Exhibit 10.5

 

PLEDGE AGREEMENT

 

PLEDGE AGREEMENT (this “Agreement”), dated as of May     , 2005, made by each
entity listed as a pledgor on the signature pages hereto (each a “Pledgor” and
collectively, the “Pledgors”), in favor of HBK INVESTMENTS L.P., in its capacity
as collateral agent (in such capacity, the “Collateral Agent”) for the “Buyers”
(as defined below) party to the Securities Purchase Agreement, dated as of even
date herewith (as amended, restated or otherwise modified from time to time, the
“Securities Purchase Agreement”) (together with its successors, transferees and
assigns, the “Investor”).

 

W I T N E S S E T H:

 

WHEREAS, AVANEX CORPORATION (the “Company”) and each party listed as a “Buyer”
on the Schedule of Buyers attached thereto (collectively, the “Buyers”) are
parties to a Securities Purchase Agreement, pursuant to which the Company shall
sell, and the Investor shall purchase, the “Notes” (as defined therein);

 

WHEREAS, it is a condition precedent to the Buyers entering into the Securities
Purchase Agreement that the Company shall have executed and delivered to the
Collateral Agent for the benefit of itself and the Buyers this Agreement to
secure all of the Company’s obligations under the Securities Purchase Agreement,
the “Notes” (as defined therein) issued pursuant thereto (as such Notes may be
amended, restated, replaced or otherwise modified from time to time in
accordance with the terms thereof, collectively, the “Notes”) and the
“Transaction Documents” (as defined in the Securities Purchase Agreement, the
“Transaction Documents”);

 

WHEREAS, each of the Pledgors other than the Company shall have executed a
Guaranty, dated as of the date hereof, in favor of the Collateral Agent (the
“Guaranty”), guaranteeing all present and future obligations of the Company
under the Securities Purchase Agreement, the Notes and the other Transaction
Documents and shall have executed, together with the Company, a Security
Agreement granting the Collateral Agent a first priority perfected lien, subject
to Permitted Liens, in substantially all their personal property (the “Security
Agreement”); and

 

WHEREAS, each Pledgor has determined that the execution, delivery and
performance of this Agreement directly benefits, and are within the corporate
purposes is in the best interest of, such Pledgor.

 

NOW, THEREFORE, in consideration of the premises and the agreements herein and
in order to induce the Collateral Agent to perform under the Securities Purchase
Agreement, each Grantor agrees with the Collateral Agent as follows:

 

SECTION 1. Definitions and Rules of Interpretation.

 

(a) Definitions. Reference is made to the Securities Purchase Agreement and the
Notes for a statement of terms thereof. All terms used in this Agreement which
are defined in the Securities Purchase Agreement or in Article 8 or Article 9 of
the Uniform Commercial Code (the “Code”) as in effect from time to time in the
State of Delaware and which are not otherwise defined herein shall have the same
meanings herein as set forth

 

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therein; provided, that terms used herein which are defined in the Code as in
effect in the State of Delaware on the date hereof shall continue to have the
same meaning notwithstanding any replacement or amendment of such statute except
as the Collateral Agent may otherwise determine. In the event that any such term
is defined in both the Securities Purchase Agreement and the Code, the
definition of such term in the Securities Purchase Agreement shall control.

 

(b) Rules of Interpretation. Except as otherwise expressly provided in this
Agreement, the following rules of interpretation apply to this Agreement: (i)
the singular includes the plural and the plural includes the singular; (ii) “or”
and “any” are not exclusive and “include” and “including” are not limiting;
(iii) a reference to any agreement or other contract includes permitted
supplements and amendments; (iv) a reference to a law includes any amendment or
modification to such law and any rules or regulations issued thereunder; (v) a
reference to a person includes its permitted successors and assigns; and (vi) a
reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule
is to the Article, Section, Annex, Exhibit or Schedule of this Agreement.

 

SECTION 2. Pledge and Grant of Security Interest. As collateral security for all
of the Obligations (as defined in Section 3 hereof), each of the Pledgors hereby
pledges and grants to the Collateral Agent a continuing security interest in,
and Lien on, all of such Pledgor’s right, title and interest in and to the
following (collectively, the “Pledged Collateral”):

 

(a) the indebtedness described in Schedule I hereto, if any, and all
indebtedness from time to time required to be pledged to the Investor pursuant
to the terms of the Security Agreement (the “Pledged Debt”), the promissory
notes and other instruments evidencing the Pledged Debt, and all interest, cash,
instruments, investment property, and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Debt;

 

(b) all present, as set forth in Schedule I, and all future, issued and
outstanding shares of capital stock, or other equity or investment securities
of, or partnership, membership, or joint venture interests in, each Subsidiary,
whether now owned or hereafter acquired by such Pledgor and whether or not
evidenced or represented by any stock certificate, certificated security or
other instrument, together with the certificates representing such equity
interests, all options and other rights, contractual or otherwise, in respect
thereof and all dividends, distributions, cash, instruments, investment property
and any other property (including, but not limited to, any stock dividend and
any distribution in connection with a stock split) from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the foregoing and all cash and noncash proceeds thereof (collectively, the
“Pledged Shares”);

 

(c) all present and future increases, profits, combinations, reclassifications,
and substitutes and replacements for all or part of the foregoing Collateral
heretofore described;

 

(d) all investment property, financial assets, securities, capital stock, other
equity interests, stock options and commodity contracts of such Pledgor, all
notes, debentures, bonds, promissory notes or other evidences of indebtedness
payable or owing to such

 

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Pledgor, and all other assets now or hereafter received or receivable with
respect to the foregoing;

 

(e) all securities entitlements of such Pledgor in any and all of the foregoing;
and

 

(f) all proceeds (including proceeds of proceeds) of any and all of the
foregoing;

 

in each case, whether now owned or hereafter acquired by such Pledgor and
howsoever its interest therein may arise or appear (whether by ownership,
security interest, Lien, claim or otherwise).

 

Notwithstanding anything herein to the contrary, in no event shall the security
interest granted under this Section 2 attach to any of the outstanding capital
stock of a Controlled Foreign Corporation in excess of 65% of the total voting
power of all classes of capital stock of such Controlled Foreign Corporation
entitled to vote. “Controlled Foreign Corporation” means a “controlled foreign
corporation” as defined in the Internal Revenue Code of 1986, as amended.

 

SECTION 3. Security for Obligations. The security interest created hereby in the
Pledged Collateral constitutes continuing collateral security for all of the
following obligations, whether now existing or hereafter incurred (the
“Obligations”):

 

(a) the payment by the Company, as and when due and payable (by scheduled
maturity, required prepayment, acceleration, demand or otherwise), of all
amounts from time to time owing by it in respect of the Securities Purchase
Agreement, the Notes and the other Transaction Documents, and (ii) the payment
by each of the Guarantors, as and when due and payable of all “Guaranteed
Obligations” under (as defined in) the Guaranty, including, without limitation,
(A) all principal of and interest on the Notes (including, without limitation,
all interest that accrues after the commencement of any bankruptcy proceeding of
the Pledgors, whether or not the payment of such interest is unenforceable or is
not allowable due to the existence of such bankruptcy proceeding), and (B) all
fees, commissions, expense reimbursements, indemnifications and all other
amounts due or to become due under any of the Transaction Documents; and

 

(b) the due performance and observance by each Pledgor of all of its other
obligations from time to time existing in respect of any of the Transaction
Documents for so long as the Notes are outstanding.

 

SECTION 4. Delivery of the Pledged Collateral.

 

(a) All promissory notes currently evidencing the Pledged Debt, if any, and all
certificates currently representing the Pledged Shares shall be delivered to the
Collateral Agent (i) with respect to any Pledged Shares of Subsidiaries
organized in the United States on or prior to the execution and delivery of this
Agreement and (ii) with respect to Pledged Shares of any other Subsidiaries,
twenty days following the execution and delivery of this Agreement. All other
promissory notes, certificates and instruments constituting Pledged Collateral
from time to time or required to be pledged to the Collateral Agent pursuant to
the

 

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terms of this Agreement or the Securities Purchase Agreement (the “Additional
Collateral”) shall be delivered to the Collateral Agent promptly upon receipt
thereof by or on behalf of any of the Pledgors. All such promissory notes,
certificates and instruments shall be held by the Collateral Agent pursuant
hereto and shall be delivered in suitable form for transfer by delivery or shall
be accompanied by duly executed instruments of transfer or assignment or undated
stock powers executed in blank, all in form and substance reasonably
satisfactory to the Collateral Agent. If any Pledged Collateral consists of
uncertificated securities, unless the immediately following sentence is
applicable thereto, the Pledgors shall cause the Collateral Agent (or its
designated custodian, nominee or other designee) to become the registered holder
thereof, or cause each issuer of such securities to agree that it will comply
with instructions originated by the Collateral Agent (or its designated
custodian, nominee or other designee) with respect to such securities without
further consent by the Pledgors. If any Pledged Collateral consists of
securities entitlements, the Pledgors shall transfer such securities
entitlements to the Collateral Agent (or its designated custodian, nominee or
other designee) or cause the applicable securities intermediary to agree that it
will comply with entitlement orders by the Collateral Agent (or its designated
custodian, nominee or other designee) without further consent by the Pledgors.

 

(b) Promptly upon the receipt by any Pledgor of any Additional Collateral which
would be listed on Schedules I and II hereto, a Pledge Amendment, duly executed
by such Pledgor, in substantially the form of Annex I hereto (a “Pledge
Amendment”), shall be delivered to the Collateral Agent, in respect of the
Additional Collateral which is or are to be pledged pursuant to this Agreement
and the Security Agreement, which Pledge Amendment shall from and after delivery
thereof constitute part of Schedules I and II hereto. Each Pledgor hereby
authorizes the Collateral Agent to attach each Pledge Amendment to this
Agreement and agrees that all promissory notes, certificates or instruments
listed on any Pledge Amendment shall for all purposes hereunder constitute
Pledged Collateral and such Pledgor shall be deemed upon delivery thereof to
have made the representations and warranties set forth in Section 5 with respect
to such Additional Collateral.

