dilution per share to new investors............................... $16.98 ======
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 July 31, 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 $19.00 per share before deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by Sycamore):
Average Shares Purchased Total Consideration Price ------------------ -------------------- Per Number Percent Amount Percent Share ---------- ------- ------------ ------- ------- Existing stockholders........... 70,556,337 91.6% $ 58,733,000 32.2% $ .83 New investors................... 6,500,000 8.4 123,500,000 67.8 19.00 ---------- ----- ------------ ----- Total......................... 77,056,337 100.0% $182,233,000 100.0% ===== =====
The table above assumes no exercise of stock options outstanding at July 31, 1999. As of July 31, 1999, there were options outstanding to purchase 1,686,300 shares of common stock at a weighted average exercise price of $1.36 per share and 18,638,700 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 July 31, 1999, net tangible book value per share after this offering would be $2.01 and total dilution per share to new investors would be $16.99. If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to 7,475,000 shares, or 9.6% of the total number of shares of common stock outstanding after this offering. 20 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 year ended July 31, 1999 and the balance sheet data as of July 31, 1998 and 1999 are derived from the financial statements of Sycamore audited by PricewaterhouseCoopers LLP, independent accountants, which are included elsewhere in this prospectus.
Period from inception (February 17, Year 1998) through ended July 31, 1998 July 31, 1999 ------------- ------------- (in thousands, except per share data) Statement of Operations Data: Revenues.......................................... $ -- $ 11,330 Cost of revenues.................................. -- 8,486 ------ --------- Gross profit.................................... -- 2,844 Operating expenses: Research and development........................ 497 13,955 Sales and marketing............................. 92 4,064 General and administrative...................... 199 1,405 Amortization of stock compensation.............. 5 3,469 ------ --------- Total operating expenses...................... 793 22,893 ------ --------- Loss from operations.............................. (793) (20,049) Interest income, net.............................. 100 559 ------ --------- Net loss.......................................... $ (693) $ (19,490) ====== ========= Basic and diluted net loss per share.............. $ (.55) $ (6.27) Weighted average shares used in computing basic and diluted net loss per share................... 1,251 3,108 Pro forma basic and diluted net loss per share (unaudited)...................................... $ (.04) $ (.51) Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)................... 18,756 38,145 As of As of July 31, 1998 July 31, 1999 ------------- ------------- (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities.. $4,279 $ 28,989 Working capital................................... 4,341 40,450 Long term debt, less current portion.............. -- 4,054 Redeemable convertible preferred stock............ 5,621 55,771 Total stockholders' deficit....................... (678) (13,623)
- -------- 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. 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. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We develop and market networking products that allow service providers to address customer requirements for high-speed data services and bandwidth. From our inception on February 17, 1998 through July 31, 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 and recognized revenues of $11.3 million from shipments of our SN 6000 product in the fourth quarter of 1999. 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 July 31, 1999, we had an accumulated deficit of $20.2 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 product sales upon shipment provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the fee is fixed and determinable and collectibility is deemed probable. If uncertainties regarding customer acceptance exist, revenue is recognized when uncertainties are resolved. Revenue from technical support and maintenance contracts is deferred and recognized ratably over the period of the related agreements. The Company records a warranty liability for parts and labor on its products. Warranty periods are generally three years from installation date. Estimated warranty costs are recorded at the time of revenue recognition. 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 performed at our facility in Chelmsford, Massachusetts. We believe that our gross margins will be affected primarily by the following factors: . demand for our products; . new product introductions both by us and by our competitors; . changes in our pricing policies and those of our competitors; . the mix of product configurations sold; and . the volume of manufacturing and the effect on manufacturing and component costs. Research and development expenses consist primarily of salaries and related personnel costs, prototype costs and other costs related to the design, development, testing and enhancement of our products. To date, we have expensed our research and development costs as they were incurred. Several components of our research and development effort require significant expenditures, the timing of which can cause significant quarterly variability in our expenses. We incur significant expenses in connection with the purchase of testing equipment for our products. We believe that research and development is critical to our strategic product development objectives and intend to enhance our technology to meet the changing requirements of our customers. As a result, we expect our research and development expenses to increase in absolute dollars in the future. Sales and marketing expenses consist primarily of salaries and the related personnel costs of sales and marketing personnel, commissions, promotional, travel and other marketing expenses and recruiting expenses. 22 We expect that sales and marketing expenses will increase in absolute dollars in the future as we increase our direct sales efforts, expand our operations internationally, hire additional sales and marketing personnel, initiate additional marketing programs and establish sales offices in new locations. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, legal, facilities, human resources and information technology personnel, recruiting expenses and professional fees. We expect that general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and our operation as a public company. In connection with the granting of certain stock options and the issuance of certain restricted shares during the period from inception through July 31, 1998 and the year ended July 31, 1999, we recorded deferred stock compensation expense of approximately $184,000 and $25.3 million, respectively. Deferred stock compensation expense consists of charges resulting from the granting of stock options and restricted shares with exercise or sales prices deemed to be below the fair value of our common stock on the date of grant. These amounts are being amortized ratably over the vesting periods of the applicable options or restricted stock, which are typically five years, with 20% vesting on the first anniversary of the date of grant and 5% vesting quarterly thereafter. The Company expects to record an additional deferred compensation expense of approximately $23.7 million for 2,337,696 stock options granted at exercise prices, ranging from $4.00 to $10.00, which are deemed to be below fair market value from August 1, 1999 through September 17, 1999. Such grants have been made on terms consistent with those described in footnote 6 to the financial statements. As a result, deferred compensation expense at September 17, 1999 is approximately $47.8 million. The Company expects to continue to grant options at exercise prices deemed to be below the fair market value through the closing of this offering. Results of Operations Period from inception (February 17, 1998) through July 31, 1998 (fiscal 1998) and the year ended July 31, 1999. Revenues We began shipping the SN 6000 in May 1999 and recognized $11.3 million of revenue in the three-month period ended July 31, 1999. All revenue was derived from the shipments of the SN 6000 product. For the year ended July 31, 1999, one customer accounted for all of our revenue. Costs of Revenues Costs of revenues were $8.5 million, or 75% of revenue, for the year ended July 31, 1999. We began shipping the SN 6000 in May 1999. Costs of revenues as a percentage of revenue in 1999 were higher than they are anticipated to be in the future due to the high cost of initial start-up of production, including the increase in personnel and the low volume of sales. Research and Development Expenses Research and development expenses were $497,000 for fiscal 1998 and $14.0 million for fiscal 1999 and represented 63% and 61% of total operating expenses for fiscal 1998 and 1999, respectively. The increase in expenses was primarily due to increased costs associated with a significant increase in personnel and personnel-related expenses, an increase in non-recurring engineering costs and an increase in prototype expenses for the design and development of the SN 6000, SN 8000 and SN 16000 products. Research and development is essential to our future success and we expect that research and development expenses will increase in absolute dollars in future periods. 23 Sales and Marketing Expenses Sales and marketing expenses were $92,000 for fiscal 1998 and $4.1 million for fiscal 1999 and represented 12% and 18% of total operating expenses in fiscal 1998 and 1999, respectively. The increase in expenses reflects the hiring of additional sales and marketing personnel, sales based commissions and marketing program costs, including web development, trade shows and product launch activities. We intend to continue to expand our domestic and international sales force and marketing efforts and as a result expect sales and marketing expenses will increase in absolute dollars in future periods. General and Administrative Expenses General and administrative expenses were $199,000 for fiscal 1998 and $1.4 million for fiscal 1999 and represented 25% and 6% of total operating expenses in fiscal 1998 and 1999, respectively. The increase in expenses reflects the hiring of additional general and administrative personnel and expenses necessary to support and scale our operations. Amortization of Stock Compensation Amortization of stock compensation expense was $5,000 and $1.4 million for fiscal 1998 and fiscal 1999, respectively. Amortization of stock compensation expense in fiscal 1998 resulted from the granting of stock options and restricted shares with the exercise or sales prices below the deemed fair value of our common stock on the date of grant. Additionally, in 1999, we incurred $2.1 million of compensation expense associated with the grant of options to non-employees and members of our advisory boards. Interest Income, Net Interest income, net was $100,000 and $559,000 for fiscal 1998 and fiscal 1999, respectively. Interest income consists of interest earned on our cash balances and marketable securities and interest expense associated with our equipment note payable. The increase in interest income reflects higher invested balances in 1999, offset by interest payments on our equipment note payable in 1999. Net Operating Losses and Tax Credit Carryforwards As of July 31, 1999, we had approximately $16.6 million of state and federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income. Such net operating loss carryforwards begin to expire in 2004 and 2019, respectively, to the extent that they are not utilized. 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. 24 Quarterly Results of Operations The following table presents our operating results for the quarters ended October 31, 1998, January 30, 1999, May 1, 1999 and July 31, 1999. In May 1999, we began shipping the SN 6000. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements appearing elsewhere in this prospectus. In the opinion of management, all necessary adjustments consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited financial statements and the related notes appearing elsewhere in this prospectus. These operating results are not necessarily indicative of the results of any future period.
Quarter Ended ---------------------------------------- July October 31, January 30, May 1, 31, 1998 1999 1999 1999 ----------- ----------- ------- ------- (in thousands) (unaudited) Consolidated Statement of Operations Data: Revenues............................ $ -- $ -- $ -- $11,330 Costs of revenues................... 24 215 934 7,313 ------- ------- ------- ------- Gross profit (loss)............... (24) (215) (934) 4,017 ------- ------- ------- ------- Operating expenses: Research and development............ 873 2,365 3,334 7,383 Sales and marketing................. 179 243 1,176 2,466 General and administrative.......... 93 280 379 653 Amortization of stock compensation.. 75 135 592 2,667 ------- ------- ------- ------- Total operating expenses.......... 1,220 3,023 5,481 13,169 ------- ------- ------- ------- Loss from operations................ (1,244) (3,238) (6,415) (9,152) Interest income, net................ 60 133 295 71 ------- ------- ------- ------- Net loss............................ $(1,184) $(3,105) $(6,120) $(9,081) ======= ======= ======= =======
Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: . fluctuation in demand for intelligent optical networking products; . the timing and size of sales of our products; . the length and variability of the sales cycle for our products; . the timing of recognizing revenue and deferred revenue; . new product introductions and enhancements by our competitors and ourselves; . changes in our pricing policies or the pricing policies of our competitors; . our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; . our ability to obtain sufficient supplies of sole or limited source components; . increases in the prices of the components we purchase; . our ability to attain and maintain production volumes and quality levels for our products; . the timing and level of prototype expenses; . costs related to acquisitions of technology or businesses; and 25 . 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. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private sales of our capital stock totaling approximately $58.7 million in net proceeds through July 31, 1999. We have also financed our operations through borrowings on long-term debt agreements for the purchase of capital equipment. At July 31, 1999, cash, cash equivalents and marketable securities totaled $29.0 million. Cash used in operating activities was $598,000 for fiscal 1998 and $27.6 million for the year ended July 31, 1999. The increase in cash used for operating activities reflects increases in net losses, accounts receivables, inventory purchases and irrevocable standby letters of credit, offset by non cash charges for amortization of stock compensation and depreciation and increased accounts payable and accrued expenses, reflecting the growth in business activity. Cash used in investing activities was $3.7 million for fiscal 1998 and $4.9 million for the year ended July 31, 1999. The increase in net cash used for investing activities reflects increased purchases of property and equipment, primarily for computers and test equipment for our development and manufacturing activities. The increases in 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 $53.2 million for the year ended July 31, 1999. The increase in cash provided by financing activities reflects the private sales of redeemable convertible preferred stock and the issuance of common stock from the exercise of stock options and the sale and issuance of restricted common stock. In December 1998, as collateral for an office facility lease, the Company has issued an irrevocable stand-by letter of credit for $92,000 which is collateralized by a U.S. Treasury Bill. The letter of credit is irrevocable and expires in January 2002. In July 1999, as collateral for inventory purchases made by a third party manufacturer on behalf of the Company, the Company has issued a guaranteed stand-by letter of credit for $4,000,000 which is collateralized by a U.S. Government security. The letter of credit is irrevocable and expires in October 1999. 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 the next 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 through the issuance of debt securities, these 26 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 complaint. 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-complaint 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 complaint 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. 27 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. Adoption of this standard did not have a material impact on our financial condition or result 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. 28 BUSINESS Overview We develop and market software-based intelligent optical networking products that enable network service providers to quickly and cost-effectively provide bandwidth and create new high speed data services. We believe that the existing public network is unable to meet the demands of high speed data applications that are driving network growth. As data traffic on the public network continues to grow at rates that surpass available network capacity, we believe that service providers require new solutions to relieve network congestion and create new data services. Our intelligent optical networking products are designed to allow service providers to deploy, manage and optimize the performance of their fiber optic networks. Our products are based on a common software architecture that we believe will accelerate our release of new products and enable our customers to upgrade with minimal network impact and operator training. We have designed our products to protect service providers' existing investment in fiber optic and transmission equipment and provide a migration path to the next generation optical public network infrastructure. Industry Background Increase in Data Traffic on the Public Network Over the past decade, the volume of high speed data traffic across the public network has grown significantly, reflecting the increasing use of the network for Internet access, electronic mail communications, electronic commerce, remote access by telecommuters and other network data transmission services. According to Ryan, Hankin & Kent, a leading market research and consulting firm, public network bandwidth will have to increase by over 2000% between 1998 and 2002 to satisfy expected Internet and other data traffic requirements. To meet the growth in the demand for high speed data services, service providers are investing significantly to upgrade the public network infrastructure, which was originally built for voice traffic. Service providers are laying fiber optic cable and installing transmission equipment which transforms the fiber from available capacity to usable bandwidth by lighting the fiber. According to Ryan, Hankin & Kent, more than $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. 29 In the current public network transmission infrastructure, the ability to manage data resides in the SONET/SDH equipment which converts the data traffic from an electrical signal to an optical signal which is transmitted over the fiber. The optical fiber itself is only a physical transmission medium with no imbedded intelligence. As a result, moving data through the network involves the following complex processes that add cost and make scaling difficult: . Traffic enters the network as an electrical signal and is converted by the SONET/SDH equipment into an optical signal for transmission across the network; . At each network transit point, the optical data traveling across the network is terminated at a SONET/SDH network terminal; . The optical data is then converted into an electrical signal and examined to see which portions of the data are to be extracted from the network at that transit point; and . The data is then converted back to an optical signal by the SONET/SDH equipment for transport to the next network transit point, where the process is repeated. 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. 30 Data traffic will typically transit through multiple SONET/SDH rings when traversing the public network. In addition, in SONET/SDH networks, up to 50% of network capacity must be reserved to provide alternative routing for traffic in the event of a network outage. This redundancy, and the numerous optical-to-electrical-to-optical conversions within each ring and between rings, create a costly and complex network architecture. As a result of these limitations, the buildout of a SONET/SDH network generally requires lengthy time commitments and significant initial equipment investment by service providers. In today's competitive environment, long lead times for service provisioning and significant purchase commitments are often not compatible with the need of service providers to rapidly and cost- effectively deploy new services and be responsive to their customer demand. To manage the frequently unpredictable demand of data traffic, service providers need to move toward a "just-in-time" investment and service delivery model allowing them to introduce and expand services when and where needed in response to demand. The migration to a "just-in-time" model will require a public network architecture that is scalable, flexible and cost-effective and that is capable of supporting the anticipated growth in high speed data communications services. 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. 31 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 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 32 manufacturing techniques have advanced significantly and that, as a result, it is now possible to engage third party manufacturers to build our products without sacrificing quality or performance. Focus On Just-In-Time Implementation. Our product architecture strategy is to develop products that will enable service providers to expand and upgrade their networks in response to demand on a "just-in-time" basis. Our software- based product architecture is designed to help us achieve this goal. Our software capabilities support a modular "plug and play" hardware architecture which is designed to allow new and enhanced modules to be easily and nondisruptively inserted into the network as optical component technology advances. Capitalize On Extensive Industry Experience. We have significant management, engineering and sales experience in the networking and optics industries and long-standing relationships with key personnel in our target customer base. We believe that our experience and relationships will be important in enabling us to develop products to meet our customers' needs and to penetrate our target market. Products and Technology Product Architecture Our software-based intelligent optical networking products 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 33 continue to evolve their network without requiring the replacement of existing infrastructure. In addition, the architecture is designed to enable service providers to rapidly absorb new optical technology and functionality into the network with minimal effort, training and incremental investment. Software- based features such as topology discovery, system self-inventory and dynamic power balancing will allow service providers to quickly respond to customer needs. Additionally, advances in optical components, such as new lasers, filters, and amplifiers, can be quickly integrated within this software-based environment. SONET/SDH Functionality. Our products are designed to provide the optical interfaces and management and restoration capabilities traditionally offered on SONET/SDH equipment. By supporting these capabilities within the optical domain, rather than the electrical domain, service providers can directly offer services without the need for separate SONET/SDH products. DWDM Technology. DWDM technology creates capacity by multiplying the number of wavelengths that a single fiber can support. We integrate commercially available DWDM optical technology into our products, providing a comprehensive solution for our customers' multiplexing needs. Network Management. Our network management products 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 Commercially Optical Distance) available ------------------------------------------------------ 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 Commercially Management services available Software - ------------------------------------------------------------------------------------- SilvxManager Network Provides end-to-end management of Field test at Management wave services customer's site 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. 34 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. 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 new and established local voice and data service providers, long distance carriers, Internet service providers, cable operators, PTTs (foreign telephone companies) and carriers who provide service to other customers. At July 31, 1999, we had shipped product to one customer, Williams Communications, Inc. Williams Communications is a leading US-based 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 7 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. 35 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 $14.0 million for the year ended July 31, 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. 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. 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 36 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 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. 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, 37 . 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. 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. 38 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......... 50 President, Chief Executive Officer and Director Frances M. Jewels....... 34 Chief Financial Officer, Vice President, Finance and Administration, Treasurer and Secretary Chikong Shue............ 48 Vice President, Engineering Ryker Young............. 35 Vice President, Sales John E. Dowling......... 46 Vice President, Operations Kurt Trampedach......... 55 Vice President, International Sales Jeffry A. Kiel.......... 35 Vice President, Product Marketing Anita Brearton.......... 40 Vice President, Corporate Marketing Timothy Barrows (1)(2).. 42 Director Paul J. Ferri (1)(2).... 60 Director John W. Gerdelman....... 46 Director Other Key Employees: Richard A. Barry........ 33 Chief Technical Officer Eric A. Swanson......... 39 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. 39 Chikong Shue has served as our Vice President of Engineering since August 1998. From June 1997 to July 1998, Mr. Shue was Vice President of Software and Systems Engineering of the Core Switching Division of Ascend Communications, Inc. Mr. Shue was a co-founder of Cascade Communications Corp. and served as director of software engineering at Cascade from May 1991 to August 1994 and as a corporate fellow and Vice President of Cascade's Remote Access Engineering division from September 1994 until March 1997. Ryker Young has served as our Vice President of Sales since August 1998. From July 1997 to August 1998, Mr. Young was Central Region Director of Sales for Ascend Communications, Inc. From January 1996 to June 1997, Mr. Young was the South Central Regional District Manager for Cascade Communications Corp. From October 1994 to December 1995, Mr. Young was Major Account Manager for Cisco Systems, Inc. John E. Dowling has served as our Vice President of Operations since August 1998. From July 1997 to August 1998, Mr. Dowling served as Vice President of Operations of Aptis Communications, a manufacturer of carrier-class access switches for network service providers. Mr. Dowling served as Vice President of Operations of Cascade Communications Corp. from May 1994 to June 1997. Kurt Trampedach has served as our Vice President of International Sales since July 1999. From June 1999 to July 1999, Mr. Trampedach was Vice President, Carrier Market Development for Lucent Technologies, Inc. From June 1997 to June 1999 he was Vice President, Carrier Market Development for Ascend Communications, Inc. From September 1996 to June 1997, Mr. Trampedach was Vice President, International Sales for Cascade Communications Corp. Mr. Trampedach was Vice President, European Operations for Alcatel USA, Inc. from April 1994 to September 1996. 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. Mr. Barrows also serves on the board of directors of SilverStream Software, Inc. Paul J. Ferri has served as a director since February 1998. Mr. Ferri has been a general partner of Matrix Partners, a venture capital firm, since February 1982. Mr. Ferri also serves on the board of directors of VideoServer, Inc. and Applix, Inc. John W. Gerdelman has served as a director since September 1999. Mr. Gerdelman has been President and Chief Executive Officer of USA Net Inc. since April 1999. Mr. Gerdelman was employed by MCI Telecommunications Corporation as President of the Network and Information Technology Division from September 1994 to April 1999 and Senior Vice President of Sales and Service Operations from June 1992 to September 1994. 40 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. 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. Barrows and Gerdelman will serve in the class whose term expires at the annual meeting of stockholders in 2000; Messrs. Ferri and Deshpande will serve in the class whose term expires at the annual meeting of stockholders in 2001; and Mr. Smith will serve in the class whose term expires at the annual meeting of stockholders in 2002. Upon the expiration of the term of a class of directors, directors in such class will be elected for three-year terms at the annual meeting of stockholders in the year in which such term expires. Compensation of Directors We reimburse directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors. 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. 41 Executive Compensation The table below sets forth, for the fiscal year ended July 31, 1999, the cash compensation earned by: . our Chairman of the Board, . our Chief Executive Officer and . the other most highly compensated executive officer who received annual compensation in excess of $100,000, collectively referred to below as the Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the compensation set forth in the table below does not include medical, group life or other benefits which are available to all of our salaried employees, and perquisites and other benefits, securities or property which do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. In the table below, columns required by the regulations of the Securities and Exchange Commission have been omitted where no information was required to be disclosed under those columns. Summary Compensation Table
Long-Term Annual Compensation Compensation --------------------------------- ---------------- Awards ---------------- Other Annual Securities All Other Salary Bonus Compensation Underlying Compensation ($) ($) ($) Options/SARS (#) ($) ------- ------ ------------ ---------------- ------------ Gururaj Deshpande Chairman and Founder... 100,000 -- -- -- -- Daniel E. Smith President and Chief Executive Officer ..... 73,077(1) -- -- -- -- Ryker Young Vice President, Sales.. 117,788 49,998(2) -- 60,000 9,326(3)
- -------- (1) Represents the total amount of compensation Mr. Smith received in fiscal 1999 for the portion of the year during which he was one of our executive officers. Mr. Smith joined us in October 1998. (2) Represents advance commission income. (3) Represents reimbursement for relocation expenses. Stock Options The following table contains information concerning the grant of options to purchase shares of our common stock to each of the Named Executive Officers during the fiscal year ended July 31, 1999. Percentages are based on an aggregate of 7,760,100 shares granted in fiscal 1999. All options were granted at fair market value as determined by the board of directors on the date of grant. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Number of Percent of Stock Securities Total Options Appreciation for Underlying Granted To Exercise Option Term(1) Options Employees in Price Expiration ----------------- Granted Fiscal Year ($/Share) Date 5% 10% ---------- ------------- --------- ------------- -------- -------- Gururaj Deshpande....... -- -- -- -- -- -- Daniel E. Smith......... -- -- -- -- -- -- Ryker Young............. 60,000(2) .78% $.33 June 16, 2009 12,578 31,875
42 (1) Amounts reported in these columns represent amounts that may be realized upon exercise of options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) on Sycamore's common stock over the term of the options. The potential realizable values set forth above do not take into account applicable tax and expense payments that may be associated with such option exercises. Actual realizable value, if any, will be dependent on the future price of the common stock on the actual date of exercise, which may be earlier than the stated expiration date. The 5% and 10% assumed annualized rates of stock price appreciation over the exercise period of the options used in the table above are mandated by the rules of the Securities and Exchange Commission and do not represent Sycamore's estimate or projection of the future price of the common stock on any date. There is no representation either express or implied that the stock price appreciation rates for the common stock assumed for purposes of this table will actually be achieved. (2) These options are exercisable immediately on the grant date, but unvested shares are subject to a repurchase right in favor of Sycamore that generally entitles us to repurchase these shares at their original exercise price upon termination of Mr. Young's services with Sycamore. Approximately one year from the hire date of Mr. Young, the repurchase right lapses as to a portion of the shares subject to the option and thereafter such right lapses as to an additional 5% of the shares subject to the option for each full three months of employment completed by Mr. Young. Fiscal Year-End Option Values The following table sets forth information for each of the Named Executive Officers with respect to the value of options outstanding as of July 31, 1999. Aggregated Year-End Option Table
Number of Securities Value of Unexercised Shares Underlying Unexercised In-The-Money Options at Acquired Value Options at July 31, 1999 July 31, 1999 ($) on Exercise Realized ------------------------- ------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Gururaj Deshpande....... -- -- -- -- -- -- Daniel E. Smith......... -- -- -- -- -- -- Ryker Young............. 60,000(1) 40,000(2) -- -- -- --
- -------- (1) These shares are subject to a repurchase right in favor of Sycamore as described above. (2) Calculated on the basis of the fair market value of our common stock as of the date of exercise, of $1.00 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 September 1999. Any shares not yet issued under our predecessor 1998 Stock Incentive Plan on the date of this offering, 18,638,700 shares as of July 31, 1999, will be available under the 1999 Plan. In addition, there will be an annual increase beginning on August 1, 2000 of the lesser of: . 3,000,000 shares; . 5% of the outstanding shares on the date of the increase; or . a lesser amount determined by the board. The 1999 plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, non-qualified stock options, restricted stock awards and other stock-based awards. Our officers, employees, directors, consultants and advisors and those of our subsidiaries are eligible to receive awards under the 1999 plan. Under present law, however, incentive stock options may only be granted to employees. No participant may receive any award for more than 500,000 shares in any calendar year. 43 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 or another committee appointed by the board to administer the 1999 plan, including the granting of options to our executive officers. Subject to any applicable limitations contained in the 1999 plan, our board of directors, our compensation committee or any other committee or executive officer to whom our board of directors delegates authority, as the case may be, selects the recipients of awards and determines: . the number of shares of common stock covered by options and the dates upon which such options become exercisable; . the exercise price of options; . the duration of options; and . the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including the conditions for repurchase, issue price and repurchase price. In the event of a merger, consolidation, asset sale, liquidation or similar transaction resulting in a change of control of Sycamore, each outstanding option will immediately become fully exercisable with respect to the total number of shares subject to the option. However, an option would not so accelerate if the option is assumed or otherwise continued in full force by the successor entity, if the option is replaced with a cash incentive program of the successor corporation which presents the spread at the time of the change of control on the shares which were not otherwise then exercisable, or if the acceleration of the option is subject to other limitations imposed on the date of grant. Notwithstanding the foregoing, the number of vested shares will, immediately prior to a change of control, be increased by the number of shares that would have become vested on the date 12 months following a change of control (six months for persons employed less than one year prior to the change of control), and if following a change of control the successor corporation terminates the employee without cause, all of his or her options will become vested upon the termination of his or her employment. No award may be granted under the 1999 plan after the tenth anniversary of the effective date, but the vesting and effectiveness of Awards previously granted may extend beyond that date. Our board of directors may at any time amend, suspend or terminate the 1999 plan, except that no award granted after an amendment of the 1999 plan and designated as subject to Section 162(m) of the Internal Revenue Code by our board of directors shall become exercisable, realizable or vested, to the extent such amendment was required to grant such award, unless and until such amendment is approved by our stockholders. 1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was adopted by our board of directors in August, 1999 and received stockholder approval in September, 1999. The purchase plan authorizes the issuance of up to a total of 750,000 shares of our common stock to participating employees. On August 1 of each year, commencing with August 1, 2000, the aggregate number of shares available for purchase during the 44 life of the plan is automatically increased by the number of shares necessary to cause the number of shares then available for purchase to be restored to 750,000. All of our employees, including directors who are employees, and all employees of any participating subsidiaries: . whose customary employment is more than 20 hours per week for more than five months in a calendar year, . whose customary employment is at least five months in any calendar year, and . who hold less than five percent of the total combined voting power of the Company are eligible to participate in the purchase plan. As of July 31, 1999, approximately 148 of our employees would have been eligible to participate in the purchase plan. On the first day of an offering period, we will grant to each eligible employee who has elected to participate in the purchase plan an option to purchase shares of common stock as follows: the employee may authorize an amount (up to 10%, or such lesser amount as shall be determined by the Board, of such employee's base pay) to be deducted from such employee's base pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the purchase plan, the option exercise price is an amount equal to 85% of the closing price per share of the common stock on either the first day or the last day of the offering period, whichever is lower. The first offering period under the purchase plan will commence on the effective date of the registration by Sycamore of its shares under the Exchange Act, with the option price on the first day of such offering period equivalent to 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) $12,500 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. Each offering period is expected to be of 6 months (other than the first offering period, which will end April 30, 2000); provided that the board of directors may, in its discretion, choose a different offering period of 27 months or less. An employee who is not a participant on the last day of the offering period, as a result of voluntary withdrawal or termination of employment or for any 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 in August 1999 and received stockholder approval in September 1999. The option plan authorizes the issuance of up to a total of 500,000 shares of our common stock to participating directors who are not also an employee or officer. On August 1 of each year, commencing with August 1, 2000, the aggregate number of shares available for the grant of options under the plan is automatically increased by the number of shares necessary to cause the total number of shares then available for grant to 500,000. Each director who is not also an employee or officer shall be automatically granted an option to purchase 30,000 shares of common stock on the latest to occur of: . the date the person is first elected to the board or . August 17, 1999. 45 In addition, each of these directors will be automatically granted an option to purchase 10,000 shares immediately following each annual meeting of stockholders. The option exercise price per share for all options granted under the option plan will be equal to the fair market value of our common stock on the date of grant. Under the plan, options are fully exercisable on the date of grant. Options granted on the later of August 17, 1999 or the date the person is first elected to the board, are subject to repurchase by the Company prior to completion of a three-year vesting period. Options granted immediately following each annual meeting of stockholders are subject to repurchase by the Company prior to completion of a one-year vesting period. The term of each option is 10 years from the date of grant. Our board of directors has discretion to establish the terms of options granted under the Plan. 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. 46 CERTAIN TRANSACTIONS Preferred Stock Issuances Since inception in February 1998, we have issued and sold shares of redeemable convertible preferred stock to the following persons and entities who are our executive officers, directors or principal stockholders. Upon the closing of this offering, each share of preferred stock will convert into three shares of common stock. 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 29, 1998, we issued an aggregate of 8,961,812 shares of Series A preferred stock to 8 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue and Matrix Partners V, L.P. The per share purchase price for our Series A preferred stock was $.91. Series B Financing. On December 3, 1998 and February 11, 1999, we issued an aggregate of 3,607,062 shares of Series B preferred stock to 11 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue, John E. Dowling and Matrix Partners V, L.P. The per share purchase price for our Series B preferred stock was $3.50. Series C Financing. On March 2, 1999, we issued an aggregate of 2,500,000 shares of Series C preferred stock to 15 investors, including Gururaj Deshpande, Daniel E. Smith, Chikong Shue, Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P. The per share purchase price for our Series C preferred stock was $8.00. Common Stock Issuances During fiscal 1999, Frances M. Jewels, our Chief Financial Officer, purchased an aggregate of 435,000 shares of common stock for $.33 per share and Kurt Trampedach, our Vice President of International Sales, purchased an aggregate of 375,000 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. 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. 47 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of July 31, 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 70,556,337 shares of common stock outstanding as of July 31, 1999, after giving effect to the conversion of all shares of redeemable convertible preferred stock into common stock. The number of shares of common stock deemed outstanding after this offering includes the 6,500,000 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 July 31, 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)........................... 16,336,869 23.2 21.2 Daniel E. Smith................................ 14,703,183 20.8 19.1 Matrix V Management Co., L.L.C.(2) 1000 Winter Street, Suite 4500 Waltham, MA 02154............................. 12,586,869 17.8 16.3 Ryker Young.................................... 1,021,812 1.4 1.3 Timothy Barrows(2) c/o Matrix V Management Co., L.L.C. 1000 Winter Street, Suite 4500 Waltham, MA 02154............................. 12,586,869 17.8 16.3 Paul J. Ferri(2) c/o Matrix V Management Co., L.L.C. 1000 Winter Street, Suite 4500 Waltham, MA 02154............................. 12,586,869 17.8 16.3 John W. Gerdelman(3)........................... * Jaishree Deshpande, as Trustee of the Gururaj Deshpande Grantor Retained Annuity Trust...... 6,000,000 8.5 7.8 All executive officers and directors as a group (12 persons).................................. 50,046,135 70.9 64.9
- -------- * Less than 1% of the outstanding common stock. (1) Includes 1,312,500 shares held by the Deshpande Irrevocable Trust and 6,000,000 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 11,328,180 shares held by Matrix Partners V, L.P. and 1,258,689 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) Mr. Gerdelman was elected to our board of directors in September 1999. 48 DESCRIPTION OF CAPITAL STOCK After this offering, the authorized capital stock of Sycamore will consist of 250,000,000 shares of common stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.01 par value per share. As of July 31, 1999, there were outstanding: . 70,556,337 shares of common stock held by 138 stockholders of record, assuming the conversion into common stock of all outstanding shares of redeemable convertible preferred stock, and . options to purchase an aggregate of 1,686,300 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 77,056,337 shares of common stock outstanding upon the closing of this offering. The following summary of provisions of our securities, various provisions of our amended and restated certificate of incorporation and our amended and restated bylaws and provisions of applicable law is not intended to be complete and is qualified by reference to the provisions of applicable law and to our amended and restated certificate of incorporation and amended and restated bylaws included as exhibits to the Registration Statement of which this prospectus is a part. See "Where You Can Find More Information." Common Stock Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any such dividends declared by the board of directors, subject to any preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of Sycamore, the holders of common stock are entitled to receive ratably the net assets of Sycamore available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any series of preferred stock which Sycamore may designate and issue in the future. Certain holders of common stock have the right to require 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 person 49 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. 50 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 EquiServe Limited Partnership. 51 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 77,056,337 shares of common stock outstanding (assuming no exercise of outstanding options). Of these shares, the 6,500,000 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
Approximate Shares Eligible Days After Date of for Future This Prospectus Sale Comment ------------------ ----------- ------- On effectiveness................. 6,500,000 Freely tradeable sold in offering 90 days after effectiveness...... 269,950 Shares salable under Rule 144 and 701 180 days after effectiveness..... 54,603,388 Shares salable under Rule 144, 144(k) or 701
Certain of the shares listed in the foregoing table as not being salable until 180 days after effectiveness may become salable earlier as described below under "Lock-up Agreements". 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 770,563 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: . by persons, other than affiliates, subject only to the manner of sale provisions of Rule 144, and . 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 1,686,300 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 1,826,643 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 20,054,900 shares of common stock issuable under our stock plans, including the 1,686,300 shares of common stock subject to outstanding options as of July 31, 1999. This registration statement is expected to become effective upon filing. 52 Lock-up Agreements All officers and directors and certain stockholders holding an aggregate of approximately 66,016,284 shares of Sycamore's Common Stock have agreed, subject to certain exceptions, not to 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, or otherwise transfer or dispose of, directly or indirectly (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), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. However, if the reported last sale price of the Common Stock on the Nasdaq National Market is at least twice the initial public offering price per share for 20 of the 30 trading days ending on the last trading day preceding the 90th day after the date of this Prospectus, 25% of the shares of Common Stock of Sycamore subject to the 180 day restriction described above (none of which may be held by officers or directors) will be released from these restrictions. The release of these shares will occur on the later to occur of: . the 90th day after the date of this Prospectus if Sycamore makes its first post-offering public release of its quarterly or annual earnings results during the period beginning on the eleventh trading day after the date of this Prospectus and ending on the day prior to the 90th day after the date of this Prospectus, or . on the second trading day following the first public release of Sycamore's quarterly or annual results occurring on or after the 90th day after the date of this Prospectus, if Sycamore does not make its first post-offering public release as set forth in the preceding clause. Morgan Stanley & Co. Incorporated may in its sole discretion choose to release any or all of these shares from such restrictions prior to the expiration of such 90 or 180-day period. Registration Rights After this offering, the holders of approximately 57,858,000 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. 53 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 6,500,000 shares of common stock. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below:
Number of Name Shares ---- --------- Morgan Stanley & Co. Incorporated............................... Lehman Brothers Inc............................................. J. P. Morgan Securities Inc..................................... Dain Rauscher Wessels........................................... --------- Total......................................................... 6,500,000 =========
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 975,000 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 the 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 $ . 54 At our request, the underwriters have reserved at the initial public offering price up to approximately 40,000 shares of common stock for sale to Williams Communications. There can be no assurance that any of the reserved shares will be purchased. In addition, at our request, the underwriters have reserved up to approximately 649,000 shares of common stock to be sold in the offering and offered hereby for sale, at the initial public offering price, to our officers, employees, customers and other business associates. The number of shares of common stock available for sale to the general public will be reduced to the extent these parties 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. There can be no assurance that any of the reserved shares will be purchased. Sycamore, our directors, officers and certain other of our stockholders have each agreed, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the period ending 180 days after the date of this prospectus, not to, directly or indirectly: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (whether such shares or any such securities are then owned by such person or are thereafter acquired directly from us); or . enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise, subject, in certain circumstances for shares held by stockholders other than officers and directors of Sycamore, to earlier release. See "Shares Eligible for Future Sale--Lock-up Agreements". 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 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. 55 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 1999 and for the period from inception (February 17, 1998) through July 31, 1998 and for the year ended July 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock we propose to sell in this offering. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement. For further information about us and the common stock we propose to sell in this offering, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. The registration statement may be inspected without charge at the principal office of the Securities and Exchange Commission in Washington, D.C. and copies of all or any part of which may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. 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. 56 SYCAMORE NETWORKS, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants.......................................... F-2 Balance Sheets at July 31, 1998 and July 31, 1999.......................... F-3 Statements of Operations for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999.................... F-4 Statements of Stockholders' Deficit for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999.......... F-5 Statements of Cash Flows for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999.................... 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 sheets and the related statements of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Sycamore Networks, Inc. at July 31, 1998 and 1999, and the results of its operations and its cash flows for the period from inception (February 17, 1998) to July 31, 1998 and for the year ended July 31, 1999 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts August 23, 1999 F-2 SYCAMORE NETWORKS, INC. BALANCE SHEETS (in thousands, except share data)
Pro Forma July 31, July 31, July 31, 1999 1998 1999 (unaudited) -------- -------- ------------- Assets Current assets: Cash and cash equivalents................... $1,197 $ 21,969 $ 21,969 Marketable securities....................... 3,082 7,020 7,020 Accounts receivable......................... -- 11,410 11,410 Inventories................................. -- 6,608 6,608 Prepaids and other current assets........... 200 5,153 5,153 ------ -------- -------- Total current assets......................... 4,479 52,160 52,160 Property and equipment, net.................. 500 5,288 5,288 Other assets................................. 102 464 464 ------ -------- -------- Total assets................................. $5,081 $ 57,912 $ 57,912 ====== ======== ======== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Current portion of notes payable............ $ -- $ 1,097 $ 1,097 Accounts payable............................ 42 5,750 5,750 Accrued compensation........................ 30 1,403 1,403 Accrued expenses............................ 66 1,751 1,751 Other current liabilities................... -- 1,709 1,709 ------ -------- -------- Total current liabilities.................... 138 11,710 11,710 Notes payable................................ -- 4,054 4,054 Commitments and contingencies (Note 5) Series A Redeemable Convertible Preferred Stock $.01 par value; 6,380,000 and 8,975,000 shares authorized at July 31, 1998 and July 31, 1999, respectively; 6,186,812 and 8,961,812 shares issued and outstanding at July 31, 1998 and July 31, 1999, respectively; 0 shares authorized, issued and outstanding on a pro forma basis; liquidation value of $8,155 at July 31, 1999........................................ 5,621 8,146 -- Series B Redeemable Convertible Preferred Stock $.01 par value; 3,625,000 shares authorized at July 31, 1999; 3,607,062 shares issued and outstanding at July 31, 1999; 0 shares authorized, issued and outstanding on a pro forma basis; liquidation value of $12,625 at July 31, 1999........................................ -- 12,625 -- Series C Redeemable Convertible Preferred Stock $.01 par value; 2,500,000 shares authorized, issued and outstanding at July 31, 1999; 0 shares authorized, issued and outstanding on a pro forma basis; liquidation value of $20,000 at July 31, 1999........................................ -- 20,000 -- Series D Redeemable Convertible Preferred Stock $.01 par value; 692,201 shares authorized, issued and outstanding at July 31, 1999; 0 shares authorized, issued and outstanding on a pro forma basis; liquidation value of $15,000 at July 31, 1999........................................ -- 15,000 -- Stockholders' equity (deficit): Preferred stock, $.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding on a pro forma basis........... -- -- -- Common stock, $.001 par value; 91,000,000 shares authorized; 7,035,000 and 23,273,112 shares issued and outstanding at July 31, 1998 and July 31, 1999, respectively; 250,000,000 shares authorized; 70,556,337 shares issued and outstanding on a pro forma basis................................ 7 23 71 Additional paid-in capital.................. 187 31,010 86,733 Accumulated deficit......................... (693) (20,183) (20,183) Notes receivable............................ -- (360) (360) Deferred compensation....................... (179) (24,113) (24,113) ------ -------- -------- Total stockholders' equity (deficit)......... (678) (13,623) 42,148 ------ -------- -------- Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)................................... $5,081 $ 57,912 $ 57,912 ====== ======== ========
The accompanying notes are an integral part of the financial statements. F-3 SYCAMORE NETWORKS, INC. STATEMENTS OF OPERATIONS (in thousands, except per share data)
Period from Inception (February 17, 1998) Year Ended through July 31, 1998 July 31, 1999 --------------------- ------------- Revenues.................................. $ -- $ 11,330 Cost of revenues.......................... -- 8,486 ----- -------- Gross profit.............................. -- 2,844 Operating expenses: Research and development................. 497 13,955 Sales and marketing...................... 92 4,064 General and administrative............... 199 1,405 Amortization of stock compensation....... 5 3,469 ----- -------- Total operating expenses................. 793 22,893 ----- -------- Loss from operations...................... (793) (20,049) Interest income, net...................... 100 559 ----- -------- Net loss.................................. $(693) $(19,490) ===== ======== Basic and diluted net loss per share...... (.55) $ (6.27) Weighted average shares used in computing basic and diluted net loss per share..... 1,251 3,108
The accompanying notes are an integral part of the financial statements. F-4 SYCAMORE NETWORKS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT (in thousands)
Common Stock ------------- Additional Total paid-in Accumulated Notes Deferred Stockholders' Shares Amount Capital Deficit Receivable Compensation Deficit ------ ------ ---------- ----------- ---------- ------------ ------------- Issuance of common stock.................. 7,035 $ 7 $ 3 $ -- $ -- $ -- $ 10 Deferred compensation expense associated with equity awards.......... -- -- 184 -- -- (184) -- Amortization of deferred compensation........... -- -- -- -- -- 5 5 Net loss................ -- -- -- (693) -- -- (693) ------ --- ------- -------- ----- -------- -------- Balance, July 31, 1998.. 7,035 7 187 (693) -- (179) (678) ------ --- ------- -------- ----- -------- -------- Exercise of stock options................ 6,074 6 2,935 -- -- -- 2,941 Issuance of common stock.................. 10,164 10 485 -- -- -- 495 Deferred compensation expense associated with equity awards.......... -- -- 25,343 -- -- (25,343) -- Issuance of equity awards in exchange for services............... -- -- 2,060 -- -- -- 2,060 Amortization of deferred compensation........... -- -- -- -- -- 1,409 1,409 Issuance of common stock in exchange for notes receivable............. -- -- -- -- (360) -- (360) Net loss................ -- -- -- (19,490) -- -- (19,490) ------ --- ------- -------- ----- -------- -------- Balance, July 31, 1999.. 23,273 $23 $31,010 $(20,183) $(360) $(24,113) $(13,623) ====== === ======= ======== ===== ======== ========
The accompanying notes are an integral part of the financial statements. F-5 SYCAMORE NETWORKS, INC. STATEMENTS OF CASH FLOWS (in thousands)
Period from inception (February 17, 1998) through Year Ended July 31, 1998 July 31, 1999 ------------------- ------------- Cash flows from operating activities: Net loss.................................... $ (693) $(19,490) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.............. 27 948 Amortization of stock compensation......... 5 3,469 Changes in operating assets and liabilities: Accounts receivable........................ -- (11,410) Inventories................................ -- (6,608) Prepaids and other current assets.......... (75) (4,953) Accounts payable........................... 42 5,708 Accrued expenses and other current liabilities............................... 96 4,767 ------- -------- Net cash used in operating activities........ (598) (27,569) ------- -------- Cash flows from investing activities: Purchases of property and equipment........ (528) (552) Purchases of marketable securities......... (3,082) (10,115) Maturities of marketable securities........ -- 6,177 Increase in other assets................... (102) (362) ------- -------- Net cash used in investing activities........ (3,712) (4,852) ------- -------- Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net.......... 5,496 50,150 Proceeds from issuance of common stock..... 11 3,076 Payments on notes payable.................. -- (33) ------- -------- Net cash provided by financing activities.... 5,507 53,193 ------- -------- Net increase in cash and cash equivalents.... 1,197 20,772 Cash and cash equivalents, beginning of period...................................... -- 1,197 ------- -------- Cash and cash equivalents, end of period..... $ 1,197 $ 21,969 ======= ======== Supplemental cash flow information: Cash paid for interest..................... $ -- $ 170 Supplementary non cash activity: Equipment acquired under notes payable..... $ -- $ 5,184 Preferred stock note receivable............ 125 -- Issuance of common stock in exchange for notes receivable.......................... -- 360
