-----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, RZPNOZBRkakleTSjBRzpTEyKuFd2C0xReEZ9PSwYvMw1AXAeGsTDkIha6TCLHNCC pGi1hiLf/al8+14UVFpsgQ== 0000927016-99-003928.txt : 19991214 0000927016-99-003928.hdr.sgml : 19991214 ACCESSION NUMBER: 0000927016-99-003928 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991213 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-27273 FILM NUMBER: 99773630 BUSINESS ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 9782502900 MAIL ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSORD STATE: MA ZIP: 01824 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 333-25853 SYCAMORE NETWORKS, INC. (Exact name of registrant as specified in its charter) Delaware 04-3410558 (State of other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 10 Elizabeth Drive Chelmsford, MA 01824 (978) 250-2900 (Address Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes X No ___, and (2) has been subject to such filing requirements for the past 90 days. Yes___ No X . ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT BECOME SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN SHARES OF ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE "REGISTRATION STATEMENT") WHICH WAS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1999. The number of shares outstanding of the Registrant's Common Stock as of November 30, 1999 was 78,696,484. 1 Sycamore Networks, Inc. Index Part I. Financial Information
Page No. Item 1. Financial Statements and Supplementary Data Balance Sheets as of October 30, 1999 and July 31, 1999 3 Statements of Operations for the three months ended October 30, 1999 and October 31, 1998 4 Statements of Cash Flows for the three months ended October 30, 1999 and October 31, 1998 5 Notes to financial statements 6 Item 2. Management's discussion and analysis of financial condition and results of operations 8 Item 3. Qualitative and quantitative disclosures about market risk 21 Part II Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 24 Exhibit Index 25
2 Part I. Financial Information Item 1. Sycamore Networks, Inc. (in thousands, except share data)
October 30, July 31, 1999 1999 ---- ---- Assets Current assets: Cash and cash equivalents $ 280,634 $ 21,969 Marketable securities 10,196 7,020 Accounts receivable 12,524 11,410 Inventories 7,568 6,608 Prepaids and other current assets 3,015 5,153 ---------- --------- Total current assets 313,937 52,160 Property and equipment, net 7,117 5,288 Other assets 919 464 ---------- --------- Total assets $ 321,973 $ 57,912 ========== ========= Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Current portion of notes payable $ -- $ 1,097 Accounts payable 10,546 5,750 Accrued compensation 813 1,403 Accrued warranty 987 453 Accrued expenses 2,042 1,298 Other current liabilities 961 1,709 ---------- --------- Total current liabilities 15,349 11,710 Notes payable -- 4,054 Commitments and contingencies Redeemable convertible preferred stock -- 55,771 Stockholders' equity (deficit): Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding -- -- Common stock, $.001 par value; 250,000,000 shares authorized; 78,696,484 and 23,273,112 shares issued and outstanding 79 23 Additional paid-in capital 385,584 30,826 Accumulated deficit (25,900) (20,183) Notes receivable (460) (360) Deferred compensation (52,679) (23,929) ---------- --------- Total stockholders' equity (deficit) 306,624 (13,623) ---------- --------- Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) $ 321,973 $ 57,912 ========== =========
The accompanying notes are an integral part of the financial statements. 3 Sycamore Networks, Inc. Statements of Operations (in thousands, except per share data)
Three Months Ended -------------------- October 30, October 31, 1999 1998 ---- ---- Revenues $ 19,510 $ - Cost of revenues 10,340 24 ----------- ---------- Gross profit (loss) 9,170 (24) Operating expenses: Research and development 7,844 873 Sales and marketing 3,445 179 General and administrative 751 93 Amortization of stock compensation 3,289 75 ----------- ---------- Total operating expenses 15,329 1,220 Loss from operations (6,159) (1,244) Interest income, net 442 60 ----------- ---------- Net loss $ (5,717) (1,184) =========== ========== Basic and diluted net loss per share $ (0.56) $ (0.39) Weighted average shares used in computing basic and diluted net loss per share 10,294 3,009 Pro forma basic and diluted net loss per share $ (0.11) $ (0.05) Weighted average shares used in computing pro forma basic and diluted net loss per share 53,420 21,750
The accompanying notes are an integral part of the financial statements. 4 Sycamore Networks, Inc. Statements of Cash Flows (in thousands)
Three months ended ------------------ October 30, October 31, 1999 1998 ---- ---- Cash flows from operating activities: Net loss $ (5,717) $ (1,184) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 650 75 Amortization of stock compensation 3,289 75 Changes in operating assets and liabilities: Accounts receivable (1,114) - Inventories (960) - Prepaids and other current assets 2,138 (176) Accounts payable 4,796 (6) Accrued expenses and other current liabilities (60) (29) ------------ --------- Net cash provided by (used in) operating activities 3,022 (1,245) ------------ --------- Cash flows from investing activities: Purchases of property and equipment (2,479) (417) Purchases of marketable securities (8,082) - Maturities of marketable securities 4,906 - Increase in other assets (455) - ------------ --------- Net cash used in investing activities (6,110) (417) ------------ --------- Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net - 2,525 Proceeds from issuance of common stock, net 266,904 147 Proceeds from notes payable - 673 Payments on notes payable (5,151) - ------------ --------- Net cash provided by financing activities 261,753 3,345 ------------ --------- Net increase in cash and cash equivalents 258,665 1,683 Cash and cash equivalents, beginning of period $ 21,969 $ 1,197 ------------ --------- Cash and cash equivalents, end of period $ 280,634 $ 2,880 ============ ========= Supplementary non-cash activity: Issuance of common stock in exchange for notes receivable $ 100 $ -
The accompanying notes are an integral part of the financial statements. 5 Sycamore Networks, Inc. Notes To Financial Statements 1. Description of Business Sycamore Networks, Inc. ("Sycamore", or the "Company") was incorporated in Delaware on February 17, 1998. Sycamore develops and markets products that transport voice and data traffic over wavelengths of light. Sycamore's products enable service providers to quickly and cost effectively provide bandwidth and create new high-speed data services. To date, Sycamore has principally marketed its products in the United States. Through May 1, 1999, Sycamore was considered to be in the development stage and was principally engaged in research and development, raising capital and building its management team. Sycamore shipped its first product in May 1999. Sycamore operates in one business segment. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited financial statements have been prepared by Sycamore and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair statement of the results for the interim periods. The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission ("SEC"), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles. Results for the interim periods are not necessarily indicative of results for the entire fiscal year. These statements should be read in conjunction with the financial statements and related footnotes included in Sycamore's registration statement Form S-1 filed with the SEC on October 21, 1999 for the year ended July 31, 1999. 3. Net Loss Per Share and Pro Forma 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. Pro forma net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of Sycamore's Series A, B, C and D redeemable convertible preferred stock into shares of Sycamore's common stock, effective upon the closing of Sycamore's initial public offering, as if such conversion had occurred at the date of original issuance. 6 The following table sets forth the computation of basic and diluted net loss per share:
(in thousands, except per share data) Three Months Three Months Ended Ended October 30, 1999 October 31, 1998 ---------------- ---------------- Numerator: Net loss $ (5,717) $(1,184) Denominator: Historical: Weighted average common shares outstanding 28,545 10,032 Weighted average common shares outstanding subject to repurchase (18,251) (7,023) -------- ------- Denominator for basic and diluted calculation 10,294 3,009 ======== ======= Basic and diluted net loss per share $ (.56) $ (.39) ======== ======= Pro Forma: Historical weighted average common shares outstanding 10,294 3,009 Weighted average number of shares assumed upon conversion of redeemable convertible preferred stock 43,126 18,741 -------- ------- Shares used in computing pro forma basic and diluted net loss per share 53,420 21,750 ======== ======= Pro forma basic and diluted net loss per share $ (.11) $ (.05) ======== =======
Options to purchase 4,828,849 and 28,500 shares of common stock at respective average exercise prices of $11.09 and $.02 per share, have not been included in the computation of diluted net loss per share for the three months ended October 30, 1999 and October 31, 1998, respectively, as their effect would have been anti-dilutive. 4. Inventory Inventory consisted of the following (in thousands): October 30, July 31, 1999 1999 ---- ---- Raw materials $1,826 $2,164 Work in process 2,427 3,026 Finished goods 3,315 1,418 ------ ------ $7,568 $6,608 ====== ====== 5. Other Comprehensive Income Sycamore 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 three months ended October 30, 1999 and October 31, 1999 does not differ from the reported net loss. 7 6. Initial Public Offering On October 21, 1999, Sycamore completed its initial public offering ("IPO") in which it sold 7,475,000 shares of Common Stock at a price to the public of $38.00 per share. The net proceeds of the IPO, after deducting underwriting discounts and other offering expenses, were approximately $263.0 million. Upon the closing of the IPO, all redeemable convertible preferred Stock (Series A, B, C and D) automatically converted to 47,283,225 shares of Common Stock. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Except for the historical information contained herein, we wish to caution you that certain matters discussed in this Report on Form 10-Q constitute forward- looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including without limitation those discussed under the caption "Factors That May Effect Future Results" included herein and under the caption "Risk Factors" in the Company's Registration Statement on Form S-1 (No. 333-84635) filed by the Company in connection with its IPO which became effective October 21, 1999. Forward-looking statements include statements regarding the future or the Company's expectations, beliefs, intentions or strategies regarding the future and may be identified by the words "anticipate," "believe," "could," "estimate" "expect," "intend," "may," "should," "will," and "would" and similar expressions. There may be events in the future that could affect these matters. Overview Sycamore develops and markets products that transport voice and data traffic over wavelengths of light. Sycamore's products enable service providers to quickly and cost effectively provide bandwidth and create new high-speed data services. From Sycamore's inception in February 1998 through May 1, 1999, Sycamore's operating activities consisted primarily of research and development, product design, development and testing. During this period, Sycamore also staffed and trained its administrative, marketing and sales personnel and began sales and marketing activities. In May 1999, Sycamore began shipping the SN 6000 product and recognized revenues of $11.3 million from shipments of the SN 6000 in the fourth quarter of 1999. Since inception, Sycamore has incurred significant losses, and as of October 30, 1999, had an accumulated deficit of $25.9 million. Sycamore has not achieved profitability on a quarterly or annual basis. Revenues are currently generated from two products: the SN 6000 and the SN 8000. While Sycamore is developing and plans to introduce future products, there can be no assurance that it will be successful in these efforts. Results of Operations Revenues Revenues for the three months ended October 30, 1999 were $19.5 million (none for the corresponding period in the prior year). Sycamore began shipping the SN 6000 in May 1999. The SN 8000 was first shipped in August 1999. For the three months ended October 30, 1999, one customer accounted for all revenues. Cost of Revenues Cost of revenues were $10.3 million for the three months ended October 30, 1999 compared to $24,000 for the same period in fiscal 1999. Sycamore began shipping the SN 6000 in May 1999 and the SN 8000 in August 1999. Cost of revenues includes material costs, costs of manufacturing overhead, the cost of the customer service organization and other period costs. 