 

(c) If any Pledgor shall receive, by virtue of such Pledgor’s being or having
been an owner of any Pledged Collateral, any (i) stock certificate (including,
without limitation, any certificate representing a stock dividend or
distribution in connection with any increase or reduction of capital,
reclassification, merger, consolidation, sale of assets, combination of shares,
stock split, spin-off or split-off), promissory note or other instrument, (ii)
option or right, whether as an addition to, substitution for, or in exchange
for, any Pledged Collateral, or otherwise, (iii) dividends payable in cash
(except such dividends permitted to be retained by such Pledgor pursuant to
Section 7 hereof) or in securities or other property or (iv) dividends,
distributions, cash, instruments, investment property and other property in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in surplus, except as
otherwise permitted to be retained by Pledgor pursuant to Section 7 hereof, such
Pledgor shall receive such stock certificate, promissory note, instrument,
option, right, payment or distribution in trust for the benefit of the
Collateral Agent, shall segregate it from such Pledgor’s other property and
shall deliver it forthwith to the Collateral Agent in the exact form received,
with any necessary endorsement and/or appropriate stock powers duly executed in
blank, to be held by the Collateral Agent as Pledged Collateral and as further
collateral security for the Obligations.

 

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SECTION 5. Representations and Warranties. Each Pledgor hereby represents and
warrants as follows:

 

(a) Each Pledgor (i) is a corporation, limited liability company or limited
partnership duly organized, validly existing and in good standing under the laws
of the state or jurisdiction of its organization, and (ii) has all requisite
power and authority to execute, deliver and perform this Agreement.

 

(b) The execution, delivery and performance by each Pledgor of this Agreement
(i) have been duly authorized by all necessary action, (ii) do not and will not
contravene its charter or bylaws, its limited liability company or operating
agreement or its certificate of partnership or partnership agreement, as
applicable, or any applicable law or any contractual restriction binding on or
affecting it or any of its properties, and (iii) do not and will not result in
or require the creation of any Lien upon or with respect to any of its
properties other than pursuant to this Agreement or the other Transaction
Documents.

 

(c) The issuers of the Pledged Shares set forth in Schedule II hereto are the
Pledgors’ only Subsidiaries existing on the date hereof. The Pledged Shares have
been duly authorized and validly issued, are fully paid and nonassessable and
the holders thereof are not entitled to any preemptive first refusal or other
similar rights. Except as noted in Schedule II hereto, the Pledged Shares
constitute 100% of the issued shares of capital stock, partnership interests or
membership or other equity interests, as applicable, of the Subsidiaries. All
other shares of stock constituting Pledged Collateral will be, when issued, duly
authorized and validly issued, fully paid and nonassessable.

 

(d) The promissory notes currently evidencing the Pledged Debt, if any, have
been, and all other promissory notes from time to time evidencing Pledged Debt,
when executed and delivered, will have been, duly authorized, executed and
delivered by the respective makers thereof, and all such promissory notes are or
will be, as the case may be, legal, valid and binding obligations of such
makers, enforceable against such makers in accordance with their respective
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws and equitable principles
(regardless of whether enforcement is sought in equity or at law).

 

(e) The Pledgors are and will be at all times the legal and beneficial owners of
the Pledged Collateral free and clear of any Lien, security interest, option or
other charge or encumbrance except for the security interest and Lien created by
this Agreement or the other Transaction Documents or any Permitted Liens.

 

(f) The exercise by the Collateral Agent of any of its rights and remedies
hereunder will not contravene any law or any contractual restriction binding on
or affecting any Pledgor or any of the properties of any Pledgor, except where
such contravention will not have a Material Adverse Effect, and will not result
in or require the creation of any Lien, security interest or other charge or
encumbrance upon or with respect to any of the properties of any Pledgor other
than pursuant to this Agreement and the other Transaction Documents.

 

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(g) No authorization or approval or other action by, and no notice to or filing
with, any governmental authority is required to be obtained or made by any
Pledgor for (i) the due execution, delivery and performance by any Pledgor of
this Agreement, (ii) the grant by any Pledgor, or the perfection (except filings
as may be required for the pledge of entities not formed under the laws of the
United States of America), of the security interest and Lien purported to be
created hereby in the Pledged Collateral or (iii) the exercise by the Collateral
Agent of any of its rights and remedies hereunder, except as may be required in
connection with any sale of any Pledged Collateral by laws affecting the
offering and sale of securities generally.

 

(h) This Agreement creates a valid security interest and Lien in favor of the
Collateral Agent in the Pledged Collateral, as security for the Obligations. The
Collateral Agent’s having possession of the promissory notes evidencing the
Pledged Debt, the certificates representing the Pledged Shares and all other
certificates, instruments and cash constituting Pledged Collateral from time to
time results in the perfection of such security interest and Lien. Such security
interest and Lien is, or in the case of Pledged Collateral in which any of the
Pledgors obtains rights after the date hereof, will be, a perfected Lien,
subject only to the Permitted Liens. All action necessary or desirable to
perfect and protect such security interest and Lien has been duly taken, except
for the Collateral Agent’s having possession of certificates, instruments and
cash constituting Pledged Collateral after the date hereof.