The accompanying notes are an integral part of the financial statements. F-6 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS 1. Nature of the Business: Sycamore Networks, Inc. (the "Company") was incorporated in Delaware on February 17, 1998. The Company develops and markets networking products that enable service providers to quickly and cost effectively provide bandwidth and create new high-speed data services. To date, the Company has principally marketed its products in the United States. 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 financing. 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: 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 and 1999, the fair value of marketable securities, which were comprised of commercial paper and certificates of deposit, 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). Revenue Recognition Revenue from product sales is recognized upon shipment provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the fee is fixed and determinable and collectibility is deemed probable. If uncertainties regarding customer acceptance exist, revenue is recognized when such uncertainties are resolved. Revenue from technical support and maintenance contracts is deferred and recognized ratably over the period of the related agreements. The Company records a warranty liability for parts and labor on its products. Warranty periods are generally three years from installation date. Estimated warranty costs are recorded at the time of revenue recognition. F-7 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Property and Equipment Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method, based upon the following asset lives: Computer and telecommunications equipment.................. 2 to 3 years Computer software........... 2 to 3 years Furniture and office equipment.................. 5 years Leasehold improvements...... Shorter of lease term or useful life of asset
The cost of significant additions and improvements is capitalized and depreciated while expenditures for maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of the assets are removed from the accounts and any resulting gain or loss is reflected in the determination of net income or loss. Research and Development and Software Development Costs The Company's products are highly technical in nature and require a large and continuing research and development effort. All research and development costs are expensed as incurred. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Technological feasibility is demonstrated by the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for general release to customers. Amortization is based on the greater of (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (ii) the straight- line method over remaining estimated life of the product. To date, the period between achieving technological feasibility and the general availability of the related products has been short and software development costs qualifying for capitalization have not been material. Accordingly, the Company has not capitalized any software development costs. Income Taxes Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recorded based on temporary differences between the financial statement amounts and the tax bases of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company periodically evaluates the realizability of its net deferred tax assets and records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Concentrations of Credit Risk and Significant Customer Information Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. The Company invests its excess cash primarily in deposits with commercial banks and high-quality corporate securities. For the year ended July 31, 1999, one customer accounted for all of the Company's revenue. The Company does not require collateral for sales to customers. F-8 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Certain components and parts used in the Company's products are procured from a single source. The Company obtains parts from one vendor only, even where multiple sources are available, to maintain quality control and enhance working relationships with suppliers. These purchases are made under existing contracts or purchase orders. The failure of a supplier, including subcontractor, to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's revenues and profits. Other Comprehensive Income The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS 130). The comprehensive net loss for the period from inception (February 17, 1998) through July 31, 1998 and for the year ended July 31, 1999 does not differ from the reported net loss. Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Common equivalent shares are composed of unvested shares of restricted common stock and the incremental common shares issuable upon the exercise of stock options and unvested restricted common shares. There were no dilutive common equivalent shares for the period. Pro forma net loss per share for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 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, C and D redeemable convertible preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred at the date of original issuance. There were no dilutive common equivalent shares for any of the periods presented. F-9 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net loss per share:
Period from inception (February 17, 1998) Year Ended through July 31, 1998 July 31, 1999 --------------------- ------------- (in thousands, except per share data) Numerator: Net loss.................................. $ (693) $(19,490) Denominator Historical: Weighted average common shares outstanding.............................. 6,507 15,195 Weighted average common shares outstanding subject to repurchase.................... (5,256) (12,087) ------ -------- Denominator for basic and diluted calculation.............................. 1,251 3,108 ------ -------- Basic and diluted net loss per share...... $ (.55) $ (6.27) ====== ======== Pro Forma: Historical weighted average common shares outstanding.............................. 3,108 Weighted average number of shares assumed upon conversion of redeemable convertible common stock............................. 35,037 -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited).............................. 38,145 ======== Pro forma basic and diluted net loss per share (unaudited)........................ $ (.51) ========
Options to purchase 1,686,300 shares of common stock at an average exercise price of $1.36 per share has not been included in the computation of diluted net loss per share for the year ended July 31, 1999 as their effect would have been anti-dilutive. Pro Forma Balance Sheet (Unaudited) Upon the closing of the Company's initial public offering, all of the outstanding shares of Series A, B, C and D redeemable convertible preferred stock will automatically convert into 47,283,225 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 July 31, 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. F-10 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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. Adoption of this standard did not have a material impact 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 currently expected to have an impact on our financial condition or results of operations. 3. Inventory Inventory consisted of the following at July 31, 1999 (in thousands):
1999 ------ Raw materials............................................................ $2,164 Work in process.......................................................... 3,026 Finished goods........................................................... 1,418 ------ $6,608 ======
4. Property and Equipment Property and equipment consisted of the following at July 31, 1998 and 1999 (in thousands):
1998 1999 ---- ------ Computer software and equipment................................... $500 $5,433 Furniture and office equipment.................................... 27 221 Leasehold improvements............................................ -- 609 ---- ------ 527 6,263 Less accumulated depreciation and amortization.................... (27) (975) ---- ------ $500 $5,288 ==== ======
Depreciation and amortization expense was $27,000 for the period from inception (February 17, 1998) through July 31, 1998 and $948,000 for the year ended July 31, 1999. F-11 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 5. Commitments and Contingencies: Capital and Operating Leases The Company's office facility is leased under a noncancelable lease that expires in 2002. The lease is collateralized by an irrevocable standby letter of credit in the amount of $92,000, which is collateralized by a U.S. Treasury Bill. Rent expense under operating leases was $27,500 and $266,000 for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999, respectively. At July 31, 1999 future minimum lease payments under all non-cancelable operating leases are as follows, in thousands: 2000...................................................................... $272 2001...................................................................... 319 2002...................................................................... 159 ---- Total future minimum lease payments....................................... $750 ====
Letter of Credit Included in prepaid expenses and other current assets is a $4 million U.S. Government security which collateralizes a stand-by letter of credit used for inventory purchases made by a third party manufacturer on behalf of the Company. The letter of credit is irrevocable and expires in October 1999. Notes Payable In August 1998, the Company entered into an equipment loan agreement with a bank. Under this loan agreement, the Company may borrow up to $1 million, for the purpose of acquisition of equipment, for a period of ten months. On July 1, 1999 the Company commenced payments to be repaid in thirty equal monthly installments. At July 31, 1999, $967,000 was outstanding under this loan agreement. In April 1999, the Company entered into an additional equipment loan agreement with the same bank. Under this loan agreement, the Company may borrow up to $5 million, for the purpose of acquisition of equipment, for a period of six months. At January 31, 2000, the outstanding balance will be converted into a term loan, to be repaid in thirty-six equal monthly installments commencing February 1, 2000. At July 31, 1999, $4,184,000 was outstanding under this loan agreement. The interest on the outstanding loan balances is calculated daily at the bank's prime rate, plus .5% (8.5% at July 31, 1999). The loans are collateralized by all the Company's assets, including accounts receivable, inventory and fixed assets. The Company is required to maintain certain financial covenants and tangible net worth calculations. Principal payments under notes payable for the years ended July 31, are as follows: $1,097,000 in 2000; $1,795,000 in 2001; $1,562,000 in 2002 and $697,000 in 2003. 6. Stockholders' Equity Common Stock The Company has authorized 91,000,000 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. The Board of Directors (the "Board") may declare dividends from lawfully available funds, subject to any preferential dividend rights of any outstanding preferred stock and restrictions under the Company's loan agreements. Holders of the common stock are entitled to receive all assets available for distribution on the dissolution or liquidation of the Company, subject to any preferential rights of any outstanding preferred stock. F-12 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 1998 Stock Incentive Plan In August 1998, the 1998 Stock Incentive Plan (the "Plan") was adopted by the Board and received stockholder approval on October 19, 1998. A total of 26,565,000 shares of common stock have been reserved for issuance under the Plan. The Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards to officers, employees, directors, consultants and advisors of the Company. No participant may receive any award for more than 500,000 shares in any calendar year. Options may be granted at an exercise price less than, equal to or greater than the fair market value on the date of grant. The Board determines the term of each option, the option exercise price, and the vesting terms. Stock options generally expire ten years from the date of grant and vest over five years. All employees who have been granted options by the Company under the 1998 Stock Incentive Plan are eligible to elect immediate exercise of all such options. However, shares obtained by employees who elect immediate exercise prior to the original option vesting schedule are subject to the Company's right of repurchase, at the option exercise price, in the event of termination. The Company's repurchase rights lapse at the same rate as the shares would have become exercisable under the original vesting schedule. As of July 31, 1999, 5,978,700 shares related to immediate option exercises are subject to repurchase by the Company at per share prices ranging from $.02 to $3.00 and 18,638,700 were reserved for future issuance. Restricted Stock Restricted stock may be issued to employees, officers, directors, consultants, and other advisors. Shares acquired pursuant to a restricted stock agreement are subject to a right of repurchase by the Company which lapses as the restricted stock vests. In the event of termination of services, the Company has the right to repurchase unvested shares at the original issuance price. The vesting period is generally five years. The Company issued 7,035,000 and 10,164,312 shares of restricted stock, of which 1,852,500 shares were issued through the 1998 Stock Incentive Plan, for the period from inception (February 17, 1998) through July 31, 1998 and the year ended July 31, 1999, respectively. The number of shares of restricted stock outstanding at July 31, 1999 was 17,199,312 of which 14,038,812 were subject to repurchase at their original issuance prices ranging from $.001 to $.33. Deferred Stock Compensation In connection with the grant of certain stock options and restricted shares to employees during the period from inception (February 17, 1998) to July 31, 1998 and the year ended July 31, 1999, the Company recorded deferred stock compensation of $184,000 and $25,300,000, respectively, representing the difference between the estimated fair market value of the common stock on the date of grant and the exercise price. Compensation related to options and restricted shares which vest over time was recorded as a component of stockholders' deficit and is being amortized over the vesting periods of the related options. During the period from inception (February 17, 1998) to July 31, 1998 and the year ended July 31, 1999, the Company recorded compensation expense relating to these options and restricted shares totaling $5,000 and $1,409,000, respectively. F-13 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Non-Employee Stock Compensation During the year ended July 31, 1999, the Company granted 410,100 shares of common stock awards which were fully vested by July 31, 1999 to non-employees and recognized compensation expense of $2,060,000. The fair value of each stock option was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: a weighted-average risk free interest rates of 5.2%, a weighted-average expected option life of 4 years, no dividend yield and a 60% volatility. Valuation of Stock Awards Had compensation cost of our stock awards been determined in accordance with the provisions of SFAS No. 123, the historical net loss and net loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
Period from Inception (February 17,1998) to Year Ended July 31, 1998 July 31, 1999 --------------------- ------------- As Reported Net loss.................................. $(693) $(19,490) Basic and diluted net loss per share...... $(.55) $ (6.27) Pro forma Net loss.................................. $(807) $(21,314) Basic and diluted net loss per share...... $(.65) $ (6.86)
The fair value of these stock awards at the date of grant was estimated using the Black-Scholes model with the following assumptions:
Period from Inception (February 17, 1998) Year Ended to July 31, 1998 July 31, 1999 --------------------- ------------- Risk free interest rate..................... 5.4% 4.5% Dividend yield.............................. 0% 0% Expected volatility......................... 0% 0% Expected life............................... 4 years 5 years
The weighted average grant date fair value of the stock award granted during the period from inception (February 17, 1998) to July 31, 1998 and the year ended July 31, 1999 was $.16 and $1.06 per share, respectively. The pro forma effect of applying SFAS No. 123 for prior years is not necessarily representative of pro forma effect to be expected in future years. All stock option transactions issued under the 1998 stock incentive plan are summarized as follows:
Number of Weighted Average Shares Exercise Price ---------- ---------------- Outstanding at July 31, 1998....................... -- -- Options granted.................................... 7,760,100 $ .48 Options exercised.................................. (6,073,800) .67 Options cancelled.................................. -- -- ---------- ----- Outstanding at July 31, 1999....................... 1,686,300 $1.36 ========== =====
F-14 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options outstanding at July 31, 1999:
Vested Options Options Outstanding Exercisable --------------------------------------- ------------------------- Range of Number of Weighted Avg. Weighted Avg. Weighted Avg. Exercise Shares Remaining Exercise Number Exercise Prices Outstanding Contract Life Price Exercisable Price -------- ----------- ------------- ------------- ----------- ------------- $.12 40,800 9.55 $ .12 30,000 $ .12 .33 584,700 9.82 .33 30,000 .33 1.00 436,899 9.94 1.00 90,000 1.00 2.00 213,501 9.98 2.00 -- 3.00 410,400 10.00 3.00 -- --------- ------- $ .12 - $3.00 1,686,300 9.91 $1.36 150,000 $ .69
Stockholder Notes Receivable At July 31, 1999, the Company held notes receivable in the amount of $360,000 from stockholders in consideration for the purchase of common stock. The notes are due five years from the date of issuance and are collateralized by the underlying common stock and, consequently, are reflected as a component of stockholders' deficit. Common Stock Purchase Option In March 1999, the Company signed a definitive Purchase and License Agreement (the "Agreement') with a customer to provide certain Company products. Under the terms of the Agreement, the customer also has the right to purchase shares of the Company in the Company's initial public offering ("IPO") of shares on a national exchange at the IPO price (estimated to be $18-$20 per share at the time these financial statements are being prepared) to an upper limit equal to the number of shares, which when multiplied by the initial public offering price, equals 5% of the dollar value of the customer's accumulated purchases of the Company's products and services as of the date of the initial public offering, but in no event more than 5% of the shares offered in the IPO. The ability of the customer to exercise its right to purchase such shares is contingent upon a closing of an IPO. Accordingly, the measurement date for a charge to record this option would be at the closing of the IPO. The Company does not believe that this option will have any material value and any charge will be necessary. 7. Redeemable Convertible Preferred Stock The Company's Board has authorized 15,792,201 shares of Series A, Series B, Series C and Series D redeemable convertible preferred stock ("Series A, Series B, Series C, Series D") at $.01 par value of which 15,761,075 are issued and outstanding at July 31, 1999. Issuances are as follows: In February 1998, the Company authorized 6,380,000 shares of Series A preferred stock. In February 1998 and April 1998, the Company sold 5,500,000 and 549,450 shares, respectively of Series A at a price of $.91 per share and received proceeds of approximately $5,505,000. In July 1998, the Company issued 137,362 shares of Series A and received proceeds of approximately $125,000 in October 1998. In October 1998, the Company sold 2,775,000 shares of Series A at a price of $.91 per share and received proceeds of approximately $2,525,250. In December 1998, the Company authorized 3,625,000 shares of Series B $.01 par value. In December 1998 and February 1999, the Company sold 3,607,062 shares of Series B at a price of $3.50 per share and received proceeds of approximately $12,625,000. In February 1999, the Company authorized 2,500,000 shares of Series C $.01 par value. In March 1999, the Company sold 2,500,000 shares of Series C at a price of $8.00 per share and received proceeds of approximately $20,000,000. F-15 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In July 1999, the Company authorized 692,201 shares of Series D $.01 par value. In July 1999, the Company sold 692,201 shares of Series D at a price of $21.67 per share and received proceeds of approximately $15,000,000. The terms of Series A, Series B, Series C and Series D redeemable convertible preferred stock are as follows: Conversion Each share of Series A, Series B, Series C and Series D may be converted into three shares of common stock at any time at the option of the holder, subject to adjustment for certain events such as a stock split, stock dividend, or stock issuance. At July 31, 1999, Series A, Series B, Series C and Series D are convertible into 47,283,225 shares of common stock. Upon the earlier of the closing of an initial public offering of the Company's common stock at a price which equals or exceeds $9.67 per share and results in proceeds of a least $10,000,000, or the date on which at least 10,000,000 shares of preferred stock have been converted to common stock, all outstanding shares of preferred stock automatically convert into shares of common stock. Dividend and Voting Rights When and if declared by the Company's Board, dividends on Series A, Series B, Series C and Series D are payable in cash in preference and prior to any payment of any dividend on common shares. The holders are entitled to the per share amount of dividends or distributions declared for common stock, multiplied by the number of shares of common stock into which the preferred stock is convertible. The holders are entitled to vote on all matters and are entitled to the number of votes equal to the number of common shares into which the Series A, Series B, Series C and Series D, are convertible as of the date of record. Liquidation Preference In the event of any liquidation, dissolution, or winding up of the Company, the holders of Series A, Series B, Series C and Series D are entitled to receive, prior and in preference to any payment or distribution of any assets or surplus funds of the Company to holders of the common shares, an amount for each share of Series A, Series B, Series C and Series D held, equal to $.91, $3.50, $8.00 and $21.67, respectively, plus any declared and unpaid dividends. The liquidation preferences are subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. Redemption If the holders of at least a majority of Series A, Series B, Series C and Series D preferred stock, at any time after February 26, 2004, so demand, the Company will be required to redeem 33% of the shares outstanding, an additional 50% on February 26, 2005 and all shares remaining on February 26, 2006. The redemption prices of each share of Series A, Series B, Series C and Series D are $.91, $3.50, $8.00 and $21.67, respectively plus all declared and unpaid dividends, if any. F-16 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table sets forth the redeemable convertible preferred stock activity (in thousands):
Series A Series B Series C Series D Total ------------- -------------- -------------- -------------- -------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------- ------ ------- ------ ------- ------ ------- Issuance-- February 1998 5,500 $5,005 5,500 $ 5,005 Issuance-- April 1998 550 500 550 500 Issuance-- July 1998 137 116 137 116 ----- ------ ------ ------- Balance July 31, 1998 6,187 5,621 6,187 5,621 ----- ------ ------ ------- Issuance-- October 1998 2,775 2,525 2,775 2,525 Issuance-- December 1998 3,506 $12,270 3,506 12,270 Issuance-- February 1999 101 355 101 355 Issuance-- March 1999 2,500 $20,000 2,500 20,000 Issuance-- July 1999 692 $15,000 692 15,000 ----- ------ ----- ------- ----- ------- --- ------- ------ ------- Balance July 31, 1999 8,962 $8,146 3,607 $12,625 2,500 $20,000 692 $15,000 15,761 $55,771 ----- ------ ----- ------- ----- ------- --- ------- ------ -------
8. Income Tax No provision for taxes has been recorded since the Company has incurred losses since inception. The components of the net deferred tax asset as of July 31, 1998 and 1999 are as follows (in thousands):
1999 1998 ----- ------- Deferred tax assets: Net operating loss carryforwards.............................. $ 122 $ 6,163 Capitalized start up costs.................................... 124 98 Research and development credits.............................. 15 515 Other......................................................... 6 63 ----- ------- 267 6,839 Deferred tax liabilities: Depreciation.................................................. -- 196 ----- ------- Net deferred tax asset........................................ 267 6,643 Valuation allowance........................................... (267) (6,643) ----- ------- Net deferred tax asset........................................ $ -- $ -- ===== =======
At July 31, 1999, the Company has available net operating loss carryforwards for federal and state tax income purposes of approximately $16.6 million available to offset future taxable income which expire in varying amounts beginning in 2019 and 2004, respectively. As required by statement of Financial Accounting Standards No. 109, " Accounting for Income Taxes," the management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and has established a full valuation allowance for such assets. which are comprised principally of net operating loss carryforwards. Management reevaluates the positive and negative evidence periodically. The net operating loss carryforwards could be limited in future years if there is a significant change in the Company's ownership. 9. Employee Benefit Plan: The Company sponsors a defined contribution plan covering substantially all of its employees which is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the 401(k) plan through payroll deductions within statutory and plan limits. The Company has made no contributions to the plan to date. F-17 SYCAMORE NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 10. Subsequent Events Proposed Public Offering of Common Stock In August 1999, the Board authorized the Company to proceed with an initial public offering of its common stock. If the offering is consummated as presently anticipated, all of the outstanding redeemable convertible preferred stock will automatically convert into 47,283,225 shares of common stock. In August 1999, the Board authorized, subject to stockholder approval, an increase in the authorized shares of the Company's common stock from 91,000,000 to 250,000,000 shares and authorized and approved 5,000,000 shares of $.01 par value undesignated preferred stock that may be issued by the Board from time to time in one or more series. This amendment is to be effective upon the closing of the Company's IPO. In August 1999, the Company approved a 3-for-1 stock split in the form of a 200% stock dividend of the Company's issued and outstanding common stock and stock options payable to stockholders of record on August 27, 1999. The redeemable convertible preferred stock conversion ratio is automatically adjusted to reflect the split. Additionally, the authorized common stock of the Company was increased from 32,000,000 to 91,000,000. All common shares, common options and per share amounts in the accompanying financial statements have been adjusted to reflect the stock split. 1999 Stock Incentive Plan. In August 1999, the Board approved, subject to stockholder approval, the 1999 Stock Incentive Plan. The 1999 plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards to officers, employees, directors, consultants and advisors of the Company. Shares not yet issued under the 1998 Stock Incentive Plan will now be available under the 1999 plan. The total amount of shares that may be issued under the 1999 plan is the remaining shares to be issued under the 1998 Stock Incentive Plan plus an annual increase beginning August 1, 2000 of the lesser of 3,000,000 or 5% of the outstanding shares on that date. 1999 Employee Stock Purchase Plan. In August 1999, the Board approved, subject to stockholder approval, the Employee Stock Purchase Plan. A total of 750,000 shares of common stock have been reserved for issuance under this plan. Eligible employees may purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period. Participation is limited to 10% of an employee's eligible compensation not to exceed amounts allowed by the Internal Revenue Code. 1999 Non-Employee Director Option Plan. In August 1999, the Board approved, subject to stockholder approval, the 1999 Non-Employee Director Option Plan. A total of 500,000 shares of common stock have been reserved for issuance under this plan. F-18 Inside back cover shows Sycamore logo. Back cover shows drawing of tree with written script: One Sycamore stands alone. 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.............................................. $ 41,570 NASD filing fee................................................... 15,450 Nasdaq National Market listing fee................................ 90,000 Printing and engraving expenses................................... 150,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 300,000 Blue Sky fees and expenses (including legal fees)................. 10,000 Transfer agent and registrar fees and expenses.................... 12,000 Miscellaneous..................................................... 80,980 --------- Total......................................................... 1,000,000 =========
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 15,346,812 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 1,852,500 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 July 31, 1999, the Registrant granted stock options to purchase 7,760,100 shares of common stock at exercise prices ranging from $.02 to $3.00 per share to employees, consultants and directors pursuant to its 1998 Stock Incentive Plan, as amended. 2. From inception through July 31, 1999, the Registrant issued and sold an aggregate of 6,073,800 shares of its common stock to employees, consultants and directors for aggregate consideration of $2,939,031 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 10.9 Lease Agreement between WA/TIB Real Estate Limited Partnership and the Company effective September 20, 1999 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) 24.2 Power of Attorney for John W. Gerdelman 27.1 Financial Data Schedule
- -------- * To be filed by amendment. ** Previously filed. + 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 Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Chelmsford, Massachusetts, on this 24th day of September, 1999. SYCAMORE NETWORKS, INC. By: /s/ Daniel E. Smith ---------------------------------- Daniel E. Smith President and Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities set forth below on September 24, 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/ Frances M. Jewels Chief Financial Officer, Vice President, Finance and Administration, Secretary and - ----------------------------------- Treasurer Frances M. Jewels /s/ Timothy Barrows Director - ----------------------------------- Timothy Barrows /s/ Paul J. Ferri Director - ----------------------------------- Paul J. Ferri /s/ John W. Gerdelman Director - ----------------------------------- John W. Gerdelman
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 10.9 Lease Agreement between WA/TIB Real Estate Limited Partnership and the Company effective September 20, 1999 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) 24.2 Power of Attorney for John W. Gerdelman 27.1 Financial Data Schedule