8 Research and Development Expenses Research and development expenses increased $6.9 million to $7.8 million for the three months ended October 30, 1999 compared to $873,000 for the same period in fiscal 1999. The increase in expenses was primarily due to increased costs associated with a significant increase in personnel and personnel-related expenses, an increase in non-recurring engineering costs and an increase in prototype expenses for the design and development of new products as well as enhancements to existing products. Research and development is essential to Sycamore's future success and Sycamore expects that the dollar amounts of research and development expenses to increase in future periods. Sales and Marketing Expenses Sales and marketing expenses increased $3.3 million to $3.4 million for the three months ended October 30, 1999 compared to $179,000 for the same period in fiscal 1999. The increase in expenses reflects the hiring of additional sales and marketing personnel, sales based commissions and marketing program costs, including web development, trade shows and product launch activities. Sycamore intends to continue to expand its domestic and international sales force and marketing efforts, and as a result, expects that the dollar amounts of sales and marketing expenses will increase in future periods. General and Administrative Expenses General and administrative expenses increased $658,000 to $751,000 for the three months ended October 30, 1999 compared to $93,000 for the same period in fiscal 1999. The increase in expenses reflects the hiring of additional general and administrative personnel and expenses necessary to support increased levels of business activities. Sycamore expects that the dollar amounts of general and administrative expenses will increase in future periods as a result of expansion of business activity and the reporting and other requirements of being a publicly traded company. Amortization of Stock Compensation Amortization of stock compensation expense was $3.3 million and $75,000 for the three months ended October 30, 1999 and October 31, 1998, respectively. Amounts for the three months ended October 30, 1999 include $837,000 of compensation expense associated with the grant of options to purchase common stock to non- employees and consultants. For the three months ended October 30, 1999, Sycamore granted 3,182,196 stock options at exercise prices, ranging from $4.00 to $17.50, which were deemed to be below fair market value, and recorded additional deferred compensation expense of approximately $31.2 million related to these grants. Amortization of stock compensation relating to these grants is expected to impact Sycamore's reported results of operations through the first quarter of fiscal 2005. Interest Income, Net Interest income, net was $442,000 and $60,000 for the three months ended October 30, 1999 and October 31, 1998, respectively. The increase in interest income reflects higher invested balances and interest earnings on the IPO proceeds, offset by interest payments on the notes payable. Net Operating Losses and Tax Credit Carryforwards As of October 30, 1999, Sycamore had approximately $19.0 million of state and federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income. Such net operating loss carryforwards begin to expire in 2004 and 2019, respectively, to the extent that they are not utilized. Sycamore has 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. 9 Liquidity and Capital Resources Prior to its IPO, Sycamore financed its operations primarily through private sales of its capital stock and through borrowings on long-term debt agreements for the purchase of capital equipment. On October 22, 1999, Sycamore completed its IPO in which it sold 7,475,000 shares of Common Stock at a price to the public of $38.00 per share. The net proceeds of the IPO, after deducting underwriting discounts and other offering expenses, were approximately $263.0 million At October 30, 1999, cash, cash equivalents and marketable securities totaled $290.8 million. Sycamore invests excess funds in short-term money market funds, commercial paper and government and non-government debt securities. Cash provided by operating activities was $3.0 million for the three months ended October 30, 1999, compared to cash used in operating activities of $1.2 million for the three months ended October 31, 1998. The increase in cash provided by operating activities is primarily due to increases in non-cash charges for amortization of stock compensation and depreciation, accounts payable offset by the increases in net losses, accounts receivables and inventory purchases. Cash used in investing activities was $6.1 million for the three months ended October 30, 1999, compared to $417,000 for the three months ended October 31, 1998. The increase in net cash used in investing activities reflects increased purchases of property and equipment, primarily for computers and test equipment for our development and manufacturing activities, and increased net purchases of marketable securities. Cash provided by financing activities was $261.8 million for the three months ended October 30, 1999 and $3.3 million for the three months ended October 31, 1998. The increase in cash provided by financing activities reflects the net proceeds of $263.0 million from Sycamore's IPO and the issuance of common stock from the exercise of stock options, offset by payments of debt obligations. In December 1998, Sycamore issued an irrevocable stand-by letter of credit for $92,000 for an office facility lease which is collateralized by an U.S. Treasury Bill. The letter of credit is irrevocable and expires in January 2002. In July 1999, Sycamore issued a guaranteed stand-by letter of credit for $4,000,000 for inventory purchases made by a third party manufacturer on behalf of Sycamore which is collateralized by a U.S. Government security. The letter of credit was irrevocable and expired in October 1999. Sycamore believes that the net proceeds from the IPO, together with Sycamore's current cash, cash equivalents and marketable securities will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Year 2000 Readiness Disclosure State of Readiness of Sycamore's Products. Sycamore has designed its products for use in the year 2000 and beyond and Sycamore believes its products are year 2000 complaint. However, Sycamore's products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of Sycamore's customers' networks involves different combinations of third party products. Sycamore cannot evaluate whether all of these third-party vendor products are year 2000 compliant. Sycamore may face warranty and other claims based on year 2000 problems in other companies' products or based on issues arising from the integration of multiple products within the customer's overall network. Although no such claims have been made against Sycamore, Sycamore may in the future be required to defend its products in legal proceedings which could be expensive regardless of the merits of such claims. In addition, some customers may wait to purchase Sycamore's products until after the year 2000, which may negatively impact Sycamore's revenue. 10 State of Readiness of Sycamore's Internal Systems. Sycamore's business may be affected by year 2000 issues related to non-complaint internal systems developed by Sycamore or by third-party vendors. The failure of Sycamore's internal systems to be year 2000 compliant could temporarily prevent Sycamore from processing orders, issuing invoices and developing products and could require Sycamore to devote significant resources to correct such problems. Sycamore has substantially completed the year 2000 testing and conversion of its material internal systems and is not currently aware of any year 2000 problem relating to any of such systems. Sycamore's material third-party vendors have stated that they are, or expect to be, year 2000 complaint in a timely manner. Sycamore cannot independently verify the Year 2000 compliance of its third party vendors. Sycamore's internal operations and business are also dependent upon the computer-controlled systems of third parties such as Sycamore's manufacturers, suppliers, customers and other service providers. Sycamore believes that absent a systemic failure outside Sycamore's control, such as a prolonged loss of electrical or telephone service, year 2000 problems of third parties such as manufacturers, suppliers, customers and service providers will not have a material impact on Sycamore's operations. However, due to the uncertainty as to the year 2000 readiness of Sycamore's manufacturer's, suppliers, customers and other service providers, Sycamore is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on Sycamore's business, results of operations or financial condition. Risks If Sycamore's 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, Sycamore's 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 Sycamore's operations and damage Sycamore's relationships with Sycamore's customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party manufacturers, suppliers and vendors, Sycamore is unable to determine at this time whether year 2000 failures could harm Sycamore's business, results of operations or financial condition. Sycamore's customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing internal systems to become year 2000 compliant. This situation may reduce funds available to purchase Sycamore's products. In addition, in the event that a significant number of Sycamore's customers experience year 2000-related problems, whether or not due to Sycamore's products, demand for technical support and assistance may increase substantially. In such case, Sycamore's cost for providing technical support may rise and the quality of such technical support and Sycamore's ability to manage incoming requests may be impaired. To date, Sycamore has not incurred material expense associated with its efforts to become year 2000 compliant and does not anticipate that any future costs in connection with Sycamore's year 2000 remediation efforts will be material. Sycamore has developed contingency plans to be implemented if its efforts to identify and correct Year 2000 problems affecting our internal systems are not effective. Sycamore's implementation of any contingency plan could have an adverse effect on its business, results of operations or financial condition. Factors That May Effect Future Results Sycamore Expects That Substantially All Of its Revenues Will Be Generated From A Limited Number Of Customers And Sycamore's Revenues Will Not Grow If It Does Not Successfully Sell Products To These Customers Sycamore currently has a limited number of customers, one of whom, Williams Communications, is significant. Williams is not contractually committed to purchase any minimum quantities of products from us. Sycamore expects that in the foreseeable future substantially all of our revenues will continue to depend on sales of intelligent optical networking products to Williams and a limited number of potential new customers. The rate at which Sycamore's current and prospective customers purchase products from 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 Sycamore for any reason, including any determination not to install our products in their networks or a downturn in their business, would seriously harm Sycamore's financial condition or results of its operations. 11 Sycamore Has Been In Business For A Short Period Of Time And The Basis For Evaluating Sycamore Is Limited Sycamore was founded in February 1998 and shipped its first intelligent optical networking product in May 1999. Sycamore has limited meaningful historical financial data upon which to base projected revenues and planned operating expenses and upon which investors may evaluate Sycamore and its prospects. In addition, Sycamore's operating expenses are largely based on anticipated revenue trends and a high percentage of Sycamore's expenses are and will continue to be fixed. Investors should consider the risks and difficulties frequently encountered by companies like Sycamore in a new and rapidly evolving market. Sycamore's ability to sell products, and the level of success, if any, Sycamore achieves, depends, among other things, on the level of demand for intelligent optical networking products, which is a new and rapidly evolving market. Any Failure Of Sycamore To Increase Revenues Would Prevent Sycamore From Achieving And Maintaining Profitability Sycamore has incurred significant losses since inception and expects to continue to incur losses in the future. As of October 30, 1999, Sycamore had an accumulated deficit of $25.9 million. Sycamore has not achieved profitability on a quarterly or annual basis, and Sycamore anticipates that it will continue to incur net losses. There can be no assurances that Sycamore's revenues will grow or that Sycamore will generate sufficient revenues to achieve or sustain profitability. Sycamore has large fixed expenses and expects to continue to incur significant and increasing sales and marketing, product development, administrative and other expenses. As a result, Sycamore will need to generate significantly higher revenues to achieve and maintain profitability. Sycamore Is Entirely Dependent On Its Line Of Intelligent Optical Networking Products And Sycamore's Future Revenue Depends On Their Commercial Success Sycamore's future growth depends on the commercial success of its line of intelligent optical networking products. To date, Sycamore's SN 6000 Intelligent Optical Transport product and SN 8000 Optical Add/Drop product are the only products that have been shipped to customers. Sycamore intends to develop and introduce new products and enhancements to existing products in the future. There can be no assurances that Sycamore will be successful in completing the development or introduction of these products. Failure of current or planned products to operate as expected could delay or prevent their adoption. If Sycamore's target customers do not adopt, purchase and successfully deploy Sycamore's current and planned products, Sycamore's revenues will not grow significantly. Because Sycamore's Products Are Complex And Are Deployed In Complex Environments, They May Have Errors Or Defects That Are Found Only After Full Deployment, Which Could Seriously Harm Sycamore's Business Sycamore's intelligent optical networking products are complex and are designed to be deployed in large and complex networks. Because of the nature of the products, they can only be fully tested when completely deployed in very large networks with high amounts of traffic. Sycamore's customers may discover errors or defects in the hardware or the software, or the product may not operate as expected, after it has been fully deployed. If Sycamore is unable to fix errors or other problems that may be identified in full deployment, Sycamore 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. 