 

SECTION 6. Covenants as to the Pledged Collateral. So long as any Obligations
(other than inchoate indemnity obligations) shall remain outstanding and the
Securities Purchase Agreement and the other Transaction Documents shall not have
been terminated, each Pledgor will, unless the Collateral Agent shall otherwise
consent in writing:

 

(a) keep adequate records concerning the Pledged Collateral and permit the
Collateral Agent, or any designees or representatives thereof at any time or
from time to time to examine and make copies of and abstracts from such records;

 

(b) at the Pledgors’ joint and several expense, promptly deliver to the
Collateral Agent a copy of each material notice or other material communication
received by any Pledgor in respect of the Pledged Collateral;

 

(c) at the Pledgors’ joint and several expense, defend the Collateral Agent’s
right, title and security interest in and to the Pledged Collateral against the
claims of any Person;

 

(d) at the Pledgors’ joint and several expense, at any time and from time to
time, promptly execute and deliver all further instruments and documents and
take all further action that may be necessary or desirable or that the
Collateral Agent may reasonably request in order to (i) perfect and protect, or
maintain the perfection of, the security interest and Lien purported to be
created hereby, (ii) enable the Collateral Agent to exercise and enforce its
rights and remedies hereunder in respect of the Pledged Collateral or (iii)
otherwise effect the purposes of this Agreement, including, without limitation,
delivering to the Collateral Agent irrevocable proxies in respect of the Pledged
Collateral;

 

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(e) not sell, assign (by operation of law or otherwise), exchange or otherwise
dispose of any Pledged Collateral or any interest therein except as expressly
permitted by the Security Agreement or any other Transaction Document;

 

(f) not create or suffer to exist any Lien, upon or with respect to any Pledged
Collateral except for the Lien created hereby or for any Permitted Lien;

 

(g) not make or consent to any amendment or other modification or waiver with
respect to any Pledged Collateral or enter into any agreement or permit to exist
any restriction with respect to any Pledged Collateral other than pursuant to
the Transaction Documents, except where such amendment, modification or
restriction would not have a Material Adverse Effect;

 

(h) except as expressly permitted by the Securities Purchase Agreement, not
permit the issuance of (i) any additional shares of any class of capital stock,
partnership interests, member interests or other equity of any Subsidiary, (ii)
any securities convertible voluntarily by the holder thereof or automatically
upon the occurrence or non-occurrence of any event or condition into, or
exchangeable for, any such shares of capital stock or (iii) any warrants,
options, contracts or other commitments entitling any Person to purchase or
otherwise acquire any such shares of capital stock;

 

(i) not issue any stock certificate, certificated security or other instrument
to evidence or represent any shares of capital stock, any partnership interest
or membership interest described in Schedule II hereto; and

 

(j) not take or fail to take any action which would in any manner impair the
validity or enforceability of the Collateral Agent’s security interest in and
Lien on any Pledged Collateral.

 

SECTION 7. Voting Rights, Dividends, Etc. in Respect of the Pledged Collateral.

 

(a) So long as no Event of Default (as defined in the Notes) (an “Event of
Default”) shall have occurred and be continuing:

 

(i) each Pledgor may exercise any and all voting and other consensual rights
pertaining to any Pledged Collateral for any purpose not inconsistent with the
terms of this Agreement, the Securities Purchase Agreement or the other
Transaction Documents; provided, however, that (A) no Pledgor will exercise or
refrain from exercising any such right, as the case may be, if the Collateral
Agent gives it notice that, in the Collateral Agent’s judgment, such action (or
inaction) is reasonably likely to have a Material Adverse Effect and (B) each
Pledgor will give the Collateral Agent at least five (5) Business Days’ notice
of the manner in which it intends to exercise, or the reasons for refraining
from exercising, any such right which is reasonably likely to have a Material
Adverse Effect;

 

(ii) the Pledgors may receive and retain any and all dividends, interest or
other distributions paid in respect of the Pledged Collateral; provided,
however, that any and all (A) dividends and interest paid or payable other than
in cash in respect of, and

 

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instruments and other property received, receivable or otherwise distributed in
respect of or in exchange for, any Pledged Collateral, (B) dividends and other
distributions paid or payable in cash in respect of any Pledged Collateral in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in surplus, and (C) cash
paid, payable or otherwise distributed in redemption of, or in exchange for, any
Pledged Collateral, together with any dividend, distribution, interest or other
payment which at the time of such dividend, distribution, interest or other
payment was not permitted by the Securities Purchase Agreement, shall be, and
shall forthwith be delivered to the Collateral Agent to hold as, Pledged
Collateral and shall, if received by any of the Pledgors, be received in trust
for the benefit of the Collateral Agent, shall be segregated from the other
property or funds of the Pledgors, and shall be forthwith delivered to the
Collateral Agent in the exact form received with any necessary indorsement
and/or appropriate stock powers duly executed in blank, to be held by the
Collateral Agent as Pledged Collateral and as further collateral security for
the Obligations; and

 

(iii) the Collateral Agent will execute and deliver (or cause to be executed and
delivered) to a Pledgor all such proxies and other instruments as such Pledgor
may reasonably request for the purpose of enabling such Pledgor to exercise the
voting and other rights which it is entitled to exercise pursuant to paragraph
(i) of this Section 7(a) and to receive the dividends, distributions, interest
and other payments which it is authorized to receive and retain pursuant to
paragraph (ii) of this Section 7(a), in each case, to the extent that the
Collateral Agent has possession of such Pledged Collateral.