- -------- * To be filed by amendment. ** Previously filed. + 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-5.1 2 OPINION OF HALE AND DORR LLP Exhibit 5.1 September 24, 1999 Sycamore Networks, Inc. 10 Elizabeth Drive Chelmsford, MA 01824 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: This opinion is furnished to you in connection with a Registration Statement on Form S-1 (File No. 333-84635) (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), for the registration of an aggregate of 7,475,000 shares of Common Stock, $0.001 par value per share (the "Shares"), of Sycamore Networks, Inc., a Delaware corporation (the "Company"). The Shares are to be sold by the Company pursuant to an underwriting agreement (the "Underwriting Agreement") to be entered into by and among the Company and Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., J.P. Morgan Securities Inc. and Dain Rauscher Wessels, as representatives of the several underwriters named in the Underwriting Agreement, the form of which has been filed as Exhibit 1.1 to the Registration Statement. We are acting as counsel for the Company in connection with the sale by the Company of the Shares. We have examined signed copies of the Registration Statement as filed with the Commission. We have also examined and relied upon the Underwriting Agreement, minutes of meetings of the stockholders and the Board of Directors of the Company as provided to us by the Company, stock record books of the Company as provided to us by the Company, the Certificate of Incorporation and By-Laws of the Company, each as restated and/or amended to date, and such other documents as we have deemed necessary for purposes of rendering the opinions hereinafter set forth. In our examination of the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, the authenticity of the originals of such latter documents and the legal competence of all signatories to such documents. We assume that the appropriate action will be taken, prior to the offer and sale of the Shares in accordance with the Underwriting Agreement, to register and qualify the Shares for sale under all applicable state securities or "blue sky" laws. We express no opinion herein as to the laws of any state or jurisdiction other than the state laws of the Commonwealth of Massachusetts, the Delaware General Corporation Law statute and the federal laws of the United States of America. To the extent that any other laws govern the matters as to which we are opining herein, we have assumed that such laws are identical to the state laws of the Commonwealth of Massachusetts, and we are expressing no opinion herein as to whether such assumption is reasonable or correct. Sycamore Networks, Inc. September 24, 1999 Page 2 Based upon and subject to the foregoing, we are of the opinion that the Shares have been duly authorized for issuance and, when such Shares are issued and paid for in accordance with the terms and conditions of the Underwriting Agreement, such Shares will be validly issued, fully paid and nonassessable. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Please note that we are opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our name therein and in the related Prospectus under the caption "Legal Matters." In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. Very truly yours, /s/ Hale and Dorr LLP HALE AND DORR LLP EX-10.3 3 PURCHASE AND LICENSE AGREEMENT EXHIBIT 10.3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 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 Affiliates Communications, Inc., and to its parent Company and any parents of its parent Company as well as any of the parents majority owned subsidiaries (hereinafter Affiliates), and Williams and its Affiliates 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' Affiliate 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 up to the delivery point at Williams' premises shall be arranged by Sycamore 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 at Williams' premises. 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 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 or pursuant to Section 8.6. 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 Products 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 Products shall not lose functionality or degrade in performance as a consequence of such Products operating in a date later than December 31, 1999. Sycamore shall also consult with Williams to (i) ensure that such Products 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 Products will be interoperable with other software used by Williams which will interact directly with the Sycamore Products 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, timeout 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 DEATH) 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 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. 17.6 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. ---------------------- 17.7 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. 17.8 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. 17.9 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. 17.10 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. Sycamore agrees that under its insurance policies Williams will be named as an additional insured. 17.11 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. 17.12 Time and Material Charges. If Sycamore invoices Williams time and material charges for services provided, Sycamore agrees to provide documentation to substantiate such charges. 17.13 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. 17.14 Marketing. Sycamore and Williams agree to engage in joint marketing and advertising activities as mutually agreed to by the parties. The amounts spent on the joint marketing activities will be based on the amount of purchases made by Williams hereunder at a contribution percentage to be mutually determined by the parties within the first twelve months of this Agreement. 15 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORKS, INC. ---------------------- 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. ---------------------- 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 ten million dollars ($10,000,000) 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. Williams commitment is an estimate only and Williams shall have no liability or penalty for failure to purchase this amount. 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. f) In the event of a release from escrow of the Materials deposited, Williams agrees that such material shall be maintained as Sycamore's Confidential and Trade Secret Information and shall only be used for the purpose of maintaining Williams' installed base of Sycamore Products by Williams or, if Williams so elects, a third party agreed to in writing by Sycamore, provided said third party is bound by the same confidentiality and use restrictions as Williams. Sycamore shall not unreasonably withhold or delay such agreement. If Sycamore is no longer operating its business, such consent will not be required. 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 Networks 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 Licensees 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 33 CONFIDENTIAL AND PROPRIETARY INFORMATION OF ------------------------------------------- SYCAMORE NETWORK, INC --------------------- Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 4. Return-to-Factory Repair Service 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 --------------------- EX-10.9 4 LEASE AGREEMENT W/TIB REAL ESTATE LIMITED EXHIBIT 10.9 LEASE AGREEMENT BETWEEN W9/TIB REAL ESTATE LIMITED PARTNERSHIP, AS LANDLORD, AND SYCAMORE NETWORKS, INC., AS TENANT DATED AUGUST ___, 1999 BASIC LEASE INFORMATION ----------------------- Lease Date: August ___, 1999 Tenant: SYCAMORE NETWORKS, INC., a Delaware corporation Landlord: W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership Premises: The entire building containing approximately 82,848 rentable square feet commonly known as 4 Omni Way, Chelmsford, Massachusetts (the "BUILDING"), and whose street address is 4 Omni Way, Chelmsford, Massachusetts and the Land (hereinafter defined) and all other improvements located thereon, including, without limitation, the parking and loading areas on the Land, the walkways and driveways providing access to the Building and such parking and loading areas, and the wires, cables, pipes, mains, conduits, trenches and other fixtures, facilities and equipment necessary or convenient to provide electricity, telephone, cable, gas, water, sewer and other utility and telecommunication services to the Building. The Premises are outlined on the plan attached to the Lease as Exhibit A. The land on which the Building is located (the "LAND") is described on Exhibit B. Term: Approximately sixty (60) months, commencing on the date (the "COMMENCEMENT DATE") which is the earlier of (i) the date which is sixty (60) days after the date (the "DELIVERY DATE") upon which the Landlord delivers the Premises to Tenant in broom-clean condition and free of tenants and occupants and their possessions, or (ii) the date upon which Tenant occupies the Premises for the Permitted Use (and not for the construction and installation of the Work, as hereinafter defined) and ending at 5:00 p.m. on the last day of the sixtieth (60) full calendar month following the Commencement Date, subject to adjustment and earlier termination as provided in the Lease . Basic Rent: Basic Rent shall be the following amounts for the following periods of time:
LEASE MONTH MONTHLY BASIC RENT --------------------- ---------------------------- 1-24 $79,396.00 25-60 $86,300.00
i As used herein, the term "LEASE MONTH" shall mean each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month shall be included in the first Lease Month for purposes of determining the duration of the Term and the monthly Basic Rent rate applicable for such partial month). Security Deposit: Subject to the provisions of Section 6 of the Lease, $500,000.00. Rent: Basic Rent, Taxes, Additional Rent, and all other sums that Tenant may owe to Landlord or otherwise be required to pay under the Lease. Permitted Use: Subject to and to the extent permitted by all applicable Laws, general office and research and development use. Initial Liability Insurance Amount: $3,000,000.00 Maximum Construction Allowance: $ 828,480.00.
Tenant's Address: Prior to Commencement Date: Following the Commencement Date: --------------------------- -------------------------------- 10 Elizabeth Drive 4 Omni Way Chelmsford, MA 01824-4111 Chelmsford, MA 01824-4111 Attn: Mr. Peter Hamel Attn: Corporate Counsel
At all times with a copy to: --------------------------- Testa, Hurwitz & Thibeault, LLP 125 High Street Boston, MA 02110 Attn: Real Estate Department Landlord's Address: For all Notices: With a copy to: --------------- -------------- Archon Group, L.P. Choate, Hall & Stewart 1275 K Street NW, Suite 900 Exchange Place Washington, DC 20005 53 State Street Boston, MA 02109-2891 Attn: Anne Rickard Jackowitz, P.C. ii The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control. LANDLORD: W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: W9/TIB Gen-Par, Inc., a Delaware corporation, its general partner By: __________________________ Name:___________________ Title:__________________ TENANT: SYCAMORE NETWORKS, INC., a Delaware corporation By: __________________________ Name:________________________ Title: President/Vice President By: ___________________________ Name:__________________________ Title: Treasurer/Assistant Treasurer iii TABLE OF CONTENTS -----------------
Page 1. DEFINITIONS AND BASIC PROVISIONS......................... 1 -------------------------------- 2. LEASE GRANT.............................................. 1 ----------- 4. RENT..................................................... 2 ---- (a) PAYMENT........................................... 2 ------- (b) OPERATING COSTS; TAXES............................ 2 ---------------------- (c) BILLING FOR ELECTRICITY........................... 5 ----------------------- 5. DELINQUENT PAYMENT; HANDLING CHARGES..................... 6 ------------------------------------ 6. SECURITY DEPOSIT......................................... 6 --------------- 7. LANDLORD'S OBLIGATIONS................................... 9 ---------------------- (a) SERVICES.......................................... 9 -------- (b) LANDLORD'S MAINTENANCE OBLIGATIONS................ 9 ---------------------------------- (c) EXCESS UTILITY USE................................ 9 ------------------ (d) RESTORATION OF SERVICES; ABATEMENT................ 10 ---------------------------------- 8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE.......... 10 ----------------------------------------------- (a) IMPROVEMENTS; ALTERATIONS........................ 10 ------------------------- (b) REPAIRS; MAINTENANCE............................. 11 -------------------- (c) PERFORMANCE OF WORK.............................. 11 ------------------- (d) MECHANIC'S LIENS................................. 12 ---------------- (e) UTILITIES........................................ 12 --------- (f) FLOOR LOAD; HEAVY MACHINERY...................... 12 ---------------------------- 9. USE...................................................... 13 --- 10. ASSIGNMENT AND SUBLETTING................................ 13 ------------------------- (a) TRANSFERS........................................ 13 --------- (b) CONSENT STANDARDS................................ 13 ----------------- (c) REQUEST FOR CONSENT.............................. 13 ------------------- (d) CONDITIONS TO CONSENT............................ 14 --------------------- (e) CANCELLATION..................................... 14 ------------ (f) ADDITIONAL COMPENSATION.......................... 14 ----------------------- (g) PERMITTED TRANSFERS.............................. 14 ------------------
iv 11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY............... 15 ------------------------------------------ (a) TENANT'S INSURANCE................................. 15 ------------------ (b) LANDLORD'S INSURANCE............................... 16 -------------------- (c) WAIVER OF NEGLIGENCE; NO SUBROGATION............... 16 ------------------------------------ (d) TENANT'S INDEMNITY................................. 16 ----------------- 12. SUBORDINATION; ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE 17 --------------------------------------------------------- (a) SUBORDINATION...................................... 17 ------------- (b) ATTORNMENT......................................... 17 --------- (c) NOTICE TO LANDLORD'S MORTGAGEE..................... 17 ------------------------------ (d) LANDLORD'S MORTGAGEE'S PROTECTION PROVISIONS....... 17 -------------------------------------------- 13. RULES AND REGULATIONS.................................... 18 --------------------- 14. CONDEMNATION............................................. 19 ------------ (a) TOTAL TAKING........................................ 19 ------------ (b) PARTIAL TAKING - TENANT'S RIGHTS..................... 19 ------------------------------- (c) PARTIAL TAKING - LANDLORD'S RIGHTS................... 19 --------------------------------- (d) AWARD............................................... 19 ----- 15. FIRE OR OTHER CASUALTY................................... 19 ---------------------- (a) REPAIR ESTIMATE.................................... 19 --------------- (b) LANDLORD'S AND TENANT'S RIGHTS..................... 19 ------------------------------ (c) LANDLORD'S RIGHTS.................................. 20 ----------------- (d) REPAIR OBLIGATION.................................. 20 ----------------- 16. PERSONAL PROPERTY TAXES.................................. 20 ----------------------- 17. EVENTS OF DEFAULT........................................ 21 ----------------- 18. REMEDIES................................................. 21 -------- 19. PAYMENT BY TENANT; NON-WAIVER............................ 22 ----------------------------- (a) PAYMENT BY TENANT................................. 22 ----------------- (b) NO WAIVER......................................... 23 --------- 20. LANDLORD'S LIEN.......................................... 23 --------------- 21. SURRENDER OF PREMISES.................................... 23 --------------------- 22. HOLDING OVER............................................. 23 ------------ 23. CERTAIN RIGHTS RESERVED BY LANDLORD...................... 24 -----------------------------------
v 24. INTENTIONALLY DELETED.................................... 24 --------------------- 25. MISCELLANEOUS............................................ 24 ------------- (a) LANDLORD TRANSFER.................................... 24 ----------------- (b) LANDLORD'S LIABILITY................................. 24 -------------------- (c) FORCE MAJEURE........................................ 25 ------------- (d) BROKERAGE............................................ 25 --------- (e) ESTOPPEL CERTIFICATES................................ 25 -------------------- (f) NOTICES.............................................. 25 ------- (g) SEPARABILITY......................................... 25 ------------ (h) AMENDMENTS; AND BINDING EFFECT....................... 25 ------------------------------ (i) QUIET ENJOYMENT...................................... 26 --------------- (j) NO MERGER............................................ 26 --------- (k) NO OFFER............................................. 26 -------- (l) ENTIRE AGREEMENT..................................... 26 ---------------- (m) WAIVER OF JURY TRIAL................................. 26 -------------------- (n) GOVERNING LAW........................................ 26 ------------- (o) JOINT AND SEVERAL LIABILITY.......................... 26 --------------------------- (p) FINANCIAL REPORTS.................................... 26 ----------------- (q) LANDLORD'S FEES...................................... 27 --------------- (r) [INTENTIONALLY OMITTED].............................. 27 (s) CONFIDENTIALITY...................................... 27 --------------- (t) HAZARDOUS MATERIALS.................................. 27 ------------------- (u) LIST OF EXHIBITS..................................... 28 ---------------- (v) TIME OF ESSENCE...................................... 28 --------------- (w) SIGNAGE.............................................. 28 ------- (x) ACCESS 28 ------ (y) FAILURE OF TENANT TO CONTINUOUSLY OCCUPY THE PREMISES 28 ----------------------------------------------------- 26. OTHER PROVISIONS......................................... 29 ----------------
vi LIST OF DEFINED TERMS Additional Rent............................................................................ 2 Affiliate.................................................................................. 1 Amendment.................................................................................. E-1 AS-IS...................................................................................... D-1 Base Building Electrical Capacity.......................................................... 9 Basic Lease Information.................................................................... 1 Basic Rent................................................................................. i Building................................................................................... i Building's Structure....................................................................... 9 Casualty................................................................................... 19 Commencement Date.......................................................................... i Common Property Expenses................................................................... 5 Common Property Lot........................................................................ 5 Common Property Plan....................................................................... 5 Construction Allowance..................................................................... D-2 Damage Notice.............................................................................. 19 Delivery Date.............................................................................. i Estimated Delivery Date.................................................................... 1 Event of Default........................................................................... 21 Exterior Areas............................................................................. 9 Fair Market Rental Rate.................................................................... G-1 GAAP....................................................................................... 15 Hazardous Materials........................................................................ 27 HVAC....................................................................................... 10 including.................................................................................. 1 Land....................................................................................... i Landlord................................................................................... 1, E-1 Landlord's Mortgagee....................................................................... 17 Law........................................................................................ 1 Laws....................................................................................... 1 Lease...................................................................................... 1-F-1 Lease Month................................................................................ ii Letter of Credit........................................................................... 7 Loss....................................................................................... 16 Mortgage................................................................................... 17 Non-Disturbance Agreement.................................................................. 18 Office Park................................................................................ 6 Omni Way................................................................................... 5 Operating Costs............................................................................ 3 Operating Costs and Tax Statement.......................................................... 4
vii Operating Year............................................................................. 6 Permitted Transfer......................................................................... 14 Permitted Transferee....................................................................... 14 Permitted Use.............................................................................. ii Premises................................................................................... i Punchlist Items............................................................................ E-1 Reduction Date............................................................................. 8 Reduction Dates............................................................................ 8 Rent....................................................................................... ii Security Deposit........................................................................... ii Taking..................................................................................... 19 Tangible Net Worth......................................................................... 15 Taxes...................................................................................... 4 Tenant..................................................................................... 1, 21, E-1 Tenant Party............................................................................... 1 Tenant's Common Property Percentage........................................................ 6 Term....................................................................................... i Total Construction Costs................................................................... D-2 Transfer................................................................................... 13 Work....................................................................................... D-1 Working Drawings........................................................................... D-1
viii LEASE ----- THIS LEASE AGREEMENT (this "LEASE") is entered into as of August __, 1999, between W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership ("LANDLORD"), and SYCAMORE NETWORKS, INC., a Delaware corporation ("TENANT"). 1. DEFINITIONS AND BASIC PROVISIONS. The definitions and basic -------------------------------- provisions set forth in the Basic Lease Information (the "BASIC LEASE INFORMATION") executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes. Additionally, the following terms shall have the following meanings when used in this Lease: "LAWS" means all federal, state, and local laws, rules and regulations, all court orders, governmental directives, and governmental orders, and all restrictive covenants affecting the Premises as of the date of this Lease, and "LAW" shall mean any of the foregoing; "AFFILIATE" means any person or entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question; "TENANT PARTY" means any of the following persons: Tenant; any assignees claiming by, through, or under Tenant; any subtenants claiming by, through, or under Tenant; and any of their respective agents, contractors, employees, and invitees; and "INCLUDING" means including, without limitation. 2. LEASE GRANT. Subject to the terms of this Lease, Landlord leases to ----------- Tenant, and Tenant leases from Landlord, the Premises for the Term. 3. TERM. Landlord shall deliver possession of the Premises to Tenant on ---- or before August 24, 1999, and in broom-clean condition and free of all tenants and occupants and their possessions (the "ESTIMATED DELIVERY DATE"). If the Premises are not delivered to Tenant on the Estimated Delivery Date as aforesaid, then (a) Landlord shall not be in default hereunder or be liable for damages therefor, and (b) Tenant shall accept possession of the Premises when Landlord tenders possession thereof to Tenant. Upon the Delivery Date, Tenant shall be deemed to have accepted the Premises in the condition specified in Section 1 of Exhibit D attached hereto, subject to Landlord's obligation to put --------- all Building HVAC and mechanical systems serving the Premises in operable condition on or before the Commencement Date, and in broom-clean condition. Following the Commencement Date, Tenant and Landlord each shall execute and deliver to the other, within ten days after receiving a written request therefor, an amendment substantially in the form of Exhibit E hereto confirming --------- the Commencement Date and the expiration date of the initial Term, that Tenant has accepted the Premises except as otherwise specified in said amendment, and that Landlord has performed all of its obligations with respect to the Premises except as otherwise specified in said amendment. Subject to all of the provisions of this Lease excepting only those requiring the payment of Basic Rent, Additional Rent and Taxes, Tenant shall have the right to use and occupy the Premises before the Commencement Date for the purpose of constructing the Work and installing its trade fixtures, equipment and personal property. Notwithstanding the foregoing, if the Premises have not been delivered to Tenant in accordance with the terms and conditions of this Lease on or before September 16, 1999, then Tenant shall have the right to 1 terminate this Lease upon ten (10) days prior written notice to Landlord; provided, however, if Landlord delivers possession of the Premises to Tenant in the condition required under this Section 3 within said ten (10) day period, then Tenant's termination notice shall be null and void and the provisions of this Lease shall remain in full force and effect. If this Lease is terminated in accordance with the provisions of the preceding sentence, Landlord shall immediately return any deposits or other funds paid to Landlord by Tenant. 4. RENT. ---- (a) PAYMENT. Commencing as of the Commencement Date, Tenant shall ------- timely pay to Landlord Basic Rent and all additional sums to be paid by Tenant to Landlord under this Lease, without notice, deduction or set off, except as otherwise expressly provided herein, at Landlord's address provided for in this Lease or as otherwise specified by Landlord in a written notice to Tenant, and shall be accompanied by all applicable state and local sales or use taxes. Basic Rent, adjusted as herein provided, shall be payable monthly in advance. The first monthly installment of Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable on the first day of each month beginning on the first day of the second full calendar month of the Term. The monthly Basic Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month from and after the Commencement Date, and shall be due on the Commencement Date. (b) OPERATING COSTS; TAXES ---------------------- (1) Tenant shall pay all of the Operating Costs (defined below) ("ADDITIONAL RENT") attributable to any period included in the Term according to the terms of this Section 4.(b). Landlord may make a good faith estimate of the Additional Rent to be due by Tenant for any calendar year or part thereof during the Term, and Tenant shall pay to Landlord, on the Commencement Date and on the first day of each calendar month thereafter, an amount equal to the estimated Additional Rent for such calendar year or part thereof divided by the number of months in such year or partial year. From time to time, Landlord may reasonably estimate and re-estimate the Additional Rent to be due by Tenant and deliver a copy of the estimate or re-estimate to Tenant; provided, however, the estimate or the difference between the re-estimate and the prior estimate in the case of a re-estimate, as applicable, attributable to the period covered by such estimate or re-estimate before the date when Tenant receives such estimate or re-estimate shall be payable within thirty (30) days after Landlord delivers the estimate or re-estimate, as applicable. Thereafter, the monthly installments of Additional Rent payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of the Additional Rent for each such calendar year as reasonably estimated by Landlord. Any amounts paid based on such an estimate shall be subject to adjustment as herein provided when actual Operating Costs are available for each calendar year. 2 (2) The term "OPERATING COSTS" shall mean all expenses and disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, and maintenance of the Premises, determined in accordance with generally accepted accounting principles consistently applied, including, but not limited to, the following costs: (A) wages and salaries (including management fees, which management fees shall not exceed fair market management fees in comparable single tenanted buildings in the Greater Boston area) of all employees at the level of building manager and below engaged in the operation, maintenance, and security of the Premises, including taxes, insurance and benefits relating thereto; (B) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the Premises; (C) costs for improvements made to the Premises which, although capital in nature, reduce the normal operating costs (including all utility costs) of the Premises, as well as capital improvements made in order to comply with any law hereafter promulgated by any governmental authority, as amortized over the useful economic life of such improvements as determined by Landlord in its reasonable discretion (with only the annual amortized portion of such costs being included in Operating Costs in any calendar year); (D) cost of all utilities, except the cost of utilities paid directly by Tenant or reimbursable to Landlord by Tenant other than pursuant to a provision similar to this provision; (E) insurance expenses; (F) repairs, replacements, and general maintenance of the Premises; (G) service or maintenance contracts with independent contractors for the operation, maintenance, repair, replacement, or security of the Premises (including, without limitation, alarm service, window cleaning, and elevator maintenance); and (H) Tenant's Common Property Percentage of Common Property Expenses. Notwithstanding any other provision of this Lease, Operating Costs shall not include costs for (i) capital improvements made to the Premises, other than capital improvements described in Section 4.(b)(2)(C) and except for items which are generally considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; (ii) repair, replacements and general maintenance and other expenses paid by proceeds of insurance or by Tenant or other third parties; (iii) interest, amortization of principal or other payments on loans to Landlord and rent and other sums due under a ground lease or master lease relating to the Premises; (iv) depreciation; (v) leasing commissions; (vi) legal expenses for services, other than those that benefit Tenant (e.g., tax disputes); (vii) Taxes (defined --- below); (viii) federal income taxes imposed on or measured by the income of Landlord from the operation of the Premises; (ix) the cost of repairs necessary to cure any latent defect in the initial construction of the Building; (x) Landlord's general overhead except as it relates specifically to the management or operations of the Premises; (xi) any cost necessary to cure any violation of any law, ordinance or regulation applicable to the Building existing as of the date of this Lease or to investigate, test, contain and/or remediate the presence of Hazardous Materials or other environmental conditions existing as of the date of this Lease (in each case, to the extent not caused or exacerbated by any Tenant Party); (xii) any cost or expense to the extent to which Landlord is paid or reimbursed (other than as a payment for Operating Costs), including, but not necessarily limited to, the cost of any item for which Landlord is paid or reimbursed by insurance warranties, service contracts, condemnation proceeds or otherwise; (xiii) costs of repairs and replacements arising out of a fire or other casualty or an exercise of eminent domain affecting the 3 Building or the Land, except for the deductibles under policies of insurance carried by Landlord; (xiv) compensation for executives or officers or other employees of Landlord above the level of the building manager; (xv) expenses arising from the gross negligence or willful misconduct of Landlord or its agents, employees or contractors; (xvi) rent loss insurance; and (xvii) costs or expenses of operating, administrating, cleaning, repairing, maintaining, replacing, managing and lighting any land, buildings, facilities, structures and improvements in the Office Park that do not serve the Premises exclusively or in common with other lots and buildings in the Office Park. (3) Tenant shall also pay all of the Taxes for each year and partial year falling within the Term, in the same manner as provided in Sections 4.(b)(1) and 4.(b)(5) for Additional Rent with regard to Operating Costs. "TAXES" shall mean taxes, assessments, and governmental charges whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Premises (or its operation), excluding, however, penalties and interest thereon and federal and state taxes on income (but if the present method of taxation changes so that in lieu of the whole or any part of any Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Premises, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "TAXES" for purposes hereof). Taxes shall include the costs of consultants retained in an effort to lower taxes and all costs incurred in disputing any taxes or in seeking to lower the tax valuation of the Premises. For property tax purposes, Tenant waives all rights to protest or appeal the appraised value of the Premises, as well as the Building, and all rights to receive notices of reappraisement. Landlord represents to Tenant that the Premises comprise a tax parcel separately assessed from other property of Landlord or any third party. (4) INTENTIONALLY DELETED. --------------------- (5) By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Operating Costs for the previous year, and of the Taxes for the previous year (the "OPERATING COSTS AND TAX STATEMENT"). If the Operating Costs and Tax Statement reveals that Tenant paid more for Operating Costs than the actual amount for the year for which such statement was prepared, or more than its actual share of Taxes for such year, then Landlord shall promptly credit or reimburse Tenant for such excess; likewise, if Tenant paid less than Tenant's actual Additional Rent or Taxes due, then Tenant shall promptly pay Landlord such deficiency. If Tenant is not in monetary default of its obligations under this Lease, within a period of sixty (60) days following receipt of the Operating Costs and Tax Statement, Tenant or its representatives (which representatives shall exclude anyone hired on a contingent fee basis) shall have the right, upon reasonable prior notice and at mutually convenient times, to examine Landlord's books and records with respect to the items in such Statement during normal business hours at Landlord's offices where such books and records are maintained (which books and records shall be maintained in accordance with GAAP). Tenant may give Landlord notice of any written objection to any items of expense. If it shall be determined 4 by Landlord and Tenant that (i) Landlord overcharged Tenant, Landlord shall promptly refund (but no later than thirty (30) days after such determination is made) to Tenant the amount of any such overcharge, or (ii) Landlord undercharged Tenant, then Tenant shall promptly pay (but no later than thirty (30) days after such determination is made) the amount of any such undercharge to Landlord. Any information obtained by Tenant pursuant to the provisions of this Section 4.(b)(5) shall be treated as confidential under the conditions set forth in Section 25.(s) of this Lease. (c) BILLING FOR ELECTRICITY. Tenant shall pay (as hereinafter ----------------------- described) for the use of all electrical service to the Premises. Tenant shall be billed directly by such utility company and Tenant agrees to pay each bill promptly in accordance with its terms, and upon default in making any such payment which continues for more than ten (10) days after written notice to Tenant, Landlord may pay such charges and collect the same from Tenant. In the event for any reason Tenant cannot be billed directly, Landlord shall forward each bill received with respect to the Building to Tenant, which Tenant shall pay within thirty (30) days of receiving each such bill unless the terms of the each such bill specify otherwise. (d) COMMON PROPERTY EXPENSES. ------------------------ (1) Definitions. For the purposes of this Section 4.(d), the ----------- following terms shall have the following respective meanings: (A) The term "COMMON PROPERTY" shall mean the retention ponds, drainage facilities, electric substations, utility lines, pumping stations and other facilities and structures which serve the Premises in common with other lots and buildings in the Office Park (as hereinafter defined), excluding any such facilities and structures that serve or benefit any lot or building in the Office Park exclusively, together with "Omni Way" (as said term is hereinafter defined) and all curbing, gutters, paving and sidewalks located within the right of way of Omni Way, as well as the parcel of land together with the gazebo and all other improvements now or hereafter located thereon (said land, gazebo and improvements, as the same may be altered from time to time, are hereinafter collectively referred to as the "COMMON PROPERTY LOT") shown as Lot 3 on a plan (the "COMMON PROPERTY PLAN") entitled "Plan of Land of Billerica Road Site, Chelmsford, MA", recorded in the Middlesex North District Registry of Deeds in Plan Book 143, as Plan 143, all as located in or about or adjacent to Omni Way. As used herein, the term "OMNI WAY" shall mean the road shown on the Common Property Plan as Patricia Drive and now being known as Omni Way, as said Omni Way may be altered or changed from time to time. (B) The term "COMMON PROPERTY EXPENSES" shall mean the aggregate costs or expenses reasonably incurred by Landlord with respect to the operation, 5 administration, cleaning, repair, maintenance, replacement, management and lighting of the Common Property, together with all costs of any insurance carried by Landlord with respect to the Common Property and together with all Taxes on, or related to, or which may become a lien on, any Common Property. (C) The term "OFFICE PARK" shall mean the land and buildings known and numbered as 2 Omni Way, 4 Omni Way, 5 Omni Way and 6 Omni Way in Chelmsford, Massachusetts, shown as Lots 2A, 2B, 2E and 2D on the Common Property Plan. (D) The term "OPERATING YEAR" shall mean each calendar year in which -------------- any part of the Term of this Lease shall fall. (E) The term "TENANT'S COMMON PROPERTY PERCENTAGE" shall mean 23.81%. ----------------------------------- (2) Tenant's Payments. ------------------ Operating Costs shall include an amount equal to (i) Common Property Expenses for each Operating Year multiplied by (ii) the Tenant's Common Property Percentage, such amount to be apportioned for any partial Operating Year in which the Commencement Date falls or the Term of this Lease ends. 5. DELINQUENT PAYMENT; HANDLING CHARGES. All past due payments required ------------------------------------ of Tenant hereunder shall bear interest from the date due until paid at the lesser of twelve percent per annum or the maximum lawful rate of interest; additionally, Landlord may charge Tenant a fee equal to 5% of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant's delinquency. In no event, however, shall the charges permitted under this Section 5 or elsewhere in this Lease, to the extent they are considered to be interest under applicable Law, exceed the maximum lawful rate of interest. 6. SECURITY DEPOSIT. Contemporaneously with the execution of this ---------------- Lease, Tenant shall pay to Landlord the Security Deposit, which shall be held by Landlord to secure Tenant's performance of its obligations under this Lease. The Security Deposit is not an advance payment of Rent or a measure or limit of Landlord's damages upon an Event of Default (defined in Section 17). Landlord may, from time to time following an Event of Default and without prejudice to any other remedy, use all or a part of the Security Deposit to perform any obligation Tenant fails to perform hereunder with respect to such Event of Default. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. After applying all sums necessary to cure any Event of Default, Landlord shall, within 30 days after the Term ends, return to Tenant the portion of the Security Deposit which was not properly applied to satisfy Tenant's obligations. The Security Deposit may be commingled with other funds, and no interest shall be paid thereon. If 6 Landlord transfers its interest in the Premises and the transferee assumes Landlord's obligations under this Lease, then Landlord shall assign the Security Deposit to the transferee and the transferor Landlord thereafter shall have no further liability for the return of the Security Deposit, but the transferee Landlord, by accepting any such transfer, shall be deemed to have assumed all obligations of Landlord with respect to the Security Deposit. In lieu of a cash Security Deposit, simultaneously with the execution and delivery of this Lease, or from time to time during the Term, Tenant may deliver to Landlord an irrevocable and unconditional standby letter of credit made payable to Landlord, its successors and assigns, in the sum of $500,000.00 (the "LETTER OF CREDIT"), in the form of the sample letter of credit attached hereto as Exhibit I or in such other form as is reasonably acceptable to Landlord, --------- which shall secure the performance by Tenant of all obligations on the part of Tenant hereunder. The issuer of the Letter of Credit shall be a banking institution with at least a rating of A and otherwise reasonably acceptable to Landlord. Although Landlord shall only have the right to draw under the Letter of Credit as set forth herein, under the terms of the Letter of Credit, the sole condition to Landlord's draw upon the Letter of Credit shall be presentment to the issuer thereof, prior to or on the expiration date, of a demand for payment, together with a statement or certification that an Event of Default has occurred under this Lease or that Landlord has received a notice of the failure to extend or renew the Letter of Credit. The Letter of Credit shall be self-renewing from year to year during the Term of this Lease so as to expire no earlier than thirty (30) days following the Lease expiration date and shall contain such other customary terms as Landlord requires in its reasonable discretion. It is agreed: (i) that the Letter of Credit may be drawn upon to cure any Event of Default that may exist, without prejudice to any other remedy or remedies which Landlord may have on account thereof, and upon Landlord's demand, Tenant shall reimburse the issuer for the amount so drawn so that the Letter of Credit will be restored to its original amount; (ii) subject to the provisions of clause (iv) below, that the Letter of Credit may be drawn upon if the Letter of Credit has not been extended or renewed without amendment at least forty-five (45) days prior to any then-current expiration date thereof; (iii) that if the rating of the issuer of the Letter of Credit at any time drops below A, then, within sixty (60) days of Landlord's written demand, Tenant shall replace the Letter of Credit with another Letter of Credit in a form reasonably acceptable to Landlord and with an issuer with a rating of at least an A and otherwise reasonably acceptable to Landlord; upon receipt of such substitute Letter of Credit, Landlord shall promptly return the previous Letter of Credit to Tenant; and Landlord may draw on the existing Letter of Credit if, after Landlord requests that Tenant replace the Letter of Credit as aforesaid, Landlord is not provided with a substitute Letter of Credit in a form, and from an issuer, satisfactory to Landlord as provided above at least fifteen (15) days prior to the then- current expiration date of the Letter of Credit; (iv) if at any time, but in any event, at least sixty (60) days prior to the expiration of the Letter of Credit, Tenant may seek Landlord's consent to switch issuers of the Letter of Credit provided the prospective issuer has a rating of at least an A and is otherwise reasonably acceptable to Landlord and the new form of Letter of Credit satisfies the requirements of Landlord hereunder and is otherwise reasonably acceptable to Landlord; upon receipt of such substitute Letter of Credit, Landlord shall promptly return the previous Letter of Credit to Tenant; and Landlord may draw on the existing Letter of Credit if, after Tenant requests 7 Landlord's consent to switch issuers as aforesaid, Landlord is not provided with a substitute Letter of Credit in a form, and from an issuer, satisfactory to Landlord in its sole and absolute discretion at least forty-five (45) days prior to the then-current expiration date of the Letter of Credit; (v) that should the Premises be conveyed by Landlord, the Letter of Credit or any portion thereof shall be assigned to Landlord's grantee, and if the same be assigned as aforesaid, Tenant hereby releases Landlord from any and all liability with respect to the Letter of Credit and its application or return, and Tenant agrees to look to such grantee for such application or return; provided, however, that, by accepting any such conveyance, such grantee shall be deemed to have assumed Landlord's obligations under this Lease (including this Section 6); and (vi) that the Letter of Credit shall be returned to Tenant upon the later of (a) thirty (30) days after the expiration of the Term or any renewal or extension thereof, or (b) the date Tenant has vacated the Premises and surrendered possession thereof to Landlord at the expiration of the Term or any extension thereof as provided herein and has paid Landlord all sums due and owing under this Lease. If Tenant initially provides Landlord with a cash Security Deposit, Tenant may replace such cash Security Deposit with a Letter of Credit in accordance with the provisions of the preceding paragraph. Upon Landlord's receipt of a Letter of Credit satisfying the terms and conditions of the preceding paragraph, Landlord shall promptly return the cash Security Deposit to Tenant. For the purposes of this Section 6, a rating of at least A (or its equivalent) shall mean that such issuer has a rating of at least A (or its equivalent) from two (2) of the following four (4) rating agencies: Fitch Investors Service, Moody's Investor Service, Standard & Poor's Corporation and Duff & Phelps. Notwithstanding any of the foregoing provisions of this Section 6 to the contrary, on the date that is thirty-six (36) months after the Commencement Date and on the date that is forty-eight (48) months after the Commencement Date during the initial Term only (individually, a "REDUCTION DATE" and collectively the "REDUCTION DATES"), the Security Deposit (or the applicable Letter or Credit) shall be reduced by $100,000.00, provided that on the applicable Reduction Date (i) the Lease is in full force and effect, (ii) no Event of Default exists, (iii) no Event of Default has occurred more than twice during the Term, and (iv) Tenant has not assigned this Lease to anyone other than an Affiliate of Tenant. If on any of the Reduction Dates the Security Deposit (or the applicable Letter of Credit) shall not be reduced because one or more of the conditions set forth in clauses (i), (ii) or (iii) above cease to exist on the applicable Reduction Date, the Security Deposit (or applicable Letter of Credit) shall not be reduced during any succeeding calendar year. If on any of the Reduction Dates the Security Deposit (or applicable Letter of Credit) shall not be reduced because only the condition set forth in clause (iv) above (as opposed to the conditions set forth in any of clauses (i), (ii) or (iii) above) ceases to exist on the applicable Reduction Date, the Security Deposit (or applicable Letter of Credit) shall be so reduced on the next Reduction Date, provided the conditions set forth in clauses (i), (ii), (iii) and (iv) above exist on that Reduction Date, and provided further that the Security Deposit (or applicable Letter of Credit) shall be reduced only by the amount which the Security Deposit (or applicable Letter of Credit) would have been reduced in the preceding Reduction Date year if all 8 of the conditions set forth in clauses (i), (ii), (iii) and (iv) above existed. Notwithstanding any other provisions of this Section 6, the Security Deposit (or the applicable Letter of Credit) shall be reduced by $100,000.00 on each anniversary of the Commencement Date, provided that the conditions set forth in clauses (i), (ii), (iii) and (iv) above are satisfied and Tenant or a Permitted Transferee has a Tangible Net Worth of at least $36,000,000.00. If the Security Deposit (or applicable Letter of Credit) is reduced pursuant to the foregoing provisions, Landlord shall return the amount of each such applicable reduction if Tenant paid the Security Deposit in cash or Tenant may replace and/or amend the Letter of Credit accordingly. 7. LANDLORD'S OBLIGATIONS ---------------------- (a) SERVICES. Landlord shall furnish to Tenant the following services (the cost of which services shall be considered Operating Costs to the extent provided under Section 4 of this Lease): (1) water at those points of supply to the Building as currently; (2) HVAC having a total capacity of at least 245 tons; (3) electricity from a 3000-amp main having a capacity of 480/277 volts, three phase; and (4) removal of snow and ice from exterior walkways, driveways and parking and loading areas of the Premises. (b) LANDLORD'S MAINTENANCE OBLIGATIONS. Landlord shall perform all repairs, maintenance and replacements necessary to keep in good condition and working order and in compliance with all applicable laws (i) the Building's roof, foundation, slabs, columns and exterior walls of the Building (the "BUILDING'S STRUCTURE"), (ii) the Building's HVAC and mechanical systems, that portion of the plumbing system located on the exterior of the Building, and that portion of the electrical system located on the exterior of the Building up to and including the main electrical panel for the Building (including all wires, cables, pipes, main conduits, trenches and other fixtures, facilities and equipment on the Land outside the Building), and, in each case, only if Tenant has not performed any repairs, maintenance, alterations and/or improvements to any such systems, (iii) the parking and loading areas, driveways, walkways, drainage, landscaping and other exterior areas of the Premises (collectively, the "EXTERIOR AREAS"), and (iv) the Common Property. Landlord shall not be responsible for (1) alterations to the Building's Structure or any other portion of the Premises required by applicable Law because of Tenant's use of the Premises (which alterations shall be Tenant's responsibility), or (2) any such maintenance obligations caused by Tenant's negligence or its failure to comply with the provisions of this Lease. Any costs incurred by Landlord in connection with the repair and maintenance of the roof, any Building systems, Exterior Area and/or the Common Property shall be considered an Operating Cost to the extent set forth in, and paid by Tenant in accordance with, Section 4 above. The Building's Structure does not include skylights, windows, glass or plate glass, doors, special fronts, or office entries, all which shall be maintained by Tenant. (c) EXCESS UTILITY USE. Landlord shall not be required to furnish electrical current for equipment that requires more than the electrical capacity currently provided in the Building (the "BASE BUILDING ELECTRICAL CAPACITY"). If Tenant's requirements for or consumption of electricity exceed the Base Building Electrical Capacity, Landlord shall, at Tenant's expense, 9 make reasonable efforts to supply such service through the then-existing feeders and risers serving the Building, and Tenant shall pay to Landlord the cost of such service within ten (10) days after Landlord has delivered to Tenant an invoice therefor. Landlord may determine the amount of such additional consumption and potential consumption by any verifiable method, including installation of a separate meter in the Premises installed, maintained, and read by Landlord, at Tenant's expense. Tenant shall not install any electrical equipment requiring special wiring or requiring voltage in excess of the Base Building Electrical Capacity unless approved in advance by Landlord. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Building. Any risers or wiring required to meet Tenant's excess electrical requirements shall, upon Tenant's written request, be installed by Landlord, at Tenant's cost, if, in Landlord's judgment, the same are necessary and shall not cause permanent damage to the Building or the Premises, cause or create a dangerous or hazardous condition, or entail excessive or unreasonable alterations, repairs, or expenses. If Tenant uses machines or equipment in the Building which affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord may install supplemental air conditioning units or other supplemental equipment in the Building, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within ten (10) days after Landlord has delivered to Tenant an invoice therefor. (d) RESTORATION OF SERVICES; ABATEMENT. Landlord shall use reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant's obligations hereunder. If, however, Tenant is prevented from using the Premises for more than 25 consecutive business days because of the unavailability of any such service and such unavailability was not caused by a Tenant Party, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Rent for each consecutive day (after such 25-day period) that Tenant is so prevented from using the Premises. 8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE. ------------------------------------------------ (a) IMPROVEMENTS; ALTERATIONS. Improvements to the Premises shall be installed at Tenant's expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, and no alterations or physical additions in or to the Premises may be made without Landlord's prior written consent. Landlord's approval of any such plans and specifications and consent of any such alterations and/or additions shall not be unreasonably withheld, delayed or conditioned; however, Landlord may withhold its consent to any plans and specifications and/or any alteration or addition that would affect the Building's Structure or would have an adverse effect on the Building's heated and refrigerated air conditioning ("HVAC"), plumbing, electrical, or mechanical systems. Notwithstanding the foregoing, Tenant may from time to time make alterations, additions or improvements to the Premises, without the consent of Landlord and without Landlord's approval of plans, provided: (i) the cost thereof shall not exceed Twenty-Five Thousand Dollars ($25,000.00) (which Twenty- 10 Five Thousand Dollars ($25,000.00) shall be exclusive of the cost of any decorative improvements (i.e., painting and carpeting) and any minor electrical --- alterations not affecting the base building electrical system) in the aggregate in any consecutive twelve-month period; (ii) except for such decorative improvements and minor electrical alterations, Tenant shall, prior to commencing any such alterations, additions and/or improvements in the Premises in connection therewith, furnish Landlord with a complete set of plans and specifications for any such alterations, additions and/or improvements; (iii) such alterations, additions and/or improvements shall not affect the exterior or the structure of the Building or have any adverse effect on any of the mechanical, electrical or plumbing systems of the Building; and (iv) Tenant shall comply with all requirements of this Lease with respect to such alterations, additions and/or improvements other than obtaining the prior approval of Landlord. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type on or about the Premises which might affect the appearance of the exterior of the Building or any other portion of the Premises other than the interior of the Building without the prior written consent of Landlord, which shall not be unreasonably withheld, delayed or conditioned; however, Landlord may withhold its consent to any such painting or installation which would affect the appearance of the exterior of the Building. All alterations, additions, or improvements made in or upon the Premises shall be removed by Tenant prior to the end of the Term (and Tenant shall repair all damage caused thereby) if Landlord conditioned its consent to the initial installation of any such alterations, additions or improvements upon such removal; otherwise, in the absence of such a removal condition with respect to each and every alteration, addition or improvement, all such alterations, additions or improvements (excluding moveable partitions and Tenant's trade fixtures and personal property) shall remain on the Premises at the end of the Term without compensation to Tenant. All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's approval of the plans and specifications therefor shall not be a representation by Landlord that such alterations, additions, or improvements comply with any Law. (b) REPAIRS; MAINTENANCE. Subject to Landlord's obligations set forth in Section 7.(b) above, Tenant shall maintain the interior of the Building in a clean and safe condition and in as good and operable condition as exists after the construction of the Work (as hereinafter defined) and any other alterations, additions or improvements performed by Tenant, reasonable wear and tear and damage by fire, other casualty and eminent domain excepted, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Tenant shall repair or replace, subject to Landlord's direction and supervision, any improvement or system installed by a Tenant Party within the Premises and any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within thirty (30) days (or such shorter period of time required to prevent any damage from occurring to the Premises) after the occurrence of such damage, then Landlord may make the same at Tenant's cost. (c) PERFORMANCE OF WORK. All work described in this Section 8 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord, which approval shall not be unreasonably withheld, delayed or conditioned. Tenant 11 shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord as an additional insured against such risks, in such amounts, and with such companies as Landlord may reasonably require. All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Building (including the Premises, the structural elements, and the plumbing, electrical lines, or other utility transmission facility). All such work which may affect the Building's HVAC, electrical, plumbing, other mechanical systems, or structural elements must be approved by the Building's engineer of record (which approval shall not be unreasonably withheld, delayed or conditioned), at Tenant's expense and, with respect to structural elements, at Landlord's election, must be performed by Landlord's usual contractors for such work. Tenant shall provide to Landlord the names, addresses and copies of contracts for all contractors, and upon completion of any work shall promptly furnish Landlord with full and final waivers of lien covering all labors and materials included in the work in question. (d) MECHANIC'S LIENS. Tenant shall not permit any mechanic's liens to be filed against the Premises or the Building for any work performed, materials furnished, or obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, within ten days after Landlord has delivered notice of the filing thereof to Tenant, either pay the amount of the lien or diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. (e) UTILITIES. Tenant shall obtain and pay for all water, gas, electricity, heat, telephone, sewer, sprinkler charges and other utilities and services used at the Premises, together with all taxes, penalties, surcharges, and maintenance charges pertaining thereto. To the extent Tenant is not billed directly for any such utilities, any amounts payable by Tenant under this Section shall be due within ten (10) days after Landlord has invoiced Tenant therefor. (f) FLOOR LOAD; HEAVY MACHINERY. (i) Tenant shall not place a load upon any floor in the Building exceeding the floor load per square foot of area which such floor was designed to carry or which is allowed by law. Landlord reserves the right to prescribe the weight and position of all business machines and mechanical equipment, including safes, which shall be placed so as to distribute the weight. Business machines and mechanical equipment shall be placed and maintained by Tenant at Tenant's expense in settings sufficient, in Landlord's judgment, to absorb and prevent vibration, noise and annoyance. Tenant shall not move any safe, heavy machinery and/or heavy equipment into or out of the Building without Landlord's prior consent, which consent may include a requirement to provide insurance, naming Landlord as an insured, in such amounts as Landlord may deem reasonable. (ii) If such safe, machinery, equipment, freight, bulky matter or fixtures requires special handling, Tenant agrees that all work in connection therewith shall comply with 12 applicable laws and regulations. Any such moving shall be at the sole risk and hazard of Tenant, and Tenant will exonerate, indemnify and save Landlord harmless against and from any liability, loss, injury, claim or suit resulting directly or indirectly from such moving. 9. USE. Tenant shall continuously occupy and use the Premises only for the Permitted Use, and for no other purposes, and shall comply with all Laws relating to the use, condition, access to, and occupancy of the Premises. The population density within the Premises as a whole shall at no time exceed one person for each 250 rentable square feet in the Premises. The Premises shall not be used for any use which creates extraordinary fire hazards, or for the storage of any Hazardous Materials. If, because of any Tenant Party's acts, the rate of insurance on the Building or its contents increases, then Tenant shall pay to Landlord the amount of such increase within thirty (30) days of Landlord's written notice therefor, and acceptance of such payment shall not waive any of Landlord's other rights. If Tenant fails to cease or remediate such acts within five (5) days after Landlord's request that Tenant do so, then such acts shall be an Event of Default. Tenant shall conduct its business and control each other Tenant Party so as not to create any nuisance or unreasonably interfere with Landlord in its management of the Building. 10. ASSIGNMENT AND SUBLETTING ------------------------- (a) TRANSFERS. Except as provided in Section 10.(g), Tenant shall not, without the prior written consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded (or which will be publicly traded upon the consummation of the transfer at issue), permit the transfer of an interest in Tenant's capital stock so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 10.(a)(1) through 10.