12 The Long And Variable Sales Cycles For Sycamore's Products May Cause Revenues And Operating Results To Vary Significantly From Quarter To Quarter A customer's decision to purchase Sycamore's intelligent optical networking products involves a significant commitment of its resources and a lengthy evaluation, testing and product qualification process. As a result, Sycamore's sales cycle is likely to be lengthy. Throughout the sales cycle, Sycamore spends considerable time and expense educating and providing information to prospective customers about the use and features of our products. Even after making a decision to purchase, Sycamore believes that its customers will deploy the products slowly and deliberately. Timing of deployment can vary widely and depends on the skills of the customer, the size of the network deployment, the complexity of the customer's network environment and the degree of hardware and software configuration necessary. Customers with significant or complex networks usually expand their networks in large increments on a periodic basis. Accordingly, Sycamore may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of Sycamore's limited operating history and the nature of its business, Sycamore cannot predict these sales and deployment cycles. The long sales cycles, as well as Sycamore's expectation that customers will tend to sporadically place large orders with short lead times, may cause Sycamore's revenues and results of operations to vary significantly and unexpectedly from quarter to quarter. Sycamore May Not Be Successful If Its Customer Base Does Not Grow Sycamore's future success will depend on attracting additional customers. The growth of Sycamore's customer base could be adversely affected by: . customer unwillingness to implement Sycamore's new optical networking architecture; . any delays or difficulties that Sycamore may incur in completing the development and introduction of our planned products or products enhancements; . new product introductions by our competitors; . any failure of Sycamore's products to perform as expected; or . any difficulty Sycamore may incur in meeting customers' delivery requirements. The Intelligent Optical Networking Market Is New And Sycamore's Business Will Suffer If It Does Not Develop As Expected The market for intelligent optical networking products is new. There can be no assurances that a viable market for our products will develop or be sustainable. If this market does not develop, or develops more slowly than Sycamore expects, Sycamore's business, results of operations and financial condition would be seriously harmed. If Sycamore Does Not Respond Rapidly To Technological Changes, Sycamore's Products Could Become Obsolete The market for intelligent optical networking products is likely to be characterized by rapid technological change, frequent new product introductions and changes in customer requirements. Sycamore may be unable to respond quickly or effectively to these developments. Sycamore may experience design, manufacturing, marketing and other difficulties that could delay or prevent Sycamore's 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 Sycamore's existing or future products obsolete. In developing Sycamore's products, Sycamore has made, and will continue to make, assumptions about the standards that may be adopted by its customers and competitors. If the standards adopted are different from those which Sycamore 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 Sycamore's existing products obsolete. In addition, in order to introduce products incorporating new technologies and new industry standards, Sycamore must be able to gain access to the latest technologies of its customers, its suppliers and other network vendors. Any failure to gain access to the latest technologies could impair the competitiveness of Sycamore's products. 13 Customer Requirements Are Likely To Evolve, And Sycamore Will Not Retain Customers or Attract New Customers If Sycamore Does Not Anticipate And Meet Specific Customer Requirements Sycamore's current and prospective customers may require product features and capabilities that its current products do not have. To achieve market acceptance for Sycamore's products, Sycamore must effectively and timely anticipate and adapt to customer requirements and offer products and services that meet customer demands. Any failure of Sycamore to develop products or offer services that satisfy customer requirements would seriously harm Sycamore's ability to increase demand for its products. Sycamore intends to continue to invest in product and technology development. The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends. Sycamore may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. The introduction of new or enhanced products also requires that Sycamore manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Sycamore's inability to effectively manage this transition would cause Sycamore to lose current and prospective customers. Sycamore's Market Is Highly Competitive, And Sycamore's Failure To Compete Successfully Would Limit Its Ability to Increase Market Share Competition in the public network infrastructure market is intense. This market has historically been dominated by large companies, such as Lucent Technologies, Nortel Networks, Cisco Systems and Ciena Corporation, and. Sycamore may face competition from other large telecommunications companies who may enter its 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 Sycamore's current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, and other resources, including vendor-sponsored financing programs. Moreover, Sycamore's competitors may foresee the course of market developments more accurately and could in the future develop new technologies that compete with Sycamore's products or even render those products obsolete. Due to the rapidly evolving markets in which Sycamore competes, additional competitors with significant market presence and financial resources may enter those markets, thereby further intensifying competition. In order to compete effectively, Sycamore must deliver products that: . provide extremely high network reliability; . scale easily and efficiently with minimum disruption to the network; . interoperate with existing network designs and equipment vendors; . reduce the complexity of the network by decreasing the need for overlapping equipment; . provide effective network management; and . provide a cost-effective solution for service providers. In addition, Sycamore believes that a knowledge of the infrastructure requirements applicable to service providers, experience in working with service providers to develop new services for their customers, and an ability to provide vendor-sponsored financing are important competitive factors in our market. Sycamore has limited ability to provide vendor-sponsored financing and this may influence the purchasing decision of prospective customers, who may decide to purchase products from one of our competitors who are better equipped to provide such financing. If Sycamore is unable to compete successfully against its current and future competitors, Sycamore could experience price reductions, order cancellations and reduced gross margins, any one of which could materially and adversely affect Sycamore's business, results of operations and financial condition. 14 Sycamore Is Likely To Face Difficulties In Obtaining And Retaining Customers If Sycamore Does Not Expand Its Sales Organization And Its Customer Service And Support Operations Sycamore's products and services require a sophisticated sales effort targeted at a limited number of key individuals within its prospective customers' organizations. This effort requires specialized sales personnel and consulting engineers. Sycamore is in the process of building its direct sales force and plans to hire additional qualified sales personnel and consulting engineers. Competition for these individuals is intense, and Sycamore might not be able to hire the kind and number of sales personnel and consulting engineers required to be successful. In addition, Sycamore believes that its future success is dependent upon Sycamore's ability to establish successful relationships with a variety of distribution partners. If Sycamore is unable to expand its direct sales operations, or establish and expand an indirect sales channel, Sycamore may not be able to increase market awareness or sales of its products, which may prevent Sycamore from achieving and maintaining profitability. Sycamore currently has a small customer service and support organization and will need to increase staff to support new customers. The support of Sycamore's products requires highly trained customer service and support personnel. Hiring customer service and support personnel is very competitive in Sycamore's industry because there are a limited number of people available with the necessary technical skills and understanding of Sycamore's market. Once Sycamore hires such personnel, they may require extensive training in Sycamore's intelligent optical networking products. If Sycamore is unable to expand its customer service and support organization and train them rapidly, Sycamore may not be able to increase sales of its products. Sycamore Depends Upon Contract Manufacturers And Any Disruption In These Relationships May Cause Sycamore To Fail To Meet The Demands Of Its Customers And Damage Its Customer Relationships Sycamore relies on a small number of contract manufacturers to manufacture its products in accordance with Sycamore's 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 Sycamore's behalf. Sycamore may not be able to effectively manage its relationship with Celestica, and Celestica may not meet Sycamore's future requirements for timely delivery. Each of Sycamore's contract manufacturers also builds products for other companies, and there can be no assurances that they will always have sufficient quantities of inventory available to fill orders placed by Sycamore's customers, or that they will allocate their internal resources to fill these orders on a timely basis. Sycamore does not have long- term supply contracts with these manufacturers. Sycamore does 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 Sycamore's products. If Sycamore is required or chooses to change contract manufacturers, this could result in a loss of revenue and damage to customer relationships. Sycamore Relies On Single Sources For Supply Of Certain Components And Sycamore's Business May Be Seriously Harmed If Its Supply Of Any Of These and Other Components Is Disrupted Sycamore currently purchases several key components, including commercial digital signal processors, RISC processors, field programmable gate arrays, SONET transceivers and erbium doped fiber amplifiers, from single or limited sources. Sycamore purchases each of these components on a purchase order basis and has no long-term contracts for these components. Although Sycamore believes that there are alternative sources for each of these components, in the event of a disruption in supply, Sycamore may not be able to develop an alternate source in a timely manner or at favorable prices. Such a failure could hurt Sycamore's ability to deliver its products to its customers and negatively affect Sycamore's operating margins. In addition, Sycamore's reliance on its suppliers exposes Sycamore to potential supplier production difficulties or quality variations. Any such disruption in supply would seriously impact future sales and revenue. Further, the optical component industry is expanding rapidly and manufacturers of optical components may be unable to meet the unpredictable and growing demand for components. Because optical components are integrated into Sycamore's products, a shortage or decrease in supply would seriously impact future sales and revenue. 15 The Unpredictability Of Sycamore's Quarterly Results May Adversely Affect The Trading Price Of Sycamore's Common Stock Sycamore's revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of Sycamore's control and any of which may cause Sycamore's stock price to fluctuate. The primary factors that may affect Sycamore include the following: . fluctuation in demand for intelligent optical networking products; . the timing and size of sales of Sycamore's products; . the length and variability of the sales cycle for Sycamore's products; . the timing of recognizing revenue and deferred revenue; . new product introductions and enhancements by Sycamore's competitors and ourselves; . changes in Sycamore's pricing policies or the pricing policies of Sycamore's competitors; . Sycamore's ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; . Sycamore's ability to obtain sufficient supplies of sole or limited source components; . increases in the prices of the components Sycamore purchases; . Sycamore's ability to attain and maintain production volumes and quality levels for Sycamore's products; . the timing and level of prototype expenses; . costs related to acquisitions of technology or businesses; and . general economic conditions as well as those specific to the telecommunications, Internet and related industries. Sycamore plans to increase significantly its operating expenses to fund greater levels of research and development, expand its sales and marketing operations, broaden its customer support capabilities and develop new distribution channels. Sycamore also plans to expand its general and administrative capabilities to address the increased reporting and other administrative demands which will result from the increasing size of Sycamore's business. Sycamore's operating expenses are largely based on anticipated organizational growth and revenue trends and a high percentage of Sycamore's 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 Sycamore's operating results from quarter to quarter and could result in substantial operating losses. Due to the foregoing factors, Sycamore believes that quarter-to-quarter comparisons of our operating results are not a good indication of Sycamore's future performance. Readers 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, investors and stockholders. In this event, the price of our common stock could decrease. If Sycamore's Products Do Not Interoperate With Customers' Networks, Installations Will Be Delayed Or Cancelled And Could Result In Substantial Product Returns, Which Could Seriously Harm Sycamore's Business Many of Sycamore's customers will require that its products be designed to interface with their existing networks, each of which may have different specifications and utilize multiple protocol standards. Sycamore's customers' networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Sycamore's products must interoperate with all of the products within these networks as well as future products in order to meet customers' requirements. The requirement that Sycamore 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 Sycamore's products. If Sycamore finds errors in the existing software used in customers' networks, Sycamore would have to modify its products to fix or overcome these errors so that Sycamore's products will interoperate and scale with the existing software and hardware. If Sycamore's products do not interoperate with those of its customers' networks, installations could be delayed, orders for products could be cancelled or products could be returned. This would also seriously harm Sycamore's reputation, all of which could seriously harm Sycamore's business and prospects. 