 

(b) Upon the occurrence and during the continuance of an Event of Default:

 

(i) all rights of each Pledgor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to paragraph
(i) of subsection (a) of this Section 7, and to receive the dividends,
distributions, interest and other payments which it would otherwise be
authorized to receive and retain pursuant to paragraph (ii) of subsection (a) of
this Section 7, shall cease, and all such rights shall thereupon become vested
in the Collateral Agent which shall thereupon have the sole right to exercise
such voting and other consensual rights and to receive and hold as Pledged
Collateral such dividends, distributions, interest and other payments;

(ii) without limiting the generality of the foregoing, the Collateral Agent may
at its option exercise any and all rights of conversion, exchange, subscription
or any other rights, privileges or options pertaining to any of the Pledged
Collateral as if it were the absolute owner thereof, including, without
limitation, the right to exchange, in its discretion, any and all of the Pledged
Collateral upon the merger, consolidation, reorganization, recapitalization or
other adjustment of any issuer of the Pledged Collateral or upon the exercise by
any issuer of the Pledged Collateral of any right, privilege or option
pertaining to any Pledged Collateral, and, in connection therewith, to deposit
and deliver any and all of the Pledged Collateral with any committee,
depository, transfer collateral agent, registrar or other designated collateral
agent upon such terms and conditions as it may determine; and

 

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(iii) all dividends, distributions, interest and other payments which are
received by any Pledgor contrary to the provisions of paragraph (i) of this
Section 7(b) shall be received in trust for the benefit of the Collateral Agent,
shall be segregated from other funds of such Pledgor, and shall be forthwith
paid over to the Collateral Agent as Pledged Collateral in the exact form
received with any necessary indorsement and/or appropriate stock powers duly
executed in blank, to be held by the Collateral Agent as Pledged Collateral and
as further collateral security for the Obligations.

 

SECTION 8. Additional Provisions Concerning the Pledged Collateral.

 

(a) Each Pledgor hereby (i) authorizes the Collateral Agent to file one or more
financing or continuation statements, and amendments thereto, relating to the
Pledged Collateral, without the signature of such Pledgor where permitted by
law, (ii) ratifies such authorization to the extent that the Collateral Agent
has filed any such financing or continuation statements, or amendments thereto,
without the signature of such Pledgor prior to the date hereof and (iii)
authorizes the Collateral Agent to execute any agreements, instruments or other
documents in such Pledgor’s name and to file such agreements, instruments or
other documents that are related to the security interest and Lien of the
Collateral Agent in the Pledged Collateral or as provided under Article 8 or
Article 9 of the UCC in any appropriate filing office.

 

(b) Each Pledgor hereby irrevocably appoints the Collateral Agent as its
attorney-in-fact and proxy, with full authority in the place and stead and in
its name or otherwise, from time to time in the Collateral Agent’s discretion to
take any action and to execute any instrument which the Collateral Agent may
deem necessary or advisable to accomplish the purposes of this Agreement
(subject to the rights of such Pledgor under Section 7(a) hereof), including,
without limitation, to receive, indorse and collect all instruments made payable
to such Pledgor representing any dividend, interest payment or other
distribution in respect of any Pledged Collateral and to give full discharge for
the same. This power is coupled with an interest and is irrevocable until the
termination of this Agreement in accordance with Section 13(e) hereof.

 

(c) If any Pledgor fails to perform any agreement or obligation contained
herein, the Collateral Agent itself may perform, or cause performance of, such
agreement or obligation, and the expenses of the Collateral Agent incurred in
connection therewith shall be jointly and severally payable by the Pledgors
pursuant to Section 10 hereof and shall be secured by the Pledged Collateral.

 

(d) Other than the exercise of reasonable care to assure the safe custody of the
Pledged Collateral while held hereunder, the Collateral Agent shall have no duty
or liability to preserve rights pertaining thereto and shall be relieved of all
responsibility for the Pledged Collateral upon surrendering it or tendering
surrender of it to any of the Pledgors. The Collateral Agent shall be deemed to
have exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Collateral Agent accords its own property,
it being understood that the Collateral Agent shall not have responsibility for
(i) ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relating to any Pledged Collateral, whether
or not the Collateral Agent has or is deemed to have

 

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knowledge of such matters, or (ii) taking any necessary steps to preserve rights
against any parties with respect to any Pledged Collateral.

 

(e) The powers conferred on the Collateral Agent hereunder are solely to protect
its interest in the Pledged Collateral and shall not impose any duty upon it to
exercise any such powers. Except for the safe custody of any Pledged Collateral
in its possession and the accounting for monies actually received by it
hereunder, the Collateral Agent shall have no duty as to any Pledged Collateral
or as to the taking of any necessary steps to preserve rights against prior
parties or any other rights pertaining to any Pledged Collateral.

 

(f) Upon the occurrence and during the continuation of any Default or Event of
Default, the Collateral Agent may at any time in its discretion (i) without
notice to the Pledgors, transfer or register in the name of the Collateral Agent
or any of its nominees any or all of the Pledged Collateral, subject only to the
revocable rights of the Pledgors under Section 7(a) hereof, and (ii) exchange
certificates or instruments constituting Pledged Collateral for certificates or
instruments of smaller or larger denominations.

 

SECTION 9. Remedies Upon Default. If any Event of Default shall have occurred
and be continuing:

 

(a) The Collateral Agent may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for herein or otherwise available
to it, all of the rights and remedies of a secured party on default under the
Code then in effect in the State of Delaware; and without limiting the
generality of the foregoing and without notice except as specified below, sell
the Pledged Collateral or any part thereof in one or more parcels at public or
private sale, at any exchange or broker’s board or elsewhere, at such price or
prices and on such other terms as the Collateral Agent may deem commercially
reasonable. The Pledgors agree that, to the extent notice of sale shall be
required by law, at least ten (10) days’ notice to any of the Pledgors of the
time and place of any public sale or the time after which any private sale is to
be made shall constitute reasonable notification. The Collateral Agent shall not
be obligated to make any sale of Pledged Collateral regardless of notice of sale
having been given. The Collateral Agent may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.