(a)(6) being a "TRANSFER"). (b) CONSENT STANDARDS. Landlord shall not unreasonably withhold its consent to any assignment or subletting of the Premises, provided that the proposed transferee (A) is creditworthy, (B) has a good reputation in the business community, (C) will use the Premises for the Permitted Use (thus, excluding, without limitation, uses for credit processing and telemarketing), and (D) is not a governmental entity, or subdivision or agency thereof. If the proposed transferee does not meet the criteria set forth in clauses (A) through (D) above, Landlord may withhold its consent in its sole discretion. (c) REQUEST FOR CONSENT. If Tenant requests Landlord's consent to a Transfer, then Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; reasonable banking, financial, and other 13 credit information; and general references sufficient to enable Landlord reasonably to determine the proposed transferee's creditworthiness and character. Concurrently with Tenant's notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $750.00 to defray Landlord's expenses in reviewing such request, and Tenant shall also reimburse Landlord, within thirty (30) days of receiving a written invoice, for its reasonable attorneys' fees incurred in connection with considering any request for consent to a Transfer (which attorneys' fees shall not exceed $2,500.00 unless otherwise agreed to by Tenant). (d) CONDITIONS TO CONSENT. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes Tenant's obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer. No Transfer shall release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord claiming the existence of an Event of Default. Tenant shall pay for the cost of any demising walls or other improvements necessitated by a proposed subletting or assignment. (e) CANCELLATION. Landlord may, within fifteen (15) business days after submission of Tenant's written request for Landlord's consent to an assignment or a sublease of the entire Premises for the then balance of the Term, cancel this Lease as of the date the proposed Transfer is to be effective. If Landlord cancels this Lease, Tenant shall pay to Landlord all Rent accrued through the cancellation date. Thereafter, Landlord may lease the Premises to the prospective transferee (or to any other person) without liability to Tenant. (f) ADDITIONAL COMPENSATION. Tenant shall pay to Landlord, immediately upon receipt thereof, fifty percent (50%) of the excess of (1) all compensation received by Tenant and attributable to Tenant's interest under this Lease or in the Premises which is the subject of such Transfer less the costs reasonably incurred by Tenant with unaffiliated third parties in connection with such Transfer (i.e., brokerage commissions, tenant finish work, and the like) ---- over (2) the Rent allocable to the portion of the Premises which is the subject of such Transfer. While any Event of Default exists, Tenant shall pay to Landlord, immediately upon receipt thereof, one hundred percent (100%) of the excess of (i) all compensation received by Tenant for a Transfer over (ii) the Rent applicable to the portion of the Premises covered thereby. (g) PERMITTED TRANSFERS. Notwithstanding Section 10.(a), Tenant may effect a Transfer of all or part of its interest in this Lease or all or part of the Premises (a "PERMITTED TRANSFER") to the following types of entities (a "PERMITTED TRANSFEREE") without the written consent of Landlord: 14 (1) an Affiliate of Tenant; (2) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as (A) Tenant's obligations hereunder are assumed by the entity surviving such merger or created by such consolidation; and (B) the Tangible Net Worth of the surviving or created entity is not less than the greater of (i) the Tangible Net Worth of Tenant as of the date hereof, or (ii) the Tangible Net Worth of Tenant at the time of any such Permitted Transfer; or (3) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of Tenant's assets if such entity's Tangible Net Worth after such acquisition is not less than the greater of (i) the Tangible Net Worth of Tenant as of the date hereof, or (ii) the Tangible Net Worth of Tenant at the time of any such Permitted Transfer. Tenant shall promptly notify Landlord of any such Permitted Transfer. Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder, or if Tenant no longer exists because of a merger, consolidation, or acquisition, the surviving or acquiring entity shall expressly assume in writing the obligations of Tenant hereunder. Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use. At least 30 days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with copies of the instrument effecting any of the foregoing Transfers and documentation establishing Tenant's satisfaction of the requirements set forth above applicable to any such Transfer. The occurrence of a Permitted Transfer shall not waive Landlord's rights as to any subsequent Transfers. "TANGIBLE NET WORTH" means the excess of total assets over total liabilities, in each case as determined in accordance with generally accepted accounting principles consistently applied ("GAAP"), excluding, however, from the determination of total assets all assets which would be classified as intangible assets under GAAP including, without limitation, goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee shall be subject to the provisions of this Section 10. 11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY ------------------------------------------ (a) TENANT'S INSURANCE. Tenant shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in amounts of $3,000,000.00 per occurrence or such other amounts as Landlord may from time to time reasonably require, insuring Tenant and, naming as additional insureds, Landlord and, if specified by written notice to Tenant, Landlord's agents and their respective Affiliates, against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises, (2) insurance covering the full value of Tenant's fixtures (including 15 trade fixtures), personal property and the trade fixtures and personal property of others in the Premises, (3) contractual liability insurance sufficient to cover Tenant's indemnity obligations for Losses (as hereinafter defined) assumed under this Lease (but only if such contractual liability insurance is not already included in Tenant's commercial general liability insurance policy), (4) worker's compensation insurance, containing a waiver of subrogation endorsement acceptable to Landlord, and (5) business interruption insurance. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence reasonably satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies, reasonably satisfactory to Landlord. (b) LANDLORD'S INSURANCE. Throughout the Term of this Lease, Landlord shall maintain, as a minimum, the following insurance policies: (1) fire and extended risk insurance covering the Building's replacement value and (2) commercial general liability insurance in an amount not less than $3,000,000.00. The cost of such insurance carried by Landlord with respect to the Premises shall be included in Operating Costs. (c) WAIVER OF NEGLIGENCE; NO SUBROGATION. Landlord and Tenant each waives any claim it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property (a "LOSS"), to the extent the same is insured against under any insurance policy that covers the Building, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, or is required to be insured against under the terms hereof, REGARDLESS OF WHETHER THE NEGLIGENCE OF THE OTHER PARTY CAUSED SUCH LOSS; however, Landlord's waiver shall not include any deductible amounts on insurance policies carried by Landlord. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. (d) TENANT'S INDEMNITY. Subject to Section 11.(c), Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages, and expenses (including reasonable attorneys' fees) arising from (1) any Loss arising from any occurrence on the Premises (other than any Loss arising out of a breach of Tenant's obligations under Section 25.(t), which shall be subject to the indemnity in such section) or (2) Tenant's failure to perform its obligations under this Lease, except to the extent caused by the negligence or fault of Landlord or its agents, employees or contractors. This indemnity provision shall survive termination or expiration of this Lease. If any proceeding is filed for which indemnity is required hereunder, Tenant agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel reasonably satisfactory to the indemnified party. 16 (e) LANDLORD'S INDEMNITY. Subject to Section 11.(c), Landlord shall defend, indemnify, and hold harmless Tenant and its agents and employees from and against all claims, demands, liabilities, causes of action, suits, judgments and expenses (including attorneys' fees) for any Loss arising from any occurrence at the Premises caused or materially contributed to by Landlord's gross negligence or willful misconduct in acting or failing to act, except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Party. If any proceeding is filed for which indemnity is required under this Section 11.(e), Landlord shall, upon request therefor, defend the indemnified party in such proceeding at its sole cost utilizing counsel reasonably satisfactory to the indemnified party. The provisions of this Section 11.(e) shall survive the expiration or termination of this Lease. 12. SUBORDINATION; ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE --------------------------------------------------------- (a) SUBORDINATION. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument, or any ground lease, master lease, or primary lease (any such security instrument or lease, a "MORTGAGE"), that now or hereafter covers all or any part of the Premises (the mortgagee under any such mortgage or the lessor under any such lease is referred to herein as a "LANDLORD'S MORTGAGEE"). Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its mortgage, ground lease, or other interest in the Premises by so notifying Tenant in writing. Provided Tenant receives a Non-Disturbance Agreement from each such Mortgagee, Tenant shall execute agreements confirming the subordination or superiority of this Lease to any Mortgage upon Landlord or Landlord's Mortgagee's reasonable request. (b) ATTORNMENT. Provided Tenant receives a Non-Disturbance Agreement from such party, Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, on the terms of such Non-Disturbance Agreement and shall execute such agreements confirming such attornment as such party may reasonably request. (c) NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee the following time periods to perform Landlord's obligations hereunder: (1) at least fifteen (15) days after receipt of such notice with respect to defaults that can be cured by the payment of money; or (2) at least thirty (30) days after receipt of such notice with respect to any other default, unless the cure requires Landlord's Mortgagee to obtain possession of the Premises, in which case such thirty (30) day period shall not commence until Landlord's Mortgagee acquires possession, so long as Landlord's Mortgagee proceeds promptly to acquire possession of the Premises with due diligence, by foreclosure of the Mortgage or otherwise. 17 (d) LANDLORD'S MORTGAGEE'S PROTECTION PROVISIONS. If Landlord's Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord's Mortgagee shall not be: (1) liable for any act or omission of any prior lessor (including Landlord); (2) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior lessor (including Landlord), and all such rent shall remain due and owing, notwithstanding such advance payment; (3) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord's Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (4) bound by any termination, amendment or modification of this Lease made without Landlord's Mortgagee's consent and written approval, except for those terminations, amendments and modifications permitted to be made by Landlord without Landlord's Mortgagee's consent pursuant to the terms of the loan documents between Landlord and Landlord's Mortgagee; (5) subject to the defenses which Tenant might have against any prior lessor (including Landlord); and (6) subject to the offsets which Tenant might have against any prior lessor (including Landlord) except for those offset rights which (A) are expressly provided in this Lease, (B) relate to periods of time following the acquisition of the Building by Landlord's Mortgagee, and (C) Tenant has provided written notice to Landlord's Mortgagee and provided Landlord's Mortgagee an opportunity to cure the event giving rise to such offset event in accordance with the time periods set forth in Section 12.(c) above. Landlord's Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Building. Nothing in this Lease shall be construed to require Landlord's Mortgagee to see to the application of the proceeds of any loan, and Tenant's agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan. (e) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT. Simultaneously upon Tenant's execution of this Lease, Tenant shall execute a Subordination, Non-Disturbance and Attornment Agreement in the form attached hereto as Exhibit H. Landlord shall return a fully executed Subordination, Non- --------- Disturbance and Attornment Agreement in the form attached hereto as Exhibit H, --------- executed by Landlord and the Lender named therein to Tenant as soon as reasonably possible but not later than ninety (90) days after the date of this Lease. Landlord shall use reasonable efforts (which efforts shall not require the expenditure of funds or the threat (or commencement) of litigation) to obtain a so-called "nondisturbance agreement" from any future Landlord's Mortgagee in the form attached hereto as Exhibit H or another form reasonably --------- acceptable to Tenant and such Landlord's Mortgagee or other institutional lenders (either the form attached hereto as Exhibit H or such other reasonably --------- acceptable form being herein referred to as the "NON-DISTURBANCE AGREEMENT"). The subordination of Tenant's rights hereunder to any future Landlord's Mortgagee under Section 12.(a) and the attornment of Tenant to any future Landlord Mortgagee under Section 12.(b) shall be conditioned upon such future Landlord's Mortgagee's execution and delivery of a Non-Disturbance Agreement. 13. RULES AND REGULATIONS. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit C. Landlord --------- may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, 18 provided that such changes will not unreasonably interfere with Tenant's use of the Premises. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party. 14. CONDEMNATION. ------------ (a) TOTAL TAKING. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "TAKING"), this Lease shall terminate as of the date of the Taking. (b) PARTIAL TAKING--TENANT'S RIGHTS. If any part of the Premises becomes subject to a Taking and such Taking will prevent Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking for a period of more than 180 days, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 30 days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking. (c) PARTIAL TAKING--LANDLORD'S RIGHTS. If such a material portion, but less than all, of the Premises becomes subject to a Taking that the remainder of the Premises cannot be restored to a good and operable condition, or if Landlord is required to pay any of the proceeds received for a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 14.(b). (d) AWARD. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the land on which the Building is situated, the Building, and other improvements taken, and Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have. 15. FIRE OR OTHER CASUALTY ---------------------- (a) REPAIR ESTIMATE. If the Premises or the Building are damaged by fire or other casualty (a "CASUALTY"), Landlord shall, within 90 days after such Casualty, deliver to Tenant a good faith estimate (the "DAMAGE NOTICE") of the time needed to repair the damage caused by such Casualty. (b) LANDLORD'S AND TENANT'S RIGHTS. If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business 19 in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 270 days after the Casualty, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. If Tenant does not so timely terminate this Lease, then (subject to Section 15.(c)) Landlord shall repair the Building or the Premises, as the case may be, as provided below, and Rent for the portion of the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of the repair, unless a Tenant Party caused such damage, in which case, Tenant shall continue to pay Rent without abatement. (c) LANDLORD'S RIGHTS. If a Casualty damages a material portion of the Building, and Landlord makes a good faith determination that restoring the Premises would be uneconomical, or if Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant, and Basic Rent and Additional Rent shall be abated as of the date of the Casualty. (d) REPAIR OBLIGATION. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Premises and shall proceed with reasonable diligence to restore the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any of the furniture, equipment, fixtures (including trade fixtures), and other personal property which may have been placed by, or at the request of, Tenant or other occupants in the Building or the Premises, and Landlord's obligation to repair or restore the Building or Premises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question. If at any time Landlord reasonably determines that the insurance proceeds shall be insufficient to pay to substantially complete the restoration of the Premises, Landlord shall give written notice to Tenant and Tenant shall have the right to terminate this Lease by written notice to Landlord within 30 days after receipt of such notice from Landlord. 16. PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same after giving written notice to Tenant at least ten (10) business days in advance, or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within 30 days after receiving written demand, the part of such taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with law and if the non-payment thereof does not pose a threat of loss or seizure of the Building or interest of Landlord therein or impose any fee or penalty against Landlord. 20 17. EVENTS OF DEFAULT. Each of the following occurrences shall be an "EVENT OF DEFAULT": (a) Tenant's failure to pay Rent within five days after Landlord has delivered notice to Tenant that the same is due; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Landlord has given Tenant written notice under this Section 17.(a) on more than one occasion during the twelve (12) month interval preceding such failure by Tenant; (b) Tenant abandons the Premises; (c) Tenant fails to comply with the Permitted Use set forth herein and the continuance of such failure for a period of ten (10) days after Landlord has delivered to Tenant written notice thereof; (d) Tenant fails to provide any estoppel certificate within the time period required under Section 25.(e) and such failure shall continue for five days after written notice thereof from Landlord to Tenant; (e) Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof; provided that if the default is of such a nature that it may not be reasonably cured within thirty (30) days, then no Event of Default shall occur hereunder if Tenant commences curing same within such thirty (30) day period and thereafter diligently and continuously pursues such cure to completion within a period of not more than ninety (90) days after the delivery of such notice. (f) The filing of a petition by or against Tenant (the term "TENANT" shall include, for the purpose of this Section 17.(f), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; or (4) for the reorganization or modification of Tenant's capital structure; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof. 18. REMEDIES. Upon an Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder, take any of the following actions: (a) Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 19.(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term plus Landlord's 21 estimate of aggregate expenses of reletting to the Premises (to the extent not actually reimbursed under said Section 19.(a)), discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Northeast Edition, in its listing of ----------------------- "Money Rates," minus one percent, minus (B) the then present fair rental rate value of the Premises for such period, similarly discounted; (b) Terminate Tenant's right to possess the Premises without terminating this Lease by giving written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession, (2) all amounts due from time to time under Section 19.(a), and (3) all Rent and other net sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period, after deducting all out-of-pocket costs incurred by Landlord in reletting the Premises. Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises). Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Rent due hereunder. Reentry by Landlord in the Premises shall not affect Tenant's obligations hereunder for the unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity of Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 18.(b). If Landlord elects to proceed under this Section 18.(b), it may at any time elect to terminate this Lease under Section 18.(a); or (c) Additionally, without notice, Landlord may alter locks or other security devices at the Premises to deprive Tenant of access thereto, and Landlord shall not be required to provide a new key or right of access to Tenant. Any and all remedies set forth in this Lease: (i) shall be in addition to any and all other remedies Landlord may have at law or in equity; (ii) shall be cumulative; and (iii) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. Notwithstanding the foregoing, Landlord shall only recover its damages allowed hereunder once. 19. PAYMENT BY TENANT; NON-WAIVER ----------------------------- (a) PAYMENT BY TENANT. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any 22 other occupant's property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into condition acceptable to a new tenant, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the Event of Default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of the state in which the Premises are located shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease. (b) NO WAIVER. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due. 20. LANDLORD'S LIEN. Intentionally omitted, provided that the deletion of this Section shall not be construed to be a waiver of Landlord's lien rights provided by law. 21. SURRENDER OF PREMISES. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises in the condition required by Section 8.(b) of this Lease, free of Hazardous Materials placed on the Premises during the Term, broom-clean, reasonable wear and tear (and condemnation and Casualty damage, as to which Sections 14 and 15 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant shall remove all trade fixtures, equipment, furniture, and personal property placed in the Premises by Tenant and all such alterations, additions, improvements and wiring which, when approved by Landlord, were required to be removed from the Premises at the earlier expiration or termination of the Term of this Lease, and may remove all such fixtures, alterations, additions, improvements and wiring which, when approved by Landlord, were permitted to be removed by Tenant from the Premises at the earlier expiration or termination of the Term of this Lease. Tenant shall repair all damage caused by such removal. All items not so removed shall, at Landlord's option, be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items; any such disposition shall not be considered a strict foreclosure. The provisions of this Section 21 shall survive the end of the Term. 23 22. HOLDING OVER. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at sufferance and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, in addition to the other Rent, a daily rate of Basic Rent equal to the greater of (a) 150% of the daily Basic Rent payable during the last month of the Term, or (b) 125% of the prevailing rental rate in the Building for similar space. The provisions of this Section 22 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom. 23. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise of such rights does not unreasonably interfere with Tenant's occupancy of the Premises, Landlord shall have the following rights: (a) To make inspections and to complete repairs, alterations, additions, changes, or improvements required to be performed by Landlord under this Lease, whether structural or otherwise, in and about the Building, or any part thereof; to enter upon the Premises (after giving Tenant reasonable advance notice thereof, except in cases of real or apparent emergency, in which case no notice shall be required) for any of the foregoing purposes and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities provided that Landlord shall minimize any interference with Tenant's business operations; and to change the name of the Building; (b) To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; and temporarily denying access to the Building (which access shall not be denied for any reason within Landlord's control for longer than one (1) business day); (c) Upon at least twenty-four (24) hours prior reasonable notice (which may be by telephone) to Tenant and, if requested by Tenant, in the presence of Tenant or its agent, to enter the Premises at reasonable hours to show the Premises to prospective purchasers, lenders, or, during the last 12 months of the Term, tenants. 24. INTENTIONALLY DELETED. --------------------- 25. MISCELLANEOUS. ------------- (a) LANDLORD TRANSFER. Landlord may transfer any portion of the Building and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord 24 shall thereby be released from any further obligations hereunder arising after the date of transfer, provided that the assignee assumes Landlord's obligations hereunder in writing. (b) LANDLORD'S LIABILITY. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Premises and the proceeds of any insurance relating to the Premises, and Landlord shall not be personally liable for any deficiency (except for any such insurance proceeds). This Section shall not limit any remedies which Tenant may have for Landlord's defaults which do not involve the personal liability of Landlord. (c) FORCE MAJEURE. Other than for Tenant's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party. (d) BROKERAGE. Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Grubb & Ellis Management Services, Inc. and Boston Real Estate Partners, whose commission shall be paid by Landlord. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. (e) ESTOPPEL CERTIFICATES. From time to time, Tenant shall furnish to any party designated by Landlord, within ten days after Landlord has made a written request therefor, a certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease as Landlord may reasonably request. Unless otherwise required by Landlord's Mortgagee or a prospective purchaser or mortgagee of the Building, the initial form of estoppel certificate to be signed by Tenant is attached hereto as Exhibit F. (f) NOTICES. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered to the intended address provided a representative of Tenant acknowledges receipt of any such communication, or (3) sent by a nationally recognized overnight courier service. All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision. (g) SEPARABILITY. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause 25 or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (h) AMENDMENTS; AND BINDING EFFECT. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof. (i) QUIET ENJOYMENT. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease. Landlord represents to Tenant that Landlord is the record owner of the Building in fee simple absolute. (j) NO MERGER. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate. (k) NO OFFER. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant. (l) ENTIRE AGREEMENT. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto. (m) WAIVER OF JURY TRIAL. To the maximum extent permitted by law, Landlord and Tenant each waive right to trial by jury in any litigation arising out of or with respect to this Lease. (n) GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the State in which the Premises are located. 26 (o) JOINT AND SEVERAL LIABILITY. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. (p) FINANCIAL REPORTS. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been most recently prepared by an independent certified public accountant or, failing those, Tenant's most recent internally prepared financial statements. If Tenant is a publicly traded corporation, Tenant may satisfy its obligations hereunder by providing to Landlord Tenant's most recent annual and quarterly reports. If Tenant is not a publicly traded corporation, Tenant will discuss its financial statements with Landlord. Landlord will not disclose any aspect of Tenant's financial statements that Tenant designates to Landlord as confidential except (1) to Landlord's Mortgagee or prospective purchasers of the Building, (2) in litigation between Landlord and Tenant, and (3) if required by court order. Tenant shall not be required to deliver the financial statements required under this Section 25.(p) more than once in any 12-month period unless requested by Landlord's Mortgagee or a prospective buyer or lender of the Building or an Event of Default occurs. (q) LANDLORD'S FEES. Whenever Tenant requests Landlord to take any action not required of it hereunder or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for Landlord's reasonable out-of-pocket costs payable to third parties and incurred by Landlord in reviewing the proposed action or consent, including without limitation reasonable attorneys', engineers' or architects' fees, within thirty (30) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. (r) [INTENTIONALLY OMITTED] (s) CONFIDENTIALITY. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord's benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord's prior written consent, other than to Tenant's lenders, accountants, attorneys and other advisors provided such advisors agree to keep the terms and conditions of this Lease confidential to the extent required under this Section 25.(s) or in connection with any litigation proceeding and/or in order to comply with any federal, state or municipal laws, regulations, rules, ordinances and/or judicial or administrative directive and/or any rules or regulations of any stock exchange, including any requirement to attach this Lease as an exhibit to any filing with the Securities and Exchange Commission. The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure. (t) HAZARDOUS MATERIALS. The term "HAZARDOUS MATERIALS" means any substance, material, or waste which is now or hereafter classified or considered to be hazardous, toxic, or dangerous under any Law relating to pollution or the protection or regulation of human health, natural resources or the environment, or poses or threatens to pose a hazard to the health or safety of persons on the Premises or in the Building. Tenant shall not use, generate, store, or 27 dispose of, or permit the use, generation, storage or disposal of Hazardous Materials on or about the Premises or the Building except in a manner and quantity necessary for the ordinary performance of Tenant's business, and then in compliance with all Laws. If Tenant breaches its obligations under this Section 25.(t), Landlord may immediately take any and all action reasonably appropriate to remedy the same, including taking all appropriate action to clean up or remediate any contamination resulting from Tenant's use, generation, storage or disposal of Hazardous Materials. Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against any and all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees and cost of clean up and remediation) arising from Tenant's failure to comply with the provisions of this Section 25.(t). This indemnity provision shall survive termination or expiration of the Lease. Except as set forth in the Environmental Reports (as hereinafter defined), to the actual knowledge of Landlord, Landlord represents that there are no Hazardous Materials on the Premises as of the date of this Lease. For the purposes hereof, "Environmental Reports" shall mean, collectively, that certain Phase I Environmental Site Assessment Report and that certain Subsurface Investigation Report prepared in October, 1997 by ENSR in connection with, among other properties, the Premises, and that certain Physical Conditions Survey Report dated October 20, 1997 and prepared by Merritt & Harris, Inc. in connection with the Premises.