16 Undetected Software Or Hardware Errors And Problems Arising From Use Of Sycamore's Products In Conjunction With Other Vendors' Products Could Result In Delays or Loss of Market Acceptance of Sycamore's Products Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. Sycamore expects that errors will be found from time to time in new or enhanced products after Sycamore begins commercial shipments. In addition, service providers typically use Sycamore's 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 Sycamore to incur significant warranty, support and repair costs, divert the attention of Sycamore's engineering personnel from product development efforts and cause significant customer relations problems. The occurrence of these problems could result in the delay or loss of market acceptance of Sycamore's products and would likely have a material adverse effect on Sycamore's 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 Sycamore's customers or could damage market acceptance for Sycamore's products. Sycamore's customers could also seek damages for losses from Sycamore. A product liability claim brought against Sycamore, even if unsuccessful, would likely be time consuming and costly. Sycamore's Failure To Establish And Maintain Key Customer Relationships May Result In Delays In Introducing New Products Or Cause Customers To Forego Purchasing Its Products Sycamore's future success will also depend upon Sycamore's 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 Sycamore's customers. Sycamore's failure to establish and maintain these customer relationships may adversely affect Sycamore's ability to develop new products and product enhancements. In addition, Sycamore may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products and enhancements or Sycamore's inability to introduce competitive new products may cause customers to forego purchases of Sycamore's products and purchase those of Sycamore's competitors, which could seriously harm Sycamore's business. Sycamore's Failure To Continually Improve Its Internal Controls And Systems, And Hire Needed Personnel, Could Impair Future Growth Sycamore has expanded its operations rapidly since inception. Sycamore continues to increase the scope of its operations and have grown headcount substantially. For example, at January 31, 1999, Sycamore had a total of 48 employees and at October 30, 1999 had a total of 228 employees. In addition, Sycamore plans to continue to hire a significant number of employees this fiscal year. Sycamore's growth has placed, and anticipated growth will continue to place, a significant strain on Sycamore's management systems and resources. Sycamore's ability to successfully offer its products and implement its business plan in a rapidly evolving market requires an effective planning and management process. Sycamore expects that it will need to continue to improve financial, managerial and manufacturing controls and reporting systems, and will need to continue to expand, train and manage its work force worldwide. Sycamore 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 Sycamore's growth. Sycamore Depends On Its Key Personnel To Manage Its Business Effectively In A Rapidly Changing Market And If Sycamore Is Unable To Retain Its Key Employees, Sycamore's Ability To Compete Could Be Harmed Sycamore's future success depends upon the continued services of Sycamore's executive officers and other key engineering, sales, marketing and support personnel, who have critical industry experience and relationships that Sycamore relies on to implement its business plan. None of Sycamore's 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 Sycamore's key employees could delay the development and introduction of, and negatively impact Sycamore's ability to sell, Sycamore's products. 17 If Sycamore Becomes Subject To Unfair Hiring Claims Sycamore Could Incur Substantial Defense Costs Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. There can be no assurances that Sycamore will not receive claims of this kind or other claims relating to Sycamore's employees in the future as it seeks to hire qualified personnel or that those claims will not result in material litigation. Sycamore could incur substantial costs in defending itself or its employees against such claims, regardless of their merits. In addition, defending itself from such claims could divert the attention of Sycamore's management away from Sycamore's operations. One of Sycamore's 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 Sycamore's customer. Although Sycamore is not a party to the lawsuit, Sycamore has chosen to assume the costs of defending this lawsuit. Sycamore's Ability To Compete Could Be Jeopardized If Sycamore Is Unable To Protect Its Intellectual Property Rights From Third-Party Challenges Sycamore relies on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Sycamore also enters into confidentiality or license agreements with our employees, consultants and corporate partners, and controls access to and distribution of our software, documentation and other proprietary information. Despite Sycamore's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use Sycamore's products or technology. Monitoring unauthorized use of Sycamore's products is difficult and Sycamore cannot be certain that the steps Sycamore has taken will prevent unauthorized use of Sycamore's technology, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States. If competitors are able to use Sycamore's technology, Sycamore's ability to compete effectively could be harmed. If Necessary Licenses Of Third-Party Technology Are Not Available To Sycamore Or Are Very Expensive, Sycamore's Products Could Become Obsolete From time to time Sycamore may be required to license technology from third parties to develop new products or product enhancements. There can be no assurances that third party licenses will be available to Sycamore on commercially reasonable terms, if at all. The inability to obtain any third- party license required to develop new products and product enhancements could require Sycamore to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm the competitiveness of Sycamore's products. Sycamore Could Become Subject To Litigation Regarding Intellectual Property Rights, Which Could Seriously Harm Sycamore's Business And Require Sycamore To Incur Significant Costs In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Although Sycamore has not been involved in any intellectual property litigation, Sycamore may be a party to litigation in the future to protect Sycamore's intellectual property or as a result of an allegation that Sycamore infringes others' intellectual property. Any parties asserting that Sycamore's products infringe upon their proprietary rights would force Sycamore to defend itself and possibly Sycamore's customers or manufacturers against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject Sycamore to significant liability for damages and invalidation of Sycamore's proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force Sycamore to do one or more of the following: . stop selling, incorporating or using Sycamore's products that use the challenged intellectual property; . obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or . redesign those products that use such technology. If Sycamore is forced to take any of the foregoing actions, Sycamore's business may be seriously harmed. 18 Sycamore May Face Risks Associated With Its International Expansion That Could Impair Sycamore's Ability To Grow Revenues Abroad Sycamore intends 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. Sycamore may not be able to develop international market demand for its products. Sycamore has limited experience in marketing and distributing its products internationally and to do so, Sycamore expects that it will need to develop versions of Sycamore's 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. Sycamore Faces A Number Of Unknown Risks Associated With Year 2000 Problems That Could Result In Claims Against Sycamore Or Impair The Use Of Sycamore's Products By Customers The year 2000 computer issue creates a variety of risks for Sycamore. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The risks involve: . potential warranty or other claims by Sycamore's customers; . errors in systems Sycamore uses to run its business; . errors in systems used by Sycamore's suppliers; . errors in systems used by Sycamore's customers; and . potential reduced spending by other companies on intelligent optical network products as a result of significant spending on year 2000 remediation. Sycamore has designed its products for use in the year 2000 and beyond and believes they are year 2000 compliant. However, Sycamore's products are generally integrated into larger networks involving sophisticated hardware and software products supplied by other vendors. Each of Sycamore's customers' networks involves different combinations of third party products. Sycamore cannot evaluate whether all of their products are year 2000 compliant. Sycamore 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 Sycamore, Sycamore may in the future be required to defend its products in legal proceedings which could be expensive regardless of the merits of these claims. If Sycamore's 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, Sycamore's 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 Sycamore's operations and damage Sycamore's relationships with customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, Sycamore is unable to determine at this time whether third party year 2000 failures could harm Sycamore's business and our financial results. Sycamore's 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 Sycamore's products. In addition, customers may wait to purchase Sycamore's products until after the year 2000, which may reduce our revenue. 19 Any Acquisitions Sycamore Makes Could Disrupt Its Business And Seriously Harm Sycamore's Financial Condition Sycamore intends 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, Sycamore could: . issue stock that would dilute Sycamore's current stockholders' percentage ownership; . incur debt; . assume liabilities; . incur amortization expenses related to goodwill and other intangible assets; or . incur large and immediate write-offs. Sycamore's operation of any acquired business will also involve numerous risks, including: . problems combining the purchased operations, technologies or products; . unanticipated costs; . diversion of management's attention from Sycamore's core business; adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which Sycamore has no or limited prior experience; and . potential loss of key employees, particularly those of the purchased organizations. There can be no assurances that Sycamore will be able to successfully integrate any businesses, products, technologies or personnel that it might acquire in the future and any failure to do so could disrupt Sycamore's business and seriously harm Sycamore's financial condition. Sycamore's Stock Price May Be Volatile An active public market for Sycamore's common stock may not be sustained. The market for technology stocks has been extremely volatile. The following factors could cause the market price of Sycamore's common stock to fluctuate significantly: . Sycamore's loss of a major customer; . the addition or departure of key personnel; . variations in Sycamore's quarterly operating results; . announcements by Sycamore or its competitors of significant contracts, new products or product enhancements, . acquisitions, distribution partnerships, joint ventures or capital commitments; . changes in financial estimates by securities analysts; . Sycamore's 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. 20 Insiders Have Substantial Control Over Sycamore And Could Limit The Ability Of Other Stockholders To Influence The Outcome Of Key Transactions, Including Changes of Control The executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 64% of Sycamore's outstanding common stock. These stockholders, if acting together, would be able to influence significantly all matters requiring approval by Sycamore's stockholders, including the election of directors and the approval of mergers or other business combination transactions. Provisions Of Sycamore's Charter Documents And Delaware Law May Have Anti- Takeover Effects That Could Prevent A Change Of Control Provisions of Sycamore's amended and restated certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third party to acquire Sycamore, even if doing so would be beneficial to Sycamore's stockholders. There May Be Sales Of A Substantial Amount Of Sycamore's Common Stock That Could Cause Sycamore's Stock Price To Fall Certain of Sycamore's current stockholders hold a substantial number of shares which are currently subject to lock up agreements or other restrictions limiting such stockholders ability to sell such shares. These stockholders may be able to sell such shares in the public market in the near future. Sales of a substantial number of shares of Sycamore's common stock within a short period of time could cause Sycamore's stock price to fall. In addition, the sale of these shares could impair Sycamore's ability to raise capital through the sale of additional stock. Item 3. Quantitative and Qualitative Disclosure About Market Risk Sycamore does not use derivative financial instruments. Sycamore generally places its marketable security investments in high credit quality instruments, primarily U.S. Government obligations and corporate obligations with contractual maturities of less than one year. Sycamore does not expect any material loss from its marketable security investments and therefore believes that the potential interest rate exposure is not material. Sycamore operates primarily in the United States, and all sales to date have been made in US dollars. Accordingly, there has not been any material exposure to foreign currency rate fluctuations. Part II Other Information Item 1. Legal Proceedings In the ordinary course of business, the Company becomes involved in various lawsuits and claims. While the outcome of these matters is not currently determinable, management believes, after consultation with legal counsel, that the outcome will not have a material adverse effect on the Company's results of operations or its financial position. Item 2. Changes in Securities and Use of Proceeds (a) Initial Public Offering On October 21, 1999, in connection with Sycamore's initial public offering, a Registration Statement on Form S-1 (No. 333-84635) was declared effective by the Securities and Exchange Commission, pursuant to which 7,475,000 shares of common stock were offered and sold at a price to the public of $38.00 per share, generating gross offering proceeds of $284.0 million. The managing underwriters were Morgan Stanley Dean Witter, Lehman Brothers, J.P. Morgan Securities Inc, and Dain Rauscher Wessels. After deducting approximately $19.9 million in underwriting discounts and approximately $1.1 million in other related expenses, the net proceeds of the offering were approximately $263.0 million. (b) Certain Grants and Exercises of Stock Options During the quarterly period ended October 30, 1999, the Registrant granted stock options to purchase 3,903,696 shares of common stock at exercise prices ranging from $4.00 to $177.06 per share to employees, consultants and directors pursuant to its 1998 Stock Incentive Plan, as amended and its 1999 Stock Incentive Plan and 1999 Non Employee Director Plan. During the quarterly period ended October 30, 1999, the Registrant issued and sold an aggregate of 725,147 shares of its common stock to employees, consultants and directors for aggregate consideration of $4,067,241 pursuant to exercises of options pursuant to its 1998 Stock Incentive Plan, as amended and its 1999 Stock Incentive Plan and 1999 Non Employee Director Plan. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Rule 701 of the Securities Act of 1933. 21 To date, Sycamore has utilized approximately $5.1 million of the proceeds from the initial public offering to repay borrowings under its outstanding equipment lines of credit. Sycamore expects to use the remaining net proceeds of the offering for working capital and general corporate purposes, including increased spending on sales and marketing, customer support, research and development, expansion of its operational and administrative infrastructure, Specific amounts for these purposes have not been determined. In addition, Sycamore may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, product lines or products. Pending these uses, Sycamore intends to invest the net proceeds in investment grade, interest-bearing securities. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On August 17, 1999 the stockholders of the Company approved by written consent a Certificate of Amendment to the Company's Certificate of Incorporation. The affirmative vote of 43,626,921 shares was received by written consent. On September 20, 1999 the stockholders of the Company approved by written consent the following matters: (i) the Company's Amended and Restated Certificate of Incorporation, to be filed upon the closing of the Company's IPO; (ii) the Company's Amended and Restated By-laws, to be effective upon the closing of the Company's IPO; (iii) the Company's 1999 Stock Incentive Plan; (iv) the Company's 1999 Employee Stock Purchase Plan; and (v) the Company's 1999 Non-Employee Director Stock Option Plan. The affirmative vote of 43,626,921 shares was received by written consent. The Annual Meeting of Stockholders of Sycamore Networks, Inc. was held on October 8, 1999 at 9:00 a.m. in Boston, Massachusetts. Of the 71,141,447 shares outstanding as of September 30, 1999, the record date, 54,632,938 shares (77%) were present or represented by proxy at the meeting. 1. The table below presents the results of the election to Sycamore's board of directors. Nominee Votes For Witheld Against - ------- --------- ------- ------- Gururaj Deshpande 54,632,938 - - Daniel E. Smith 54,632,938 - - Paul J. Ferri 54,632,938 - - Timothy Barrows 54,632,938 - - John W. Gerdelman 54,632,938 - - Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits Number Exhibit Description ------ ------------------- *3.1 Amended and Restated Certificate of Incorporation of the Company *3.2 By-Laws of the Company 22 *4.1 Specimen common stock certificate *4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company 10.1 Form of Indemnification Agreement between the Company, the Directors of the Company and certain officers of the Company 10.2 Form of Change in Control Agreement between the Company and certain officers of the Company +10.3 Addendum to Purchase and License Agreement between the Company and Williams Communications, Inc. dated November 21, 1999 10.4 Promissory Note and Pledge Agreement between the Company and Kevin Oye, Vice President of Business Development 27.1 Financial Data Schedule (Filed Electronically) * Filed with the Company's Registration Statement on Form S-1 (No. 333-84635) filed with the Securities and Exchange Commission by the Company in connection with its initial public offering which became effective October 21, 1999 + 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) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended October 30, 1999. 23 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sycamore Networks, Inc. /s/ Frances M. Jewels - --------------------- Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) Dated: December 13, 1999 24 Exhibit Index Number Exhibit Description ------ ------------------- *3.1 Amended and Restated Certificate of Incorporation of the Company *3.2 By-Laws of the Company *4.1 Specimen common stock certificate *4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company 10.1 Form of Indemnification Agreement between the Company, the Directors of the Company and certain officers of the Company 10.2 Form of Change in Control Agreement between the Company and certain officers of the Company +10.3 Addendum to Purchase and License Agreement between the Company and Williams Communications, Inc. dated November 21, 1999 10.4 Promissory Note and Pledge Agreement between the Company and Kevin Oye, Vice President of Business Development 27.1 Financial Data Schedule (Filed Electronically) * Filed with the Company's Registration Statement on Form S-1 (No. 333-84635) filed with the Securities and Exchange Commission by the Company in connection with its initial public offering which became effective October 21, 1999 + 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-10.1 2 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 INDEMNIFICATION AGREEMENT This Agreement is made as of the ___ day of ____________, by and between Sycamore Networks, Inc., a Delaware corporation (the "Corporation), and ____________________ ("Indemnitee"), a director or officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as directors and officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its directors and officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Amended and Restated Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as a director or officer without adequate protection, and WHEREAS, the Corporation desires Indemnitee to serve as a director or officer of the Corporation. NOW THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as ------------------ a director or officer of the Corporation for so long as he is duly elected or appointed or until such time as he tenders his resignation in writing 2. Definitions. As used in this Agreement: ----------- (a) The term "Proceeding" shall include any threatened, pending or completed action, suit, or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, and any appeal therefrom. (b) The term "Corporate Status" shall mean the status of a person who is or was a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. (c) The term "Expenses" shall include, without limitation, attorneys' fees, retainers, court costs, transcript costs, fees of experts, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and other disbursements or expenses of the types customarily incurred in connection with investigations, judicial or administrative proceedings or appeals, but shall not include the amount of judgments, fines or penalties against Indemnitee or amounts paid in settlement in connection with such matters. (d) References to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan shall be -1- deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. Indemnification in Third-Party Proceedings. The Corporation shall ------------------------------------------ indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of his Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding, if Indemnitee acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to of any criminal Proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create ---- ---------- a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal Proceeding, had reasonable cause to believe that his conduct was unlawful. 4. Indemnification in Proceedings by or in the Right of the Corporation. -------------------------------------------------------------------- The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of his Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding, if he acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made under this Paragraph 4 in respect of any claim, issue, or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Court of Chancery of Delaware shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as the Court of Chancery shall deem proper. 5. Exceptions to Right of Indemnification. Notwithstanding anything to -------------------------------------- the contrary in this Agreement, except as set forth in Paragraph 10, the Corporation shall not indemnify the Indemnitee in connection with a Proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. Notwithstanding anything to the contrary in this Agreement, the Corporation shall not indemnify the Indemnitee to the extent the Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to the Indemnitee and the Indemnitee is subsequently reimbursed from the proceeds of insurance, the Indemnitee shall promptly refund such indemnification payments to the Corporation to the extent of such insurance reimbursement. 6. Indemnification of Expenses of Successful Party. Notwithstanding any ----------------------------------------------- other provision of this Agreement, to the extent that Indemnitee has been successful, on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by him or on his behalf in connection therewith. Without limiting the foregoing, if any Proceeding or any claim, issue or matter therein is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the Indemnitee did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee had reasonable cause to believe his conduct was unlawful, the Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto. 7. Notification and Defense of Claim. As a condition precedent to his --------------------------------- right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any Proceeding for which indemnity will or could be sought by him and provide the Corporation with a copy of any summons, citation, subpoena, complaint, -2- indictment, information or other document relating to such Proceeding with which he is served. With respect to any Proceeding of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Paragraph 7. The Indemnitee shall have the right to employ his own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Agreement. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 8. Advancement of Expenses. Subject to the provisions of Paragraph 9 ----------------------- below, in the event that the Corporation does not assume the defense pursuant to Paragraph 7 of this Agreement of any Proceeding to which Indemnitee was or is a party or is threatened to be made a party by reason of his Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith and of which the Corporation receives notice under this Agreement, any Expenses incurred by the Indemnitee in defending such Proceeding shall be paid by the Corporation in advance of the final disposition of such matter; provided, however, that the payment of such Expenses incurred by the Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Agreement. Such undertaking shall be accepted without reference to the financial ability of the Indemnitee to make repayment. 9. Procedure for Indemnification. In order to obtain indemnification or ----------------------------- advancement of Expenses pursuant to Paragraphs 3, 4, 6 or 8 of this Agreement, Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification or advancement of Expenses. Any such indemnification or advancement of Expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless with respect to requests under Paragraphs 3, 4 or 8 the Corporation determines within such 60-day period that such Indemnitee did not meet the applicable standard of conduct set forth in Paragraph 3 or 4, as the case may be. Such determination shall be made in each instance by (a) a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the Proceeding ("disinterested directors"), whether or not a quorum, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the Proceeding, (c) independent legal counsel (who may, to the extent permitted by applicable law, be regular legal counsel to the Corporation), or (d) a court of competent jurisdiction. 10. Remedies. The right to indemnification or advancement of Expenses as -------- provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to above in Paragraph 9. Unless otherwise required by law, the burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Paragraph 9 that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. Indemnitee's expenses (of the type described in the -3- definition of "Expenses" in Paragraph 2(c)) reasonably incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. 11. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, judgments, fines, penalties or amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with any Proceeding but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 12. Subrogation. In the event of any payment under this Agreement, the ----------- Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. 13. Term of Agreement. This Agreement shall continue until and terminate ----------------- upon the later of (a) six years after the date that Indemnitee shall have ceased to serve as a director or officer of the Corporation or, at the request of the Corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or (b) the final termination of all Proceedings pending on the date set forth in clause (a) in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Paragraph 10 of this Agreement relating thereto. 14. Indemnification Hereunder Not Exclusive. The indemnification and --------------------------------------- advancement of Expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certification of Incorporation, the By-Laws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of Delaware, any other law (common or statutory), or otherwise, both as to action in his official capacity and as to action in another capacity while holding office for the Corporation. Nothing contained in this Agreement shall be deemed to prohibit the Corporation from purchasing and maintaining insurance, at its expense, to protect itself or the Indemnitee against any expense, liability or loss incurred by it or him in any such capacity, or arising out of his status as such, whether or not the Indemnitee would be indemnified against such expense, liability or loss under this Agreement; provided that the Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 15. No Special Rights. Nothing herein shall confer upon Indemnitee any ----------------- right to continue to serve as an officer or director of the Corporation for any period of time or at any particular rate of compensation. 