 

(b) Each Pledgor recognizes that it may be impracticable to effect a public sale
of all or any part of the Pledged Shares or any other securities constituting
Pledged Collateral and that the Collateral Agent may, therefore, determine to
make one or more private sales of any such securities to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire such
securities for its own account, for investment and not with a view to the
distribution or resale thereof. Each Pledgor acknowledges that any such private
sale may be at prices and on terms less favorable to the seller than the prices
and other terms which might have been obtained at a public sale and,
notwithstanding the foregoing, agrees that such private sales shall be deemed to
have been made in a commercially reasonable manner and that the Collateral Agent
shall have no obligation to delay sale of any such securities for the period of
time necessary to permit the issuer of such securities to register such
securities for public sale under the Securities Act of 1933, as amended (the
“Securities Act”). Each Pledgor further

 

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acknowledges and agrees that any offer to sell such securities which has been
(i) publicly advertised on a bona fide basis in a newspaper or other publication
of general circulation in the financial community of New York, New York (to the
extent that such an offer may be so advertised without prior registration under
the Securities Act) or (ii) made privately in the manner described above to not
less than fifteen (15) bona fide offerees shall be deemed to involve a “public
disposition” for the purposes of Section 9-610 of the Code (or any successor or
similar, applicable statutory provision) as then in effect in the State of
Delaware, notwithstanding that such sale may not constitute a “public offering”
under the Securities Act, and that the Collateral Agent may, in such event, bid
for the purchase of such securities.

 

(c) Any cash held by the Collateral Agent as Pledged Collateral and all cash
proceeds received by the Collateral Agent in respect of any sale of, collection
from, or other realization upon, all or any part of the Pledged Collateral may,
in the discretion of the Collateral Agent, be held by the Collateral Agent as
collateral for, and/or then or at any time thereafter applied (after payment of
any amounts payable to the Collateral Agent pursuant to Section 10 hereof) in
whole or in part by the Collateral Agent against, all or any part of the
Obligations in such order as the Collateral Agent shall elect consistent with
the provisions of the Securities Purchase Agreement.

 

(d) In the event that the proceeds of any such sale, collection or realization
are insufficient to pay all amounts to which the Collateral Agent is legally
entitled, the Pledgors shall be jointly and severally liable for the deficiency,
together with interest thereon at the highest rate specified in the Notes for
interest on overdue principal thereof or such other rate as shall be fixed by
applicable law, together with the costs of collection and the reasonable fees,
costs and expenses of any attorneys employed by the Collateral Agent to collect
such deficiency.

 

SECTION 10. Indemnity and Expenses.

 

(a) Each of the Pledgors, jointly and severally, hereby agrees to indemnify and
hold the Collateral Agent and each of the Buyers (and all of its officers,
directors, employees, attorneys, consultants) harmless from and against any and
all claims, damages, losses, liabilities, obligations, penalties, fees, costs
and expenses (including, without limitation, reasonable legal fees and
disbursements of counsel) to the extent that they arise out of or otherwise
result from this Agreement (including, without limitation, enforcement of this
Agreement), except claims, damages, losses, liabilities, obligations, penalties,
fees, costs and expenses arising or resulting directly from such Person’s gross
negligence or willful misconduct as determined by a court of competent
jurisdiction.

 

(b) Each Pledgor shall be jointly and severally obligated for, and will upon
demand pay to the Collateral Agent the reasonable amount of any and all
out-of-pocket costs and expenses, including the reasonable fees and
disbursements of the Collateral Agent’s counsel and of any experts which the
Collateral Agent may incur in connection with (i) the preparation, negotiation,
execution, delivery, recordation, administration, amendment, waiver or other
modification or termination of this Agreement, (ii) the custody, preservation,
use or operation of, or the sale of, collection from, or other realization upon,
any Pledged Collateral,

 

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(iii) the exercise or enforcement of any of the rights of the Collateral Agent
hereunder, or (iv) the failure by any Pledgor to perform or observe any of the
provisions hereof.

 

SECTION 11. Notices, Etc. All notices and other communications provided for
hereunder shall be in writing and shall be mailed (by certified mail, postage
prepaid and return receipt requested), sent by Federal Express or other
recognized courier service (return receipt requested), telecopied or delivered,
if to any Pledgor, to it at the address specified for the Company in the
Agreement or if to the Collateral Agent, to it at the address specified in the
Security Agreement; or as to either such Person at such other address as shall
be designated by such Person in a written notice to such other Person complying
as to delivery with the terms of this Section 11. All such notices and other
communications shall be effective (i) if sent by certified mail, postage
prepaid, return receipt requested, when received or three (3) Business Days
after mailing, whichever first occurs, (ii) if telecopied, when transmitted and
confirmation is received, provided same is on a Business Day and, if not, on the
next Business Day or (iii) if delivered or sent by Federal Express or other
recognized courier service (return receipt requested), upon delivery, provided
same is on a Business Day and, if not, on the next Business Day.