(u) LIST OF EXHIBITS. All exhibits and attachments attached hereto are ---------------- incorporated herein by this reference. Exhibit A - Survey of Premises Exhibit B - Legal Description of Building Exhibit C - Building Rules and Regulations Exhibit D - Tenant Finish-Work: Allowance Exhibit E - Amendment No. 1 Exhibit F - Form of Tenant Estoppel Certificate Exhibit G - Extension Option Exhibit H - Form of Subordination, Non-Disturbance and Attornment Agreement Exhibit I - Letter of Credit
(v) TIME OF ESSENCE. Time is of the essence of this Lease and each and all of its provisions. (w) SIGNAGE. Tenant may install, at Tenant's risk and expense, exterior signage on the Building, in accordance with all Laws and subject to Landlord's prior approval and consent, which shall not be unreasonably withheld, delayed or conditioned. (x) ACCESS. Tenant shall have twenty-four (24) hour access to the Premises seven (7) days a week (subject to force majeure, emergency, etc.). (y) FAILURE OF TENANT TO CONTINUOUSLY OCCUPY THE PREMISES. If, for more than three hundred sixty-five (365) days, Tenant (1) vacates the Premises or (2) fails to continuously operate its business therein, Landlord may terminate the Lease upon giving written 28 notice to Tenant as of the date specified in such notice. If Landlord terminates this Lease, then this Lease shall terminate and neither party shall have any further obligations hereunder as of the terminate date except as otherwise provided herein and Tenant shall pay to Landlord all Rent accrued through the termination date. Thereafter, Landlord may lease the Premises (or any portion thereof) to any person without liability to Tenant. 26. OTHER PROVISIONS. LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, SET-OFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 29 IN WITNESS WHEREOF, and in consideration of the mutual entry into this Lease and for other good and valuable consideration, and intending to be legally bound, each party hereto has caused this Lease Agreement to be duly executed as a Massachusetts instrument under seal as of the day and year first above written. TENANT: SYCAMORE NETWORKS, INC., a Delaware corporation By: ----------------------------------- Name: ---------------------------- Title: President/Vice President By: --------------------------------------- Name: --------------------------------- Title: Treasurer/Assistant Treasurer LANDLORD: W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: W9/TIB Gen-Par, Inc., a Delaware corporation, its general partner By: --------------------------------- Name: ---------------------------- Title: ---------------------------- 30 EXHIBIT A --------- SURVEY OF PREMISES ------------------ A-1 EXHIBIT B --------- LEGAL DESCRIPTION OF BUILDING ----------------------------- Lot 2B as shown on that certain plan entitled "Plan of Land of Billerica Road Site, Chelmsford, MA", which plan is recorded with the Middlesex North District Registry of Deeds in Plan Book 143 as Plan 143. B-1 EXHIBIT C --------- BUILDING RULES AND REGULATIONS ------------------------------ The following rules and regulations shall apply to the Premises, the Building, and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas shall not be obstructed by Tenant or used by Tenant for purposes other than ingress and egress to and from the Premises and for going from one to another part of the Building. 2. Plumbing, fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or deposited therein. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees or invitees, shall be paid by Tenant. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows or exterior doors or other exterior part of the Building without the prior written consent of Landlord. No curtains or other window treatments shall be placed between the glass and the Building standard window treatments. 4. Landlord shall provide all door locks to the Premises, at the cost of Tenant, and Tenant shall not place any additional door locks in the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned. Landlord shall furnish to Tenant a reasonable number of keys to the Premises, at Tenant's cost, and Tenant shall not make a duplicate thereof. 5. Tenant assumes all risks of and shall be liable for all damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord if damaged or injured as a result of acts in connection with carrying out this service for such tenant. 6. Landlord may reasonably prescribe weight limitations and determine the locations for safes and other heavy equipment or items, which shall in all cases be placed in the Building so as to distribute weight in a manner reasonably acceptable to Landlord which may include the use of such supporting devices as Landlord may reasonably require. All damages to the Building caused by the installation or removal of any property of Tenant, or done by Tenant's property while in the Building, shall be repaired at the expense of Tenant. 7. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds or animals shall be brought into or kept in, on or about Tenant's Premises. No portion of the Building shall at any time be used or occupied as sleeping or lodging quarters. 8. Tenant shall cooperate with Landlord's employees in keeping the Premises neat and clean. 9. Tenant shall not use or keep in the Building any flammable or explosive fluid or substance (other than typical office supplies [e.g., photocopier toner] used in compliance with all Laws). 10. Landlord will not be responsible for lost or stolen personal property, money or jewelry from Tenant's Premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not. 11. All vehicles are to be parked for business purposes having to do with Tenant's business operated in the Premises, parked within designated parking spaces, one vehicle to each space. No vehicle shall be parked as a "billboard" vehicle in the parking lot. Any vehicle parked improperly may be towed away. Tenant, Tenant's agents, employees, vendors and customers who do not operate or park their vehicles as required shall subject the vehicle to being towed at the expense of the owner or driver. C-2 EXHIBIT D --------- TENANT FINISH-WORK: ALLOWANCE ----------------------------- 1. Except as set forth in this Exhibit, Tenant accepts the Premises in their "AS-IS" condition on the date that this Lease is entered into. On or before the Commencement Date, all Building HVAC and mechanical systems serving the Premises shall be operable. 2. Tenant shall provide to Landlord for its approval final working drawings, prepared by an architect that has been approved by Landlord (which approval shall not unreasonably be withheld, delayed or conditioned), of all alterations, improvements and installations that Tenant proposes to construct, install and complete in the Premises; such working drawings shall include the partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building, and detailed plans and specifications for the construction of the alterations, improvements and installations called for under this Exhibit in accordance with all applicable governmental laws, codes, rules, and regulations. If any of Tenant's proposed construction work will affect the Building's HVAC, electrical, mechanical, or plumbing systems, then the working drawings pertaining thereto must be approved by the Building's engineer of record. Landlord's approval or disapproval, as the case may be, of the final working drawings (inclusive of any approval required by the Building's engineer of record) shall be completed within ten (10) days of Landlord's receipt of such working drawings. If Landlord disapproves the final working drawings, Landlord shall specify the reasons for such disapproval in writing to Tenant. Landlord's (and the Building engineer's) approval of such working drawings shall not be unreasonably withheld, delayed or conditioned, provided that (a) they comply with all applicable laws, rules, and regulations, (b) such working drawings are sufficiently detailed to allow construction of the alterations, improvements and installations in a good and workmanlike manner, (c) the alterations, improvements and installations depicted thereon conform to the reasonable rules and regulations promulgated from time to time by Landlord for the construction of tenant alterations, improvements and installations (a copy of which has been delivered to Tenant), and (d) the alterations, improvements and installations do not affect the Building's Structure or have any adverse effect on the Building's HVAC, electrical, mechanical or plumbing systems. Within five (5) business days of receiving any revision to such working drawings, Landlord shall advise Tenant in writing of Landlord's approval or disapproval of such revisions and, in the event of any full or partial disapproval, any changes reasonably requested by Landlord. As used herein, "WORKING DRAWINGS" shall mean the final working drawings approved by Landlord, as amended from time to time by any approved changes thereto, and "WORK" shall mean all alterations, improvements and installations to be constructed in accordance with and as indicated on the Working Drawings. Landlord's approval of the Working Drawings shall not be a representation or warranty of Landlord that such drawings are adequate for any use or comply with any law, but shall merely be the consent of Landlord thereto. Landlord shall, at Tenant's request, sign the Working Drawings to evidence its review and approval thereof. All changes in the Work must receive the prior written approval of Landlord (which approval shall not be withheld, delayed or conditioned), and in the event of any such D-1 approved change Tenant shall, upon completion of the Work, furnish Landlord with an accurate, reproducible "as-built" plan of the improvements as constructed. 3. The Work shall be performed only by contractors and subcontractors approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. All contractors and subcontractors shall be required to procure and maintain insurance against such risks, in such amounts, and with such companies as Landlord may reasonably require. Certificates of such insurance, with paid receipts therefor, must be received by Landlord before the Work is commenced. Promptly upon Landlord's approval of the Working Drawings and delivery of the Premises to Tenant, Tenant shall commence the construction of the Work and diligently and continuously pursue the completion of the same. The Work shall be performed in a good and workmanlike manner free of defects, shall conform with the Working Drawings, and shall be performed in such a manner and at such times as not to interfere unreasonably with or delay Landlord's other contractors and the operation of the Building. Tenant's construction representative shall coordinate with Landlord's property manager for reasonable access to the Premises during Tenant's construction of the Work. 4. The entire cost of performing the Work (including, without limitation, design of the Work and preparation of the Working Drawings, costs of construction, labor and materials, electrical usage during construction, additional janitorial services, general tenant signage, related permitting, taxes and insurance costs, all of which costs are herein collectively called the "TOTAL CONSTRUCTION COSTS") in excess of the Construction Allowance (as hereinafter defined) shall be paid by Tenant. 5. Landlord shall provide to Tenant a construction allowance (the "CONSTRUCTION ALLOWANCE") equal to the lesser of (a) $828,480.00 or (b) the Total Construction Costs, as adjusted for any approved changes to the Work. 6. Subject to the terms and conditions of this Lease, Landlord shall pay the Construction Allowance to Tenant for the purpose of financing a portion of the Total Construction Costs and the cost of designing, constructing, installing and completing any additional improvements, alterations and installations in the Premises within nine (9) months after the date of this Lease. As conditions to Tenant's right to receive the Construction Allowance: (i) Tenant shall not be in default under the Lease; (ii) the Lease shall be in full force and effect; (iii) the portion of the Work covered by any application for payment shall, in Landlord's reasonable discretion, have been substantially completed in accordance with the Working Drawings and the provisions of this Lease; (iv) Tenant shall furnish to Landlord: (A) if the entire Work is substantially complete, a Certificate of Occupancy respecting the Premises; and (B) such evidence as Landlord may reasonably require to evidence that all persons furnishing or supplying labor and materials in connection with the construction of the Work, or in the case of completion of a portion of the Work, have been paid and that no lien exists of record with respect thereto; and (v) Tenant shall not request any portion of the Construction Allowance more than once a month. Landlord shall pay each requested portion of the Construction Allowance within twenty (20) business days from Tenant's written request for the same provided that Tenant has complied with the requirements set forth in the preceding sentence. If, within nine (9) months after the date of D-2 this Lease, Landlord has not received applications for payment, together with any other information reasonably requested by Landlord, from Tenant for the entire Construction Allowance pursuant to the provisions of this Exhibit D, or upon paying the full amount of the Construction Allowance to Tenant in accordance with the provisions hereof, Landlord shall have no further obligation to extend any credit to Tenant after disbursing all payments of the Construction Allowance properly requested in applications for payment received by Landlord before the end of such nine-month period provided Landlord has received all other information it reasonably requested be provided by Tenant. 7. In consideration for Landlord's management and supervision of services performed in connection with the Work, Tenant shall pay to Landlord, within ten (10) business days after demand therefor, the actual costs incurred by Landlord to review and approve the Working Drawings and/or any drafts and/or modifications thereto and to review the construction of the Work. D-3 EXHIBIT E --------- AMENDMENT NO. 1 --------------- This Amendment No. 1 (this "AMENDMENT") is executed as of_______, 199___ between W9/TIB Real Estate Limited Partnership, a Delaware limited partnership ("LANDLORD"), and Sycamore Networks, Inc., a Delaware corporation ("TENANT"), for the purpose of amending the Lease Agreement between Landlord and Tenant dated August __, 1999 (the "LEASE"). Capitalized terms used herein but not defined shall be given the meanings assigned to them in the Lease. AGREEMENTS For valuable consideration, whose receipt and sufficiency are acknowledged, Landlord and Tenant agree as follows: 1. CONDITION OF PREMISES. Tenant has accepted possession of the Premises pursuant to the Lease. Any improvements required by the terms of the Lease to be made by Landlord have been completed to the full and complete satisfaction of Tenant in all respects except for the punchlist items described on Exhibit A ---------- hereto (the "PUNCHLIST ITEMS"), and except for such Punchlist Items, Landlord has fulfilled all of its duties under the Lease with respect to such initial tenant improvements. Furthermore, Tenant acknowledges that the Premises are suitable for the Permitted Use. 2. COMMENCEMENT DATE. The Commencement Date of the Lease is___, 1999. If the Commencement Date set forth in the Lease is different than the date set forth in the preceding sentence, then the Commencement Date as contained in the Lease is amended to be the Commencement Date set forth in the preceding sentence. 3. EXPIRATION DATE. The Term is scheduled to expire on_______, 200_. If the scheduled expiration date of the initial Term as set forth in the Lease is different than the date set forth in the preceding sentence, then the scheduled expiration date as set forth in the Lease is hereby amended to the expiration date set forth in the preceding sentence. 4. CONTACT NUMBERS. Unless Landlord is otherwise notified by Tenant, (a) Tenant's telephone number in the Premises is_____ and (b) Tenant's telecopy number in the Premises is______ . 5. RATIFICATION. Each of Landlord and Tenant hereby ratifies and confirms its respective obligations under the Lease. To the best of its knowledge, Tenant represents and warrants to Landlord that it has no defenses thereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, the Lease is and remains in good standing and in full force and effect, and, to the best of its knowledge, Tenant has no claims, counterclaims, set-offs or defenses E-1 against Landlord arising out of the Lease or in any way relating thereto or arising out of any other transaction between Landlord and Tenant, except as set forth below: 6. BINDING EFFECT; GOVERNING LAW. Except as modified hereby, the Lease shall remain in full effect and this Amendment shall be binding upon Landlord and Tenant and their respective successors and assigns. If any inconsistency exists or arises between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall prevail. This Amendment shall be governed by the laws of the State in which the Premises is located. 7. COUNTERPARTS. This Amendment may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document. Executed as of the date first written above. TENANT: SYCAMORE NETWORKS, INC., a Delaware corporation By: ---------------------------------- Name: ------------------------------ Title: President/Vice President By: ----------------------------------- Name: ------------------------------ Title: Treasurer/Assistant Treasurer LANDLORD: W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: W9/TIB Gen-Par, Inc., a Delaware corporation, its general partner By: ------------------------------------ Name: ------------------------------- Title: ------------------------------- E-2 EXHIBIT A --------- PUNCHLIST ITEMS --------------- A-1 EXHIBIT F --------- FORM OF TENANT ESTOPPEL CERTIFICATE ----------------------------------- The undersigned is the Tenant under the Lease (defined below) between W9/TIB Real Estate Limited Partnership, a Delaware limited partnership, as Landlord, and the undersigned as Tenant, for the building located at 4 Omni Way, Chelmsford, Massachusetts, and hereby certifies as follows: 1. The Lease consists of the original Lease Agreement dated as of_______, 199___ between Tenant and Landlord ['s predecessor-in-interest] and the following amendments or modifications thereto (if none, please state "none"): The documents listed above are herein collectively referred to as the "LEASE" and represent the entire agreement between the parties with respect to the Premises. All capitalized terms used herein but not defined shall be given the meaning assigned to them in the Lease. 2. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Section 1 above. 3. The Term commenced on _______ , 1999 and the Term expires, excluding any renewal options, on___________, 200__, and Tenant has no option to purchase all or any part of the Premises or the Building or, except as expressly set forth in the Lease, any option to terminate or cancel the Lease. 4. Tenant currently occupies the Premises described in the Lease and Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows (if none, please state "none"): 5. All monthly installments of Basic Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through _______. The current monthly installment of Basic Rent is $________. 6. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and, to the best of Tenant's knowledge, Landlord F-1 is not in default thereunder. In addition, Tenant has not delivered any notice to Landlord regarding a default by Landlord thereunder, except as follows: 7. As of the date hereof, to the best of Tenant's knowledge, there are no existing defenses or offsets against enforcement of the Lease, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord, and no event has occurred and no condition exists, which, with the giving of notice or the passage of time, or both, will constitute a default under the Lease. 8. No rental has been paid more than thirty (30) days in advance and no security deposit has been delivered to Landlord except as provided in the Lease. 9. Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises is located, and Tenant has full right and authority to execute and deliver this Estoppel Certificate, and each person signing on behalf of Tenant is authorized to do so, except as follows: 10. There are no actions pending against Tenant under any bankruptcy or similar laws of the United States or any state. 11. Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises. 12. All tenant improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned, and all reimbursements and allowances due to the undersigned under the Lease in connection with any tenant improvement work have been paid in full, except as follows: 13. Tenant acknowledges that this Estoppel Certificate may be delivered to Landlord, Landlord's Mortgagee or to a prospective mortgagee or prospective purchaser, and their respective successors and assigns, and acknowledges that Landlord, Landlord's Mortgagee and/or such prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in disbursing loan advances or making a new loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of disbursing loan advances or making such loan or acquiring such property. F-2 Executed as of the date first written above. TENANT: SYCAMORE NETWORKS, INC., a Delaware corporation By: ---------------------------------- Name: ------------------------------ Title: President/Vice President By: ------------------------------------ Name: ------------------------------- Title: Treasurer/Assistant Treasurer F-3 EXHIBIT G --------- RENEWAL OPTION -------------- Provided no Event of Default exists and Tenant is occupying the entire Premises at the time of such election, Tenant shall have the option to extend the Term of this Lease for one additional period of five (5) years, by delivering written notice of the exercise thereof to Landlord not later than twelve (12) months before the expiration of the Term. The Basic Rent payable for each month during such extended Term shall be the "FAIR MARKET RENTAL RATE" (determined as set forth below), at the commencement of such extended Term, for extensions of leases of space of equivalent quality, condition, size, age, utility and location, with the length of the extended Term and the credit standing of Tenant to be taken into account. Within thirty (30) days after receipt of Tenant's notice to extend but in any event not earlier than fourteen (14) months prior to the commencement of the five-year extension term, Landlord shall deliver to Tenant written notice of Landlord's determination of the Fair Market Rental Rate and shall advise Tenant of the required adjustment to Basic Rent, if any, and the other terms and conditions offered. Tenant shall, within ten (10) days after receipt of Landlord's notice, notify Landlord in writing whether Tenant accepts or rejects Landlord's determination of the Fair Market Rental Rate. If Tenant timely notifies Landlord that Tenant accepts Landlord's determination of the Fair Market Rental Rate (and failure of Tenant to notify Landlord within the time period prescribed above shall be deemed acceptance) or if, after a timely rejection by Tenant of such determination, the Fair Market Rental Rate is determined according to the procedures set forth in this Exhibit ------- G, then, on or before the commencement date of the extended Term, Landlord and - - Tenant shall execute an amendment to this Lease extending the Term on the same terms provided in this Lease, except as follows: (a) Basic Rent shall be adjusted to the Fair Market Rental Rate; (b) Tenant shall have no further to extend the Term option unless expressly granted by Landlord in writing; and (c) Landlord shall lease to Tenant the Premises in their then-current condition, and Landlord shall not provide to Tenant any allowances (e.g., --- moving allowance, construction allowance, and the like) or other tenant inducements. If Tenant rejects Landlord's determination of the Fair Market Rental Rate, Tenant may, but only within ten (10) days after receipt of Landlord's notice, require by written notice to Landlord that the determination of Fair Market Rental Rates be made by brokers. In such event, within ten (10) days thereafter, each party shall select a qualified commercial real estate broker with at least ten (10) years experience in appraising property and buildings in the city or submarket in which the Premises are located. The two brokers shall give their opinion of Fair Market Rental Rates within ten (10) days after their retention. In the event the opinions of the two brokers differ and, after good faith efforts over the succeeding ten (10) day period, they cannot mutually agree, the brokers shall immediately and jointly appoint a third broker with the qualifications specified above. This G-1 third broker shall immediately (within five (5) days) choose either the determination of Landlord's broker or Tenant's broker and such choice of this third broker shall be final and binding on Landlord and Tenant. Each party shall pay its own costs for its real estate broker. The parties shall equally share the costs of any third broker. The parties shall immediately confirm the renewal term, Basic Rent and the other terms and conditions so determined, in writing. Tenant's rights under this Exhibit shall terminate if (1) this Lease or Tenant's right to possession of the Premises is terminated, (2) Tenant assigns any of its interest in this Lease or sublets any portion of the Premises to any person other than to a Permitted Transferee, (3) Tenant fails to timely exercise its option under this Exhibit, time being of the essence with respect to Tenant's exercise thereof, or (4) Tenant's Tangible Net Worth is less than $25,000,000.00. G-2 EXHIBIT H --------- SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ------------------------------------------------------- This AGREEMENT is made and entered into as of ___________________, 1999, by and among LaSalle National Bank, as Trustee for GS Mortgage Securities Corporation II Commercial Mortgage Pass-Through Certificates, Series 1998-GSFL1 ("Lender"), W9/TIB Real Estate Limited Partnership, a Delaware limited partnership ("Landlord"), and Sycamore Networks, Inc., a Delaware corporation ("Tenant"). 