16. Savings Clause. If this Agreement or any portion thereof shall be -------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated and to the fullest extent permitted by applicable law. 17. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall constitute the original. 18. Successors and Assigns. This Agreement shall be binding upon the ---------------------- Corporation and its successors and assigns and shall inure to the benefit of the estate, heirs, executors, administrators and personal representatives of Indemnitee. 19. Headings. The headings of the paragraphs of this Agreement are -------- inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. -4- 20. Modification and Waiver. This Agreement may be amended from time to ----------------------- time to reflect changes in Delaware law or for other reasons. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof nor shall any such waiver constitute a continuing waiver. 21. Notices. All notices, requests, demands and other communications ------- hereunder shall be in writing and shall be deemed to have been given (i) when delivered by hand or (ii) if mailed by certified or registered mail with postage prepaid, on the third day after the date on which it is so mailed: (a) if to the Indemnitee, to: (b) if to the Corporation, to: Sycamore Networks, Inc. 10 Elizabeth Drive Chelmsford, MA 01824 Attn: General Counsel or to such other address as may have been furnished to Indemnitee by the Corporation or to the Corporation by Indemnitee, as the case may be. 22. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Delaware. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SYCAMORE NETWORKS, INC. Attest: By: ____________________________ By: __________________________ Name: ____________________________ Title: ___________________________ INDEMNITEE: __________________________________ -6- EX-10.2 3 FORM OF CHANGE IN CONTROL AGREEMENT EXHIBIT 10.2 CHANGE IN CONTROL AGREEMENT This Change In Control Agreement (the "Agreement") is made and entered into as of ______________ (the "Effective Date"), by and between Sycamore Networks, Inc., a Delaware corporation (the "Company") and ___________________________ ("Executive"). RECITALS -------- The Company recognizes that the possibility of a change of control or other event which may change the nature and structure of the Company and that uncertainty regarding the consequences of such events may adversely affect the Company's ability to retain its key employees. The Company also recognizes that Executive possesses an intimate and essential knowledge of the Company upon which the Company may need to draw for objective advice and continued services in connection with any acquisition of the Company or other change of control that is potentially advantageous to the Company's stockholders. The Company believes that the existence of this Agreement will serve as an incentive to Executive to remain in the employ of the Company and will enhance its ability to call on and rely upon Executive in connection with a change of control. The Company and Executive desire to enter into this Agreement in order to provide additional compensation and benefits to Executive and to encourage Executive to continue to devote his full attention and dedication to the Company and to continue his employment with the Company. 1. Definitions. As used in this Agreement, unless the context requires a ----------- different meaning, the following terms shall have the meanings set forth herein: 1.1. "Cause" means: ----- 1.1.1. The willful engaging by the Executive in illegal conduct or gross misconduct which is materially injurious to the Company. 1.2. "Change of Control" means the occurrence, as the result of a single ----------------- transaction or through a series of transactions, of any of the following events: 1.2.1. any Person becomes the beneficial owner, directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as amended, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or 1.2.2. Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of date hereof or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or 1.2.3. there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof (the "Acquiror")) at least a majority of the combined voting power of the securities of the Company or the Acquiror outstanding immediately after such merger or consolidation as appropriate, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; or 1.2.4. the stockholders of the Company approve a plan of liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets, other than a sale or disposition by the Company of all or a substantial portion of the Company's assets to an entity, at least a majority of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 1.3. "Constructive Termination" means the occurrence of any of the ------------------------ following conditions, without Executive's written consent: 1.3.1. Any diminution in the Executive's position, title or responsibilities; or 1.3.2. Any required relocation of the Executive; or 1.3.3. Any diminution in the Executive annual salary or bonus potential from that in effect immediately prior to the Change in Control. 1.4 "Subsequent Acquisition" means: ---------------------- 1.4.1. A merger or consolidation which results in the voting securities of the Acquiror (as defined in Section 1.2 of this Agreement) outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity (the "Subsequent Acquiror") less than a majority of the combined voting power of the voting securities of the Acquiror or such Subsequent Acquiror, as the case may be, outstanding immediately after such merger or consolidation; 1.4.2. The sale of all or substantially all of the assets of the Acquiror or of the subsidiary or unit of the Acquiror formed by or to effect the Change of Control; or 1.4.3. The sale of shares of capital stock of the Acquiror, or of the subsidiary or unit of the Acquiror formed by or to effect the Change of Control, in a single transaction or series of related transactions, representing at least 80% of the voting power of the voting securities of the Acquiror or of the subsidiary or unit of the Acquiror formed by or to effect the Change of Control. 1.5. "Termination Upon a Change of Control" means: -------------------------------------- 1.5.1. Any termination of the employment of Executive by the Company without Cause during the period commencing thirty (30) days prior to the date of the Company's first public announcement that the Company has entered into a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company's stockholders and other conditions and contingencies); 1.5.2. Any termination of the employment of Executive by the Company without Cause following a Change of Control; 1.5.3. Any resignation by Executive upon the occurrence of a Constructive Termination after the date of any Change of Control. 1.5.4. "Termination Upon Change of Control" shall not include any termination of Executive's employment (a) by the Company for Cause; or (b) as a result of the voluntary termination of employment by Executive for a reason other than Constructive Termination. 2. Position and Duties. Executive shall continue to be an at-will ------------------- employee of the Company employed in his/her current position at his/her then current salary rate. Executive shall also be entitled to continue to participate in and to receive benefits on the same basis as other executive or senior staff members under any of the Company's employee benefit plans as in effect from time to time. In addition, Executive shall be entitled to the benefits afforded to other employees similarly situated under the Company's vacation, holiday and business expense reimbursement policies. Executive agrees to devote his/her full business time, energy and skill to his/her duties at the Company. These duties shall include, but not be limited to, any duties consistent with Executive's position which may be assigned to Executive from time to time. 3. Option and Restricted Stock Vesting Upon Change of Control ---------------------------------------------------------- 3.1. All options or restricted stock granted by the Company to the Executive and held by the Executive shall, immediately prior to the effectiveness of the Change of Control, become vested and exercisable (and no longer subject to repurchase by the Company) as to an additional number of shares or options equal to the number of shares or options as to which would have become vested and exercisable (and no longer subject to repurchase by the Company) on the date twelve months after the effectiveness of the Change of Control. 4. Termination Upon Change of Control ---------------------------------- 4.1. In the event of Executive's Termination Upon Change of Control, Executive shall be entitled to the following severance benefits: 4.1.1. Executive shall be entitled to receive all salary, accrued vacation earned through the date of Executive's termination and Executive's annual incentive bonus for the year in which termination occurs, pro rated through the date of Executive's termination, all less applicable withholding; 4.1.2. Executive shall be entitled to receive an additional eighteen months' of Executive's base salary as in effect on the date of such termination, plus an additional amount equal to 150% of Executive's annual incentive bonus for the year in which the termination occurs, all less applicable withholding, paid in a lump sum within thirty (30) days of termination of employment; 4.1.3. Executive shall be entitled to receive reimbursement for all expenses that Executive reasonably and necessarily incurred by Executive in connection with the business of the Company prior to Executive's termination of employment, within ten (10) days of submission of proper expense reports by Executive; 4.1.4. Executive and/or Executive's dependents shall be entitled to elect continued group health plan coverage in accordance with the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The Company will pay the full premium for continuation coverage for Executive and/or Executive's dependents for a period of 18 months following the date of Executive's Termination Upon Change of Control. Notwithstanding the above, Company shall cease providing continued group health plan coverage for Executive and/or Executive's dependents in the event that, at any juncture during the period of continuation coverage provided for herein, Executive and/or Executive's dependents become(s) covered under another employer's group health plan that (i) has no preexisting condition exclusions or (ii) has a preexisting condition exclusion that does not apply to Executive and/or Executive's dependents or is satisfied by the creditable coverage of Executive and/or Executive's dependents in accordance with HIPAA; 4.1.5. Executive payments received under this Section 4 shall be entitled to receive the benefits, if any, under the Company's 401(k) Plan, qualified deferred compensation plan, employee stock purchase plan and other Company benefit plans to which he may be entitled pursuant to the terms of such plans; and 4.1.6. Executive shall be entitled to receive outplacement services and Career Counseling at the Company's expense for a period of 12 months after the date of the Termination Upon Change of Control. 4.1.7. All options or restricted stock granted by the Company to the Executive and held by the Executive shall become vested and exercisable (and no longer subject to repurchase by the Company) in full, effective upon the Executive's Termination Upon Change of Control. 5. Subsequent Acquisition ---------------------- 5.1. In the event of a Subsequent Acquisition, Executive shall be entitled to the following benefits: 5.1.1 All options or restricted stock granted by the Company to the Executive and held by the Executive shall, immediately prior to the effectiveness of the Subsequent Acquisition, become vested and exercisable (and no longer subject to repurchase by the Company) in full. 6. 280G. If, due to the benefits provided under this Agreement, Executive ---- is subject to any excise tax due to characterization of any amounts payable or benefits provided hereunder as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code, the Company agrees to reimburse Executive in an amount up to $1,000,000 (one million dollars) of such excise tax; provided, however, that, no reimbursement shall be made for any excise tax payable with respect to the reimbursement made pursuant to this section 6. The excise tax reimbursement made pursuant to this section 6 shall be subject to all applicable withholding. The foregoing shall be conditioned upon Executive cooperating with the Company in such manner as may be reasonably requested (other than reducing amounts payable hereunder) so as to minimize the amount of such excise tax. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 6 shall be made in writing by independent public accountants agreed to by the Company and Executive (the "Accountants"), whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 6, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 6. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6. 7. Exclusive Remedy. Under any claim for breach of this Agreement or ---------------- wrongful termination, the payments and benefits provided for in Sections 3, 4, 5 and 6 shall constitute Executive's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between Executive and the Company in the event of Executive's termination. Except as expressly set forth herein, Executive shall be entitled to no other compensation, benefits, or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Sections 3, 4, 5 and 6 have been provided to Executive. 8. Proprietary and Confidential Information. Executive agrees to continue ---------------------------------------- to abide by the terms and conditions of the Company's confidentiality and/or proprietary rights agreement between Executive and the Company. 9. Conflict of Interest. Executive agrees that for a period of one (1) -------------------- year after termination of his/her employment with the Company, he/she will not, directly or indirectly, solicit the services of or in any other manner persuade employee or customers of the Company to discontinue that person's or entity's relationship with or to the Company as an employee or customer, as the case may be. 10. Arbitration. Any claim, dispute or controversy arising out of this ----------- Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by the American Arbitration Association in Middlesex County in Massachusetts; provided, however, that this arbitration provision shall not preclude the Company from seeking injunctive relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or confidential and proprietary information. Both parties hereby waive any right to a jury trial to resolve such claims, disputes, or controversies. All costs and expenses of arbitration or litigation, including but not limited to attorneys fees and other costs reasonably incurred by Executive, shall be paid by the Company. Judgment may be entered on the award of the arbitration in any court having jurisdiction. 