 

SECTION 12. Security Interest Absolute. All rights of the Collateral Agent, all
Liens and all obligations of each of the Pledgors hereunder shall be absolute
and unconditional irrespective of: (i) any lack of validity or enforceability of
the Securities Purchase Agreement or any other agreement or instrument relating
thereto, (ii) any change in the time, manner or place of payment of, or in any
other term in respect of, all or any of the Obligations, or any other amendment
or waiver of or consent to any departure from the Securities Purchase Agreement
or any other Transaction Document, (iii) any exchange or release of, or
non-perfection of any Lien on any Collateral, or any release or amendment or
waiver of or consent to departure from any guaranty, for all or any of the
Obligations, or (iv) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, any of the Pledgors in respect of the
Obligations (other than the payment in full of the Obligations). All
authorizations and agencies contained herein with respect to any of the Pledged
Collateral are irrevocable and powers coupled with an interest.

 

SECTION 13. Miscellaneous.

 

(a) No amendment of any provision of this Agreement shall be effective unless it
is in writing and signed by each Pledgor and the Collateral Agent, and no waiver
of any provision of this Agreement, and no consent to any departure by the
Pledgors therefrom, shall be effective unless it is in writing and signed by the
Collateral Agent, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.

 

(b) No failure on the part of the Collateral Agent to exercise, and no delay in
exercising, any right hereunder or under any other Transaction Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right. The rights and remedies of the Collateral Agent provided herein and
in the other Transaction Documents are cumulative and are in addition to, and
not exclusive of, any rights or remedies provided by law. The rights of the

 

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Collateral Agent under any Transaction Document against any party thereto are
not conditional or contingent on any attempt by the Collateral Agent to exercise
any of its rights under any other Transaction Document against such party or
against any other Person.

 

(c) Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining portions
hereof or affecting the validity or enforceability of such provision in any
other jurisdiction.

 

(d) This Agreement shall create a continuing security interest in and Lien on
the Pledged Collateral and shall (i) remain in full force and effect until the
termination of this Agreement in accordance with Section 13 (e) hereof and (ii)
be binding on the Pledgors and their respective successors and assigns and shall
inure, together with all rights and remedies of the Collateral Agent, to the
benefit of the Collateral Agent and its successors, transferees and assigns.
Without limiting the generality of clause (ii) of the immediately preceding
sentence, the Collateral Agent may assign or otherwise transfer its rights and
obligations under this Agreement and any other Transaction Document to any other
Person pursuant to the terms of the Securities Purchase Agreement, and such
other Person shall thereupon become vested with all of the benefits in respect
thereof granted to the Collateral Agent herein or otherwise. Upon any such
assignment or transfer, all references in this Agreement to the Collateral Agent
shall mean the assignee of the Collateral Agent. Except as a result of the
merger or consolidation of one Pledgor into another Pledgor as expressly
permitted by the Transaction Documents, none of the rights or obligations of any
of the Pledgors hereunder may be assigned or otherwise transferred without the
prior written consent of the Collateral Agent, and any such assignment or
transfer shall be null and void.

 

(e) Notwithstanding anything to the contrary in this Agreement, (i) this
Agreement (along with all powers of attorney granted hereunder) and the security
interests and Lien created hereby shall terminate and all rights to the Pledged
Collateral shall revert to the Pledgors upon the repayment in full and /or
complete conversion to equity securities of the Company of all indebtedness
obligations (other than inchoate indemnity obligations) owed by the Company to
the Collateral Agent under the Notes (including, without limitation, all
principal, interest and fees related to the Notes), and (ii) the Collateral
Agent will, upon each Pledgor’s request and at each such Pledgor’s expense, (A)
return to such Pledgor such of the Pledged Collateral (to the extent delivered
to the Collateral Agent) as shall not have been sold or otherwise disposed of or
applied pursuant to the terms hereof, and (B) execute and deliver to such
Pledgor, without recourse, representation or warranty, such documents as such
Pledgor shall reasonably request to evidence such termination.

 

(f) The internal laws, and not the laws of conflicts, of Delaware shall govern
the enforceability and validity of this agreement, the construction of its terms
and the interpretation of the rights and duties of the parties, except as
required by mandatory provisions of law and except to the extent that the
validity and perfection or the perfection and the effect of perfection or
non-perfection of the security interest and Lien created hereby, or remedies
hereunder, in respect of any particular Pledged Collateral are governed by the
law of a jurisdiction other than the State of Delaware.

 

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(g) Each party to this agreement hereby irrevocably and unconditionally submits,
for itself and its property, to the exclusive jurisdiction of the state and
federal courts sitting in the State of Delaware, in connection with any suit,
action or proceeding directly or indirectly arising out of, under or in
connection with the transaction documents, the conversion shares, or the
transactions contemplated thereby. No party to this agreement may move to (i)
transfer any such suit, action or proceeding brought in such state and federal
courts sitting in the State of Delaware to another jurisdiction, (ii)
consolidate any such suit, action or proceeding brought in such Delaware court
or federal court with a suit, action or proceeding in another jurisdiction or
(iii) dismiss any such suit, action or proceeding brought in such state and
federal courts sitting in the State of Delaware for the purpose of bringing the
same in another jurisdiction. Each party to this agreement agrees that a final,
non-appealable judgment in any such suit, action or proceeding shall be
conclusive and may be enforced in any other jurisdiction by suit on the judgment
or in any other manner provided by law. Each party to this agreement hereby
irrevocably and unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
the transaction documents, the shares or the conversion shares in any state and
federal courts sitting in the State of Delaware. Each party to this agreement
hereby consents to the service of process in any such suit, action or proceeding
by notice in the manner specified in Section 11.