1. RECITALS. -------- 1.1 Mortgage. Lender is the holder of a Promissory Note dated -------- ________________, 19____, in the original principal amount of $_________________ of Landlord, which is secured, inter alia, by a Mortgage and Security Agreement (the "Mortgage") and Assignment of Lease and Rents (the "Lease Assignment"), both dated ____________, and recorded with the Middlesex South Registry of Deeds at Book _____, Pages _____ and _____, respectively, covering premises more particularly described in the Mortgage (the "Premises"). 1.2 Lease. Landlord and Tenant entered into a Lease dated August __, ----- 1999 (the "Lease"), whereby Landlord demised to Tenant the Premises. 2. CONSIDERATION. The terms of the Lease constitute a material inducement to Lender's consent thereto and entering into and performing this Agreement. 3. SUBORDINATION OF THE LEASE. Subject to the terms of this Agreement, this Lease shall be and is hereby made subject and subordinate to the Mortgage. 4. NON-DISTURBANCE. Lender shall not, in the exercise of any right, remedy, or privilege granted by the Mortgage or the Lease Assignment, or otherwise available to Lender at law or in equity, disturb Tenant's possession under the Lease so long as: (a) Tenant is not in default under any provision of the Lease or this Agreement beyond any applicable notice and/or cure periods at the time Lender exercises any such right, remedy or privilege; and (b) The Lease at that time is in force and effect according to its original terms, or with such amendments or modifications as Lender shall have approved, if such approval is required by the terms of the Mortgage or the Lease Assignment; and (c) Tenant thereafter continues to fully and punctually perform all of its obligations under the Lease without default thereunder beyond any applicable cure period; and H-1 (d) Tenant attorns to or at the direction of Lender, as provided in Paragraph 5. Without limiting the foregoing, and so long as the foregoing conditions are met, Lender agrees that (i) Tenant will not be named as a party to any foreclosure or other proceeding instituted by Lender to enforce the terms of the Mortgage or the Lease Assignment; (ii) any sale or other transfer of the Premises or of the Landlord's interest in the Lease, pursuant to foreclosure or any voluntary conveyance or other proceeding in lieu of foreclosure, will be subject and subordinate to Tenant's possession under the Lease; and (iii) the Lease will continue in force and effect according to its original terms, or with such amendments as Lender shall have approved, if such approval is required by the terms and conditions of the Mortgage or the Lease Assignment. 5. ATTORNMENT. Tenant shall attorn to Lender, to any receiver or similar ---------- official for the Premises appointed at the instance and request, or with the consent, of Lender and to any person who acquires the Premises, or the Landlord's interest in the Lease, or both, pursuant to Lender's exercise of any right, remedy or privilege granted by the Mortgage, or otherwise at law or in equity. Without limitation, Tenant shall attorn to any person or entity that acquired the Premises pursuant to foreclosure of the Mortgage, or by any proceeding or voluntary conveyance in lieu of such foreclosure, or from Lender, whether by sale, exchange or otherwise. Any such attornment shall be conditioned upon Lender or any such person, entity, receiver or other official complying with the provisions of the next succeeding paragraph. Upon any attornment under this Paragraph 5, the Lease shall continue in full force and effect as a direct lease between Tenant and the person, entity, receiver or other official to whom Tenant attorns, except that such person, entity, receiver or other official shall not be: (i) liable for any breach, act or omission of any prior landlord; or (ii) subject to any offsets, claims or defenses which Tenant might have against any prior landlord; or (iii) bound by any rent or additional rent or other payment in lieu of rent which Tenant might have paid to any prior landlord more than 30 days in advance of its due date under the Lease or which such person or entity has physical possession of; or (iv) bound by any amendment or modification of the Lease made without Lender's written consent, where such consent is required by the Mortgage; or (v) bound by any notice given by Tenant to Landlord, whether or not such notice is given pursuant to the terms of the Lease, unless a copy thereof was then also given to Lender; or (vi) liable for any security deposit or other sums held by any prior landlord, unless actually received. H-2 The person or entity to whom Tenant attorns shall be liable to Tenant under the Lease only during such person or entity's period of ownership, and such liability shall not continue or survive as to the transferor after a transfer by such person or entity of its interest in the Lease and the Premises. 6. REPRESENTATIONS AND WARRANTIES. ------------------------------ 6.1 Landlord and Tenant each hereby represent and warrant to Lender as follows regarding the Lease: (a) A true and correct copy of the Lease (inclusive of all riders and exhibits thereto) is attached to the counterpart of this Agreement being delivered to Lender. There are no other oral or written agreements, understandings or the like between Landlord and Tenant relating to the Premises or the Lease transaction. (b) The term of the Lease is expected to commence on or about _____________, 1999. (c) Under the Lease, Tenant shall be obligated to pay rent without present right of defense or offset, at the rate of $79,396.00 per month for the first 24 months and $86,300.00 per month for the next 36 months of the Lease term. Rent is paid through and including N/A, 19__. No rent has been paid more than 30 days in advance, and Tenant has no claim against the Landlord for any deposits or other sums. (d) The Lease has not been modified, altered or amended in any respect. (e) All of the improvements by Landlord contemplated by the Lease have been entirely completed as required therein. (f) The addresses for notices to be sent to Tenant and Landlord are as set forth in the Lease. (g) To Tenant's knowledge, Tenant has no right of first refusal, option or other right to purchase the Premises or any part thereof, including, without limitation, the Demised Premises. 6.2 Several. Landlord and Tenant severally represent and warrant to ------- Lender with respect to themselves, but not with respect to the other: (a) The execution of the Lease was duly authorized, the Lease was properly executed and is in full force and effect and is valid, binding and enforceable against Tenant and Landlord and there exists no monetary default or, to the best of their knowledge, no non-monetary default, nor state of facts which with notice, the passage of time, or both, could ripen into a default, on the part of either Tenant or Landlord. (b) There has not been filed by or against nor, to the best of the knowledge and belief of the representing party, is there threatened against or contemplated by, Landlord or Tenant, a H-3 petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or of any state thereof, or any other action brought under said bankruptcy laws. (c) There has not been any assignment, hypothecation or pledge of the Lease or rents accruing under the Lease, other than pursuant to the Mortgage and the Lease Assignment. Tenant makes the representation set forth in this subparagraph only to its best knowledge and belief. 7. RENTS. Landlord and Tenant jointly and severally acknowledge that the ----- Lease Assignment provides for the direct payment to Lender of all rents and other monies due and to become due to Landlord under the Lease upon the occurrence of certain conditions as set forth in the Lease Assignment without Lender's taking possession of the Demised Premises or otherwise assuming Landlord's position or any of Landlord's obligations under the Lease. Upon receipt from Lender of written notice to pay all such rents and other monies to or at the direction of Lender, Landlord authorizes and directs Tenant thereafter to make all such payments to or at the direction of Lender, releases Tenant of any and all liability to Landlord for any and all payment so made, and shall defend, indemnify and hold Tenant harmless from and against any and all claims, demands, losses, or liabilities asserted by, through or under Landlord (except by Lender) for any and all payments so made. Upon receipt of such notice, Tenant thereafter shall pay all monies then due and becoming due from Tenant under the Lease to or at the direction of Lender, notwithstanding any provision of the Lease to the contrary. Tenant agrees that neither Lender's demanding or receiving any such payments, nor Lender's exercising any other right, remedy, privilege, power or immunity granted by the Mortgage or the Lease Assignment, will operate to impose any liability upon Lender for performance of any obligation of Landlord under the Lease, except as set forth in Paragraph 5 of this Agreement and except as Lender elects otherwise in writing. Such payments shall continue until Lender directs Tenant otherwise in writing. Tenant agrees not to pay any rent under the Lease more than 30 days in advance without Lender's consent. The provisions of this Paragraph 7 will apply from time to time throughout the term of the Lease. 8. CURE. If Tenant becomes entitled to terminate the Lease or offset, ---- withhold or abate rents because of any default by Landlord, then Tenant shall give Lender written notice specifying Landlord's default. Lender then shall have the right, but not the obligation, to cure the specified default within the following time periods: (a) Fifteen days after receipt of such notice with respect to defaults that can be cured by the payment of money; or (b) Thirty days after receipt of such notice with respect to any other default; unless the cure requires Lender to obtain possession of the Demised Premises, in which case such thirty day period shall not commence until Lender acquires possession, so long as Lender proceeds promptly to acquire possession of the Demised Premises with due diligence, by foreclosure of the Mortgage or otherwise. H-4 Nothing contained in this Paragraph 8 shall require Lender to commence or continue any foreclosure or other proceedings, or, if Lender acquires possession of the Demised Premises, to continue such possession, if all defaults specified by Tenant in its notice are cured. Possession by a receiver, or other similar official appointed at the instance, or with the consent, of Lender shall constitute possession by Lender for all purposes under this Paragraph 8. 9. ESTOPPEL LETTERS. Whenever reasonably requested by Lender, Landlord ---------------- and Tenant from time to time shall severally execute and deliver to or at the direction of Lender, and without charge to Lender, one or more written certifications of all of the matters as set forth in Paragraph 6, whether Tenant has exercised any renewal option or options and any other factual information the Lender may reasonably require to confirm the current status of the Lease, including, without limitation, a confirmation that the Lease is and remains subordinated as provided in this Agreement. 10. CASUALTY AND EMINENT DOMAIN. Landlord and Tenant jointly and --------------------------- severally agree that the Mortgage permits Lender, at its option, to apply to the indebtedness from time to time secured by the Mortgage any and all insurance proceeds payable with respect to any casualty loss at the Demised Premises and any and all awards or other compensation that may be payable for the condemnation of all or any portion of the Demised Premises, or any interest therein, or by way of negotiated settlement or conveyance in lieu of condemnation; and Landlord and Tenant jointly and severally consent to any such application by Lender. Notwithstanding the foregoing, Landlord and Lender agree that any and all insurance or condemnation proceeds payable with respect to Tenant's property or the interruption or relocation of Tenant's business (except for rental loss insurance proceeds) will be paid to Tenant, so long as they do not reduce the proceeds otherwise payable to Lender. 11. NOTICES. All notices, demands, and other communications that must or ------- may be given or made in connection with this Agreement must be in writing and, unless receipt is expressly required, will be deemed delivered or made 5 days after having been mailed by registered or certified mail, return receipt requested, or by express mail, in any event with sufficient postage affixed, and addressed to the parties as follows: TO LENDER: c/o AMRESCO Services, L.P. 235 Peachtree Street, N.E., Suite 900 Atlanta, Georgia 30303 Attn: Private Sector Servicing TO LANDLORD: W9/TIB Real Estate Limited Partnership c/o Archon Group, L.P. 1275 K Street NW, Suite 900 Washington, DC 20005 H-5 TO TENANT: Prior to Commencement Date: Following the -------------------------- ------------- Commencement Date: ----------------- Sycamore Networks, Inc. Sycamore Networks, Inc. 10 Elizabeth Drive 4 Omni Way Chelmsford, MA 01824-4111 Chelmsford, MA 01824-4111 Attn: Mr. Peter Hamel Attn: Corporate Counsel and a copy at all times to: Testa, Hurwitz & Thibeault, LLP 125 High Street Boston, MA 02110 Attn: Real Estate Department Such addresses may be changed by notice pursuant to this Paragraph 11; but notice of change of address is effective only upon receipt. Tenant will furnish Lender with copies of all notices from Tenant to Landlord claiming a default by Landlord under the Lease, and Landlord will furnish Lender with copies of all notices from Landlord to Tenant claiming a default by Tenant under the Lease. All communications to Lender shall reference "AMRESCO Loan No.: __________". 12. SUCCESSORS AND ASSIGNS. As used in this Agreement, the word "Tenant" ---------------------- shall mean Tenant and any subsequent holder or holders of an interest under the Lease, as the text may require, provided that the interest of such holder is acquired in accordance with the terms and provisions of the Lease and the word "Lender" shall mean Lender or any other subsequent holder or holders of the Mortgage or any party acquiring title to the Premises or Landlord's interest in the Lease by purchase at a foreclosure sale, by deed of the Lender, or otherwise. Subject to the foregoing, this Agreement shall bind and inure to the benefit of Landlord, Tenant and Lender, their legal representatives, successors and assigns. The terms Lease, Mortgage and Lease Assignment shall include any and all amendments, modifications, replacements, substitutions, extensions, renewals and supplements thereto. 13. FURTHER ASSURANCES. Landlord and Tenant from time to time shall ------------------ execute and deliver at Lender's request all instruments that may be necessary or appropriate to evidence their agreement hereunder provided such instrument neither increases Tenant's obligations or decreases its rights under the Lease or this Agreement. 14. COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all such counterparts shall constitute one and the same instrument. 15. SEVERABILITY. A determination that any provision of this Agreement is ------------ unenforceable or invalid shall not affect the enforceability or validity of any other provision, and any determination that the application of any provision of this Agreement to any person or to any H-6 person or to particular circumstances is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LENDER: LASALLE NATIONAL BANK, as Trustee for GS Mortgage Securities Corporation II Commercial Mortgage Pass-Through Certificates, Series 1998-GSFL1 By: AMRESCO Services, L.P., its authorized agent By: AMRESCO Mortgage Capital, Inc., its general partner By: ---------------------------- Name: ------------------------ Title: Servicing Officer LANDLORD: W9/TIB REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: W9/TIB Gen-Par, Inc., a Delaware corporation, its general partner By: ------------------------------ Name: -------------------------- Title: ------------------------- TENANT: SYCAMORE NETWORKS, INC., a Delaware corporation By: --------------------------------- Name: ----------------------------- Title: President/Vice President By: --------------------------------- Name: ----------------------------- Title: Treasurer/Assistant Treasurer H-7 STATE OF ____________ ) ) COUNTY OF __________ ) _____________ ___, 1999 Then personally appeared the above-named _________________________________, __________________________________ of AMRESCO Mortgage Capital, Inc., as general partner of AMRESCO Services, L.P., as authorized agent for LaSalle National Bank, as Trustee for GS Mortgage Securities Corporation II Commercial Mortgage Pass-Through Certificates, Series 1998-GSFL1, and acknowledged the foregoing instrument to be his/her free act and deed and the free act and deed of AMRESCO Mortgage Capital, Inc., AMRESCO Services, L.P. and LaSalle National Bank, before me, ____________________________________ (Seal) Notary Public My commission expires: STATE OF ____________ ) ) COUNTY OF __________ ) _____________ ___, 1999 Then personally appeared the above-named _________________________________, __________________________________ of W9/TIB Gen-Par, Inc., as General Partner of W9/TIB Real Estate Limited Partnership, and acknowledged the foregoing instrument to be his/her free act and deed, the free act and deed of W9/TIB Gen- Par, Inc., and the free act and deed of W9/TIB Real Estate Limited Partnership, before me, ____________________________________ (Seal) Notary Public My commission expires: STATE OF ____________ ) ) COUNTY OF __________ ) _____________ ___, 1999 Then personally appeared the above-named _________________________________, __________________________________ of Sycamore Networks, Inc., and acknowledged the foregoing instrument to be his/her free act and deed and the free act and deed of Sycamore Networks, Inc., before me, ____________________________________ (Seal) Notary Public My commission expires: H-8 EXHIBIT I --------- SAMPLE LETTER OF CREDIT ----------------------- Beneficiary/Landlord: Issuance Date: W9/TIB Real Estate Limited Partnership, ______________________, 1999 a Delaware limited partnership c/o Archon Group, L.P. Irrevocable Standby Letter 1275 K Street NW, Suite 900 of Credit No. _______________ Washington, DC 20005 Applicant/Accountee/Tenant: Credit Amount: Sycamore Networks, Inc., USD $500,000.00 a Delaware corporation Up to an Aggregate Thereof 4 Omni Way Date and Place of Expiry: Chelmsford, MA 01824-4111 _______________, 1999 At Our Counters in Boston, MA Ladies and Gentlemen: We hereby issue our irrevocable standby letter of credit in your favor for the account of the Applicant for an aggregate amount not to exceed FIVE HUNDRED THOUSAND U.S. DOLLARS available for payment by presentation of your draft(s) drawn on ourselves at sight, and accompanied by the following documents: 1. Your statement/certificate, on your letterhead, signed by a person purporting to be your authorized officer/representative, appropriately completed in the following form: A. "The undersigned, an authorized officer/representative of W9/TIB Gen- Par, Inc., general partner of W9/TIB Real Estate Limited Partnership (the "Landlord"), hereby certifies with regard to __________ Irrevocable Standby Letter of Credit no. __________ that Sycamore Networks, Inc. (the "Tenant") is in default relative to the Lease Agreement dated August _____, 1999 (the "Lease") by and between Landlord and Tenant and such default has continued uncured beyond all applicable notice and grace periods." OR B. "We are in receipt of _______________ Notice of Non-Extension of its letter of credit no. _______________ and Sycamore Networks, Inc. (the "Tenant") has failed to provide a replacement letter of credit reasonably acceptable to us as of the date of our drawing and the Tenant remains liable to us pursuant to the Lease." 2. The original of this letter of credit (for endorsement of drawing), which will be returned unless the credit is fully utilized. I-1 Partial drawings are permitted. We engage with you that all draft(s) drawn under and in compliance with the terms and conditions of this letter of credit shall be duly honored on presentation to us at our office at _______________, Boston, MA _______, Attn: _______________, ____ Floor, on or before the Expiry Date as specified above or any automatically extended date herein before set forth. Draft(s) must indicate the name of the issuing bank, the letter of credit number and must be presented at the office specified in the preceding sentence. It is a condition of this letter of credit that it shall be deemed automatically extended without amendment for an additional period of one year from the present or each future expiration date hereof, but not beyond _________________ [NOTE: 30 DAYS AFTER THE EXPIRATION OF THE TERM], unless at least forty-five (45) days prior to any such expiration date we notify you by certified mail, that we elect not to so extend this letter of credit for any such additional period. Upon receipt by you of such notice, you may draw hereunder your draft(s) at sight on ourselves for the then full amount of this letter of credit accompanied by your statement as specified above. This letter of credit is transferable in its entirety, but not in part, to any successor landlord under the Lease and may be successively transferred. If it is your intention to transfer your interest hereunder, kindly return the letter of credit to us for appropriate endorsement and furnish us with your instructions. Please note your signature on your request for transfer must be authenticated by your bank. (Transfer form is attached.) In the event of transfer all required documents are to be signed by the transferee. This letter of credit sets forth in full the terms of our obligations to you, and our undertaking shall not in any way be amended or amplified by reference to any documents, instruments or any agreement referred to herein or to which this letter of credit related, and such reference, if any, shall not be deemed to incorporate herein by reference any document, instrument or agreement. Except as otherwise expressly stated herein, this letter of credit is subject to the International Standby Practices (ISP98), the International Chamber of Commerce, Publication No. 590, and shall, as to matters not governed by ISP98, be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Very truly yours, By:_______________________________ Name: Title: I-2 TRANSFER This form is to be used where a Letter of Credit is transferred in its entirety and no substitution of invoices is involved. Date Re: Credit issued or advised by ----------------------------- Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: ---------------------------------------- (Name of Second Beneficiary) ---------------------------------------- (Address) ---------------------------------------- (Name of Advising Bank) ---------------------------------------- (Address) all rights of the undersigned beneficiary to draw under the above Letter of Credit in its entirety. 1. By this transfer, all rights of the undersigned beneficiary in such Letter of Credit are transferred to the Second Beneficiary and the Second Beneficiary shall have the sole rights as beneficiary thereof, including sole rights relating to any amendment, whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised direct to the Second Beneficiary without necessity of any consent of or notice to the undersigned beneficiary. 2. The advice of such Letter of Credit is returned herewith, and we ask you to endorse the transfer on the reverse thereof, and forward it direct to the Second Beneficiary with your customary notice of transfer, or advise the letter of credit to the Second Beneficiary by telex/SWIFT. SIGNATURE AUTHENTICATED Very truly yours, (Bank) By:________________________________ (Authorized Signature) Name: I-3 EX-24.2 5 POWER OF ATTORNEY Exhibit 24.2 POWER OF ATTORNEY The undersigned director of Sycamore Networks, Inc. hereby constitutes and appoint Gururaj Deshpande, Daniel E. Smith and Frances M. Jewels, and each of them singly, my true and lawful attorneys with full power to them, and each of them singly, with full powers of substitution and resubstitution, to sign for me and in my name in the capacity indicated below, the Registration Statement on Form S-1 (file no. 333-84635) 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 my name and on my behalf in my capacity as director 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 my signature as it may be signed by my 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). Signed this 24th day of September, 1999. /s/ John W. Gerdelman -------------------------- John W. Gerdelman EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 7-MOS 12-MOS JUL-31-1998 JUL-31-1999 FEB-17-1998 AUG-01-1998 JUL-31-1998 JUL-31-1999 1,197 21,969 3,082 7,020 0 11,410 0 0 0 6,608 4,479 52,160 527 6,263 27 975 5,081 57,912 138 11,710 0 4,054 5,621 55,771 0 0 7 23 (685) (13,646) 5,081 57,912 0 11,330 0 11,330 0 8,486 0 8,486 793 22,893 0 0 100 559 (693) (19,490) 0 0 (693) (19,490) 0 0 0 0 0 0 (693) (19,490) (0.55) (6.27) (0.55) (6.27)
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