11. Interpretation. Executive and the Company agree that this Change in -------------- Control Agreement shall be interpreted in accordance with and governed by the laws of the State of Massachusetts. 12. Conflict in Benefits. This Agreement shall supersede all prior -------------------- arrangements, whether written or oral, and understandings regarding the subject matter of this Agreement and shall be the exclusive agreement for the determination of any payments and accelerated option vesting due upon Executive's termination of employment upon a Change of Control; provided, however, that this Agreement is not intended to and shall not affect, limit or terminate (i) any plans, programs, or arrangements of the Company that are regularly made available to a significant number of employees of the Company, (ii) any agreement or arrangement with Executive that has been reduced to writing and which does not relate to the subject matter hereof, or (iii) any agreements or arrangements hereafter entered into by the parties in writing, except as otherwise expressly provided herein. 13. Release of Claims. No severance benefits shall be paid to Executive ----------------- under this Agreement unless and until Executive shall, in consideration of the payment of such severance benefit, execute a release of claims in a form satisfactory to the Company; provided however that such release shall not apply to any right of Executive to be indemnified by the Company. 14. Successors and Assigns. ----------------------- 14.1. Successors of the Company. The Company will require any successor ------------------------- or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession transaction shall be a breach of this Agreement and shall entitle Executive to terminate his or her employment with the Company within three months thereafter and to receive the benefits provided under of this Agreement in the event of Termination Upon Change of Control. As used in this Agreement, "Company" shall mean the Company as defined above and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 14.2. Heirs of Executive. This Agreement shall inure to the benefit of ------------------ and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. 15. Notices. For purposes of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: if to the Company: Sycamore Networks, Inc. 10 Elizabeth Drive Chelmsford, MA 01824 Attn: General Counsel and if to Executive at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 16. No Representations. Executive acknowledges that he/she is not relying ------------------ and has not relied on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 17. Validity. If any one or more of the provisions (or any part thereof) of -------- this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 18. Modification. This Agreement may only be modified or amended by a ------------ supplemental written agreement signed by Executive and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. "Company" SYCAMORE NETWORKS, INC. Date: By: -------------------- ----------------------- Title: -------------------- "Executive" Print Name: ----------------------- Date: ------------------------ ------------------------ Executive's Signature Address for Notice: - ----------------------- - ----------------------- - ----------------------- EX-10.3 4 ADDENDUM TO PURCHASE AND LICENSE AGREEMENT EXHIBIT 10.3 ------------ CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. ASTERISKS (*) DENOTE SUCH OMISSIONS. ADDENDUM TO PURCHASE AND LICENSE AGREEMENT ------------------------------------------ THIS ADDENDUM (THE "ADDENDUM") 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 10 Elizabeth Drive, Chelmsford, MA 01824, and WILLIAMS COMMUNICATIONS, INC. ("WILLIAMS") a Delaware corporation having a principal place of business at One Williams Center, Tulsa, OK 74172. This Addendum modifies the Purchase and License Agreement by and between Sycamore and Williams dated March 5, 1999 (THE "AGREEMENT"). Except as specifically hereinafter modified by this Addendum, the terms and conditions of the Agreement shall continue in full force and effect. In the event of a conflict, this Addendum shall control over the Agreement. Unless otherwise defined herein, capitalized terms shall have the meaning ascribed to them in the Agreement. 1. Exhibits A and B to the Agreement are deleted in their entirety and replaced with the revised Exhibit A which is attached hereto and incorporated by reference. 2. Section 1 of the Agreement shall be amended to extend the Term of the Agreement to 4 (four) years from the date of this Addendum, after which it shall renew automatically for successive twelve (12) month additional terms, unless otherwise terminated pursuant to the terms thereof. In the event of any automatic renewal, the purchase commitment contained in Exhibit A, as amended, shall not be renewed or applicable to Williams. 3. The last sentence of Section 2.1 of the Agreement shall be deleted in its entirety and replaced with the following: "The parties hereby agree that additional terms and conditions of the Williams purchase of Sycamore's Products (including pricing and discounts) shall be those set forth in Exhibit A, as amended." 4. Section 3.3 of the Agreement shall be deleted in its entirety and replaced with the following: "Sycamore shall use reasonable efforts to ship the Products on the shipment date reasonably 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 shipment date requested in Williams' purchase order. 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 approval by Williams. Sycamore shall not submit an invoice for a partial shipment unless such partial shipment has been approved by Williams in writing. Sycamore shall be obligated to ship Products hereunder no later than: (i) (**) past the date of Sycamore's acceptance of the purchase order for such Product and (ii)(**) past the date of Sycamore's --- acknowledgment of the related EWR (defined in Exhibit A, as amended) (such date being no sooner that (**) past the date of Sycamore's acknowledgment of the related EWR) or such other date as the parties agree upon in writing (the "Shipment Date"). If shipment is delayed more than (**) past the Shipment Date due to Sycamore's delay only, Williams may cancel the order upon prior written notice to Sycamore. For the purposes of computing the Purchase Hurdle Amount (defined in Exhibit A), shipments cancelled pursuant to the previous sentence of this sub-paragraph 3.3, shall be deemed to have shipped. (**) If Williams purchase order(s) exceed(s) its corresponding EWR by greater than (**) in Product quantity, order dollar amount or Product type including specifications (the "EWR Plus (**)") and Sycamore accepts the purchase order, then Sycamore will be required to meet the Shipment Date as set forth above for the Products ordered which are within the related EWR Plus (**). Notwithstanding the preceding sentence, Sycamore shall be obligated to ship all Products in excess of the related EWR Plus (**) (the "Excess Products") within (**) of Sycamore's acceptance of the purchase order(s) for the Excess Products which shall be considered the Shipment Date for the Excess Products." 5. The Agreement, and all terms and conditions contained therein, shall continue in full force and effect, as amended hereby. IN WITNESS WHEREOF, the parties have caused this Addendum 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/ Ryker Young By: /s/ Joseph C. Turcotte --------------- ---------------------- Name: Ryker Young Name: Joseph C. Turcotte Title: Vice President Title: Chief Operations Officer Date: November 21, 1999 Date: November 21, 1999 EXHIBIT A ADDITIONAL TERMS AND CONDITIONS ------------------------------- 1) PURCHASE COMMITMENT - Williams agrees to a minimum purchase commitment of 400 million dollars, net invoice value (which invoice value shall reflect list price minus any discounts to which Williams is then entitled) of Sycamore Products, over the 48 month period following the execution of this Addendum. Williams liability for failure to make this purchase commitment shall be as set forth in Section 7 below and Williams shall have no other liability for failure to make this purchase commitment. Nothing in this Addendum shall be construed to be a 'take or pay' obligation. 2) ROLLING FORECAST - Beginning (**) and on at least a quarterly basis, Williams shall deliver to Sycamore a rolling forecast of all of Williams' anticipated Sycamore Product orders for the next (**) (the "Forecast"). Each Forecast shall contain reasonable detail regarding such Product orders, including, but not limited to, general Product specifications and the 'wavelength plan' for the Products forecasted. The Forecast may be in Microsoft Excel format for ease of use. The Forecast shall be prepared by Williams using good faith. 3) ENGINEERING WORK REQUESTS - Williams shall submit to Sycamore when available the final Williams 'Engineering Work Requests' which are generated by the Engineering Planning department of Williams and submitted to the Transmission Engineering department of Williams (the "EWRs"). In reliance on the EWRs, Sycamore may commence manufacturing of the Sycamore Products described in the EWRs. Williams agrees to submit purchase orders for the Sycamore Products contained within the respective EWRs within (**) of the date each EWR is submitted to and accepted by Sycamore. Sycamore agrees to accept such purchase orders that do not deviate more than (**) in product quantity, order dollar amount or product type (including specifications) from the related EWR. Sycamore shall accept such purchase orders in accordance with Section 2.3 of the Agreement. Sycamore shall acknowledge and accept each EWR in writing, which writing shall include the date of Sycamore's acceptance. 4) TRAINING - Sycamore shall provide, at no cost to Williams, (**) training credit for every (**) of Sycamore accepted purchase orders issued by Williams. A single training credit shall entitle one person to attend one product training class at Sycamore's Chelmsford facility. This training benefit shall be in addition to those other options available to Williams contained in Exhibit F of the Agreement. 5) JOINT MARKETING - Sycamore and Williams shall engage in mutually agreed upon joint marketing activities during the term of the Agreement. The parties shall initially target joint marketing spending of an amount not to exceed (**) per year per party (with no carry-forward) toward mutually agreed upon joint marketing efforts. If, ten months after the execution of the Addendum, Williams has not achieved its Purchase Hurdle Amount, the targeted amount referred to in the previous sentence shall be eliminated until such time as Williams is entitled to the additional provisions of 7(a) through 7(c) of Section 7, below. 6) QUALITY ASSURANCE - Sycamore is scheduled to have an ISO 9001 registered quality system by the end of calendar year 2000. In addition to product quality, this quality system will monitor product development, product verification and support after installation. The quality system will track (on a quarterly basis) released product measurements such as: (i) Out of Box Acceptance; (ii) On Time Deliveries vs. Customer Request Date; and (iii) Demonstrated Mean Time Between Failures ("MTBF") vs. Calculated MTBF. Each product measurement will be managed against quarterly objectives relating to such measurements. Performance levels below quarterly objectives will require an automatic review by Sycamore management and Williams management. Further, Sycamore will have an online call handling and bug reporting system by the end of calendar year 1999. Williams will be given the ability to report problems and track resolution through its online account. 7) ADDITIONAL TERMS AND CONDITIONS - For so long as Williams issues and Sycamore accepts purchase orders in accordance with this Addendum for at least (**) dollars, net invoice value, of Sycamore Products during each of the first (**) period following the execution of this Addendum, (the "Purchase Hurdle Amount") the additional provisions 7(a) through 7(c) of this Section 7 shall apply. The Purchase Hurdle Amount shall be appropriately adjusted to reflect any cancellations or permissible returns as set forth in the Agreement and the Addendum. Should Williams fail to achieve the Purchase Hurdle Amount during any such period, the additional provisions 7(a) through 7(c) of this Section 7 shall not apply and Williams shall be entitled only to a (**) Product discount (on Sycamore's then- current end-user pricing) until such time as Williams issues purchase orders totaling the difference between (A) the Purchase Hurdle Amount and (B) the amount actually ordered by Williams. By way of example, if during the first purchase hurdle period Williams issues, and Sycamore accepts, purchase orders totaling (**) dollars, then the applicable discount on subsequent purchase orders shall be reset to (**) during the second purchase hurdle period until such time as Williams' issues, and Sycamore accepts, purchase orders totaling (**) dollars. After such purchase orders have been accepted, the additional provision 7(a) through 7(c) of this Section 7 shall apply during the remaining term of the second purchase hurdle period and the measurement of the Purchase Hurdle Amount for such period shall commence. If Williams purchases (**) dollars in the remaining term of the second hurdle period so that its total purchases for that period are (**) dollars, the additional provisions of 7(a) through 7(c) shall not apply to purchases made during the third hurdle period until such time as Williams issues and Sycamore accepts purchase orders totaling (**) dollars. After such purchase orders have been accepted, the additional provision 7(a) through 7(c) of this Section 7 shall apply for the remaining term of the third purchase hurdle period and the measurement of the Purchase Hurdle Amount for such period shall commence. If during the relevant period Williams issues, and Sycamore accepts, purchase orders totaling more than (**) dollars, net invoice value, of Sycamore Products, then the Purchase Hurdle Amount for the next (**) period shall be reduced by the dollar amount over (**) dollars so ordered and accepted. By way of example, if Williams were to issue, and Sycamore were to accept, purchase orders totaling (**) dollars, net invoice value, of Sycamore Products during the (**) period following the execution of this Addendum, then Williams shall be deemed to have achieved the Purchase Hurdle Amount for such period and for each of the next (**) periods and the additional provisions of 7(a) through 7(c) would apply during the entire four year term. A) (**). B) INITIAL SOFTWARE COSTS - Sycamore agrees that total Sycamore software costs to Williams relating to Sycamore Products purchased over the term of the amended Agreement will be no more than (**) of total costs of all Sycamore Products purchased. No other discount shall apply to Sycamore software. C) DISCOUNTS/LIST PRICE REDUCTIONS - Sycamore grants Williams a Product discount of (**) from current end-user list price and agrees to extend to Williams a Product discount of (**) from the then-current end-user list price and a Product discount of (**) from any list price made available to Williams pursuant to this Section 7(c). Williams shall use its best efforts to make prompt payment (**) for all purchases. Further discounts shall be as follows: i) With regard to the current generation of Sycamore Products ("Gen1 Products"), Sycamore shall reduce (**) from the Gen1 Products list price on each of (**) and (**). ii) Upon commercial availability of Sycamore's next generation Products of like functionality ("Gen2 Products"), the list price available to Williams of the Gen2 Products shall be equal to (i) the Gen1 Product list price as of the date of the execution of this Addendum, less (ii) ---- a reduction of (**). Sycamore shall further reduce the list price available to Williams of the Gen2 Products by (**) on each of (**) and (**). Prices shall be expressed per (**). iii) Following the introduction of the Gen2 Products and upon commercial availability of Sycamore's next generation Products of like functionality ("Gen3 Products"), the list price available to Williams of the Gen3 Products shall be equal to (i) the Gen2 Product list price made available to Williams as of the date the Gen2 Products became commercially available, less (ii) a reduction of (**). Sycamore shall ---- further reduce the list price available to Williams of the Gen3 Products by (**) on each of (**) and (**). Prices shall be expressed per (**). iv) With regard to the introduction of next generation (**), on (**) the list price available to Williams of such next generation (**) shall be equal to (i) the list price of current (**) as of the date the Addendum is executed, less (ii) a reduction of (**). On (**), Sycamore ---- shall further reduce the list price available to Williams of the next generation (**) by (**). Prices shall be expressed per (**). EX-10.4 5 PROMISSORY NOTE EXHIBIT 10.4 Dated: October 20, 1999 SECURED PROMISSORY NOTE ----------------------- FOR VALUE RECEIVED, the undersigned hereby promises to pay to Sycamore Networks, Inc., a Delaware corporation with its principal offices in Chelmsford, Massachusetts ("Sycamore"), or order, the principal sum of ninety-nine thousand nine hundred and seventy eight ($99,978) Dollars on or prior to December 1, 2000, (the "Maturity Date") or on such earlier date on which the undersigned's employment with Sycamore terminates for any reason. The outstanding principal balance hereunder shall, commencing on the date hereof, bear interest at the rate of eight and one quarter percent (8.25%) per annum. In the event this Note is paid in full prior to the Maturity Date, the undersigned shall also on the date of such prepayment pay an amount equal to all accrued but unpaid interest, plus all interest which would have accrued and been payable through the Maturity Date had the principal sum of this Note been paid in accordance with the terms of this Note as set forth in the first paragraph of this Note, or such lesser amount as may be required by law. This Note is a full recourse obligation. Further, the obligation to pay the interest and principal on account of this Note is secured by a pledge of 2,631 shares of Common Stock of Sycamore, pursuant to a Security and Pledge Agreement of even date hereof which Security and Pledge Agreement sets forth the rights and obligations of the parties in the event of default as defined in said Pledge Agreement. Further, this Note shall become immediately due and payable without notice or demand upon the occurrence at any time of any event of default under the Security and Pledge Agreement. Payment of principal and interest hereunder shall be made in lawful money of the United States at the offices of Sycamore, 10 Elizabeth Drive, Chelmsford, Massachusetts. Maker of this Note hereby waives notice, presentation, and demand and shall be liable for all reasonable expenses of collection in the event of default including counsel fees of the Payee. All rights and obligations hereunder shall be governed by the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the undersigned has executed the within Note under seal as of the date first above-mentioned. ______________________________ ______________________________ Witness [signature of maker] ______________________________ Print Name SECURITY AND PLEDGE AGREEMENT ---------------------------- This is a Pledge Agreement made as of the 20th day of October, 1999 between Kevin Oye, an individual residing at 14 Upper Warren Way Warren NJ, 07059 ("Pledgor") and Sycamore Networks, Inc., a Delaware corporation with its principal office at 10 Elizabeth Drive, Chelmsford, Massachusetts ("Pledgee"). 1. Pledge of Collateral. Pledgor hereby grants Pledgee a security -------------------- interest in the shares of Sycamore Networks, Inc. Common Stock ("Shares") identified in Exhibit A, annexed hereto, which Pledgor has delivered to Pledgee, as well as such other instruments, documents, stock certificates, money and goods as may come into Pledgee's possession from time to time, whether through delivery by Pledgor or otherwise (the "Collateral"). 2. Obligations Secured. The security interest in the Collateral granted ------------------- hereby secures payment and performance of all debts, loans and liabilities of Pledgor to Pledgee arising out of a promissory note from Pledgor to Pledgee of even date herewith in the principal amount of ninety-nine thousand nine hundred and seventy-eight thousand ($99,978) Dollars (the "Note"), together with all interests, fees, charges and expenses with respect to such debt, loan or liability (the "Obligations"). 3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's ---------------------------------------------------------- only duty with respect to the Collateral shall be to exercise reasonable care to secure the safe custody thereof. Pledgee shall have the right but not the obligation to (a) demand, sue for, receive and collect all money or money damages payable on account of any Collateral, (b) protect, preserve or assert any other rights of Pledgor or take any other action with respect to the Collateral, (c) pay any taxes, liens, assessments, insurance premiums or other charges pertaining to Collateral. Any expenses incurred by Pledgee under the preceding sentence shall be paid by Pledgor upon demand, become part of the Obligations secured by the Collateral and bear interest at the rate provided in the Note until paid. Pledgee shall be relieved of all responsibility for the Collateral upon surrendering it to Pledgor. 4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and ---------------------------------- covenants (a) that he is and will be the lawful owner of the Collateral, (b) that the Collateral is and will remain free and clear of all liens, encumbrances and security interests other than the security interest granted by Pledgor hereunder, and (c) that Pledgor has the sole right and lawful authority to pledge the Collateral and otherwise to comply with the provisions hereof. In the event that any adverse claim is asserted in respect of the Collateral or any portion thereof, except such as may result from an act of Pledgee not authorized hereunder, Pledgor promises and agrees to indemnify Pledgee and hold Pledgee harmless from and against any losses, liabilities, damages, expenses, costs and reasonable counsel fees incurred by Pledgee in exercising any right, power or remedy of Pledgee hereunder or defending, protecting or enforcing the security interests created hereunder. Any such loss, liability or expense so incurred shall be paid by -1- Pledgor upon demand, become part of the Obligations secured by the Collateral and bear interest at the rate provided in the Note until paid. 5. Voting of Collateral. While Pledgor is not in default hereunder, -------------------- Pledgor may vote shares pledged as Collateral. 6. Dividends and Other Distributions. While Pledgor is not in default --------------------------------- hereunder, Pledgor may receive cash dividends and other cash distributions payable with respect to Collateral. Pledgor shall cause all non-cash dividends and distributions with respect to Collateral to be distributed directly to Pledgee, to be held by Pledgee as additional Collateral, and if any such distribution is made to Pledgor he shall receive such distribution in trust for Pledgee and shall immediately transfer it to Pledgee. 7. Pledgor's Default. Pledgor shall be in default hereunder upon the ----------------- occurrence of any of the following events: (a) If Pledgor is not paying his debts as they become due, becomes insolvent, files or has filed against him a petition under any chapter of the United States Bankruptcy Code, 11 U.S.C. (S)101 et seq. (or any similar -- --- petition under any insolvency law of any jurisdiction), proposes any liquidation, composition or financial reorganization with his creditors, makes an assignment or trust mortgage for the benefit of creditors, or if a receiver, trustee, custodian or similar agent is appointed or takes possession with respect to any property or business of Pledgor; (b) If Pledgor dies; (c) If any lien, encumbrance or adverse claim of any nature whatsoever is asserted with respect to any Collateral; (d) If any warranty of Pledgor hereunder is or shall become false; (e) If Pledgor fails to fulfill any obligation hereunder; (f) If Pledgor fails to pay or perform any of the Obligations when such payment of performance is due. 8. Pledgee's Rights Upon Default. Upon the occurrence of any default as ----------------------------- defined in the preceding section, Pledgee may, if Pledgee so elects in its sole option, subject at times to compliance with the securities law and regulations of the United States: (a) at any time and from time to time sell, assign and deliver the whole or any part of the Collateral at a sale through a broker in a public market where securities of the type constituting such Collateral are usually traded, without any advertisement, presentment, demand for performance, protest, nature of protest, notice of dishonor or any other notice; -2- (b) at any time and from time to time sell, assign and deliver all or any part of the Collateral, or any interest therein, at any other public or private sale, for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as Pledgee in its absolute discretion may determine, provided that -------- (i) at least ten days' notice of the time and place of any such sale shall be given to Pledgor, and (ii) in the case of any private sale, such notice shall also contain the terms of the proposed sale and Pledgee shall sell the Collateral proposed to be sold to any purchaser procured by Pledgor who is ready, willing and able to purchase, and who prior to the time of such sale tenders the purchase price of, such Collateral on terms more favorable to Pledgee than the terms contained in such notice; (c) exercise the right to vote, the right to receive cash dividends and other distributions, and all other rights with respect to the Collateral as though Pledgee were the absolute owner thereof, whether or not such rights were retained by Pledgor as against Pledgee before default; and (d) exercise all other rights available to a secured party under the Uniform Commercial Code and other applicable law. 9. Application of Sale Proceeds. In the event of a sale of Collateral, ---------------------------- the proceeds shall first be applied to the payment of the expenses of the sale, including brokers' commissions, counsel fees, any taxes or other charges imposed by law upon the Collateral or the transfer thereof and all other charges paid or incurred by Pledgee pertaining to the sale; and, second, to satisfy outstanding Obligations, in the order in which Pledgee elects in its sole discretion; and, third, the surplus (if any) shall be paid to Pledgor. 10. Notices. All notices made or required to be made hereunder shall be ------- sent by United States first class or certified or registered mail, with postage prepaid, by prepaid Federal Express, next day delivery, or delivered by hand to Pledgee or to Pledgor at the addresses first above written. Notice by mail or Federal Express shall be deemed to have been made on the date when the notice is deposited in the mail. 11. Heirs, Successors, Etc.. This Pledge Agreement and all of its terms ----------------------- and provisions shall benefit and bind the heirs, successors, assigns, transferees, executors and administrators of each of the parties hereto. If this Pledge Agreement is executed by more than one Pledgor, then (a) "Obligations" shall include the Obligations of either or both of the Pledgors, (b) Pledgors shall be in default if any of the events described in Section 7 above takes place with respect to either Pledgor, (c) any notice required of Pledgee shall be given to both Pledgors and (d) all Pledgors' covenants, warranties and representations hereunder shall be joint and several. 12. Pledgee's Forbearance. Any forbearance, failure or delay by Pledgee --------------------- in exercising any right, power or remedy hereunder shall not be deemed a waiver of such right, -3- power or remedy. Any single or partial exercise of any right, power or remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived in writing by Pledgee. EXECUTED under seal at Chelmsford, Massachusetts, as of the date first above written. _________________________ [signature] _________________________ [print name] Agreed: Sycamore Networks, Inc. By:____________________ -4- Exhibit A to Security and Pledge Agreement ------------------------------------------ 2,631 Shares of Sycamore Networks, Inc. Common Stock -5- EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF OCTOBER 30, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUL-31-2000 AUG-01-1999 OCT-30-1999 280,634 10,196 12,524 0 7,568 313,937 8,742 1,625 321,973 15,349 0 0 0 79 306,545 321,973 19,510 19,510 10,340 15,329 0 0 442 (5,717) 0 (5,717) 0 0 0 (5,717) (0.56) (0.56)
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