 

(h) Each Pledgor irrevocably consents to the service of process of any of the
aforesaid courts in any such action, suit or proceeding by the mailing of copies
thereof by registered or certified mail (or any substantially similar form of
mail), postage prepaid, to such Pledgor at its address provided herein, such
service to become effective when received.

 

(i) Nothing contained herein shall affect the right of the Collateral Agent to
serve process in any other manner permitted by law or commence legal proceedings
or otherwise proceed against any Pledgor or any property of any Pledgor in any
other jurisdiction.

 

(j) Each Pledgor irrevocably and unconditionally waives any right it may have to
claim or recover in any legal action, suit or proceeding referred to in this
Section any special, exemplary, punitive or consequential damages.

 

(k) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT,
ACTION OR PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR OTHER TRANSACTION DOCUMENTS.

 

(l) The headings herein are for convenience only, do not constitute a part of
this Agreement and shall not be deemed to limit or affect any of the provisions
hereof. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.

 

(m) This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which shall be deemed
to be an original, but all of which taken together shall constitute one and the
same agreement.

 

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(n) All of the obligations of the Pledgors hereunder are joint and several. The
Collateral Agent may, in its sole and absolute discretion, enforce the
provisions hereof against any of the Pledgors and shall not be required to
proceed against all Pledgors jointly or seek payment from the Pledgors ratably.
In addition, the Collateral Agent may, in its sole and absolute discretion,
select the Pledged Collateral of any one or more of the Pledgors for sale or
application to the Obligations, without regard to the ownership of such Pledged
Collateral, and shall not be required to make such selection ratably from the
Pledged Collateral owned by all of the Pledgors. The release or discharge of any
Pledgor by the Collateral Agent shall not release or discharge any other Pledgor
from the obligations of such Person hereunder.

 

[Signature Page Follows]

 

-15-

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IN WITNESS WHEREOF, each Pledgor has caused this Agreement to be executed and
delivered by its officer thereunto duly authorized, as of the date first above
written.

 

AVANEX CORPORATION

By:

   

Name:

   

Title:

   

Address:

 

40919 Encyclopedia Circle

   

Fremont, California 94538

 

AVANEX U.S.A. CORPORATION

By:

   

Name:

   

Title:

   

Address:

 

40919 Encyclopedia Circle

   

Fremont, California 94538

 

AVANEX INTERNATIONAL CORPORATION

By:

   

Name:

   

Title:

   

Address:

 

40919 Encyclopedia Circle

   

Fremont, California 94538

 

LAMBDAFLEX, INC.

By:

   

Name:

   

Title:

   

Address:

 

40919 Encyclopedia Circle

   

Fremont, California 94538

 

--------------------------------------------------------------------------------

PEARL ACQUISITION CORP.

By:

   

Name:

   

Title:

   

Address:

 

40919 Encyclopedia Circle

   

Fremont, California 94538

 

--------------------------------------------------------------------------------

ACCEPTED BY:

HBK INVESTMENTS L.P., as Collateral Agent

By:    

Name:

   

Title:

   

Address:

 

300 Crescent Court, Suite 700

   

Dallas, Texas 75201

 

--------------------------------------------------------------------------------

SCHEDULE I TO PLEDGE AGREEMENT

 

None

 

Pledgor

--------------------------------------------------------------------------------

 

Name of Payee

--------------------------------------------------------------------------------

 

Pledged Debt

Description

--------------------------------------------------------------------------------

  

Principal Amount

Outstanding as of

--------------------------------------------------------------------------------

 

--------------------------------------------------------------------------------

SCHEDULE II TO PLEDGE AGREEMENT

 

Pledged Shares

 

Pledgor

--------------------------------------------------------------------------------

 

Name of Issuer

--------------------------------------------------------------------------------

 

Number of Shares% of
Shares

--------------------------------------------------------------------------------

   Class

--------------------------------------------------------------------------------

   Certificate No.(s)

--------------------------------------------------------------------------------

 

--------------------------------------------------------------------------------

ANNEX I

 

TO

 

PLEDGE AGREEMENT

 

PLEDGE AMENDMENT

 

This Pledge Amendment, dated ·, 20·, is delivered pursuant to Section 4 of the
Pledge Agreement referred to below. The undersigned hereby agrees that this
Pledge Amendment may be attached to the Pledge Agreement, dated as of May ·,
2005, made by [Pledgor] and certain of its affiliates in favor of [Steelhead
Investments L.P.], as Collateral Agent for the Buyers, (the “Collateral Agent”)
as it may heretofore have been or hereafter may be amended or otherwise modified
or supplemented from time to time and that the promissory notes [and/or] shares
or other equity interests listed on this Pledge Amendment shall be hereby
pledged collaterally assigned to the Collateral Agent and become part of the
Pledged Collateral referred to in such Pledge Agreement and shall secure all of
the obligations referred to in such Pledge Agreement.

 

Pledged Shares

 

Pledgor

--------------------------------------------------------------------------------

 

Name of Issuer

--------------------------------------------------------------------------------

 

Number of Shares or Other
Equity Interests

--------------------------------------------------------------------------------

   Class

--------------------------------------------------------------------------------

   Certificate No(s)

--------------------------------------------------------------------------------

 

[PLEDGOR] By:        

Name:

   

Title: