<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
COMMISSION FILE NUMBER: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8530 CORRIDOR ROAD, SAVAGE, MD 20763
(Address of Principal Executive Offices) (Zip Code)
(301) 317-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES ( ) NO (X)
CIENA Corporation became subject to filing requirements of Section 13
of the Securities Exchange Act of 1934 ("Exchange Act") on February 7, 1997 and
since that time has filed all reports required to be filed under the Exchange
Act.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MARCH 7, 1997
---------------------------------- ----------------------------
Common stock. $.01 par value 96,221,608
Page 1 of 17 pages
Exhibit Index appears on page 15
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CIENA CORPORATION
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations
Quarters ended January 31, 1996
and January 31, 1997 3
Balance Sheets
October 31, 1996 and January 31, 1997 4
Statements of Cash Flows
Quarters ended January 31, 1996 and
January 31, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index to Exhibits 15
</TABLE>
2
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CIENA CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended January 31,
------------------------------------------
1996 1997
---------------- ---------------
<S> <C> <C>
Revenue $ - $ 53,933
Cost of goods sold - 20,832
---------------- ---------------
Gross profit - 33,101
---------------- ---------------
Operating expenses:
Research and development 2,473 3,050
Selling and marketing 491 2,598
General and administrative 499 6,295
---------------- ---------------
Total operating expenses 3,463 11,943
---------------- ---------------
Income (loss) from operations (3,463) 21,158
Interest and other income (expense), net 167 392
Interest expense (38) (102)
---------------- ---------------
Income (loss) before income taxes (3,334) 21,448
Provision for income taxes - 8,365
---------------- ---------------
Net income (loss) $ (3,334) $ 13,083
================ ===============
Pro forma net income (loss) per common and common
equivalent share $ (.03) $ .13
================ ===============
Pro forma weighted average common and common
equivalent shares outstanding 99,111 99,425
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CIENA CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Pro forma
October 31, January 31, January 31,
1996 1997 1997
------------------- ---------------- ---------------
(Audited) (Unaudited) (Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 22,557 $ 31,940 $ 154,432
Accounts receivable (net of allowance of $ -) 16,759 26,131 26,131
Inventories, net 13,228 16,145 16,145
Deferred income taxes 1,834 3,768 3,768
Prepaid expenses and other 634 1,537 1,537
------------------- ---------------- ---------------
Total current assets 55,012 79,521 202,013
Equipment, furniture and fixtures, net 11,863 19,362 19,362
Other assets 426 728 728
------------------- ---------------- ---------------
Total assets $ 67,301 $ 99,611 $ 222,103
=================== ================ ===============
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Current installments of capital lease obligations $ 960 $ 976 $ 976
Current maturities of notes payable 69 93 93
Accounts payable 6,278 9,915 9,915
Accrued liabilities 5,242 13,341 13,341
Income taxes payable 3,342 10,795 10,795
Deferred revenue 3,265 3,152 3,152
------------------- ---------------- ---------------
Total current liabilities 19,156 38,272 38,272
Capital lease obligations, less current installments 2,186 1,940 1,940
Notes payable, less current maturities 487 463 463
Deferred rent 98 449 449
------------------- ---------------- ---------------
Total liabilities 21,927 41,124 41,124
Commitments and contingencies - - -
Mandatorily redeemable preferred stock - par value $.01, 16,250,000
shares authorized;
14,663,148 issued and outstanding; zero outstanding pro forma 40,404 40,404 -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized;
zero shares issued and outstanding; zero outstanding pro forma - - -
Common stock - par value $.01; 180,000,000 shares authorized;
13,191,585 and 13,512,935 shares issued and outstanding; 94,078,675
outstanding pro forma 132 135 941
Additional paid-in capital 339 372 162,462
Notes receivable from stockholders (60) (66) (66)
Retained earnings 4,559 17,642 17,642
------------------- ---------------- ---------------
Total stockholders' equity 4,970 18,083 180,979
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity $ 67,301 $ 99,611 $ 222,103
=================== ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CIENA CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended January 31,
--------------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,334) $ 13,083
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Non-cash charges from equity transactions - 10
Depreciation and amortization 210 1,071
Provision for inventory excess and obsolescence 50 750
Provision for warranty and other contractual obligations - 1,131
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 7 (9,372)
Increase in prepaid expenses and other (7) (903)
Increase in inventories (1,907) (3,667)
Increase in deferred income taxes - (1,934)
Decrease (increase) in other assets 8 (337)
Increase in accounts payable and accruals 1,912 10,605
Increase in income taxes payable - 7,453
Increase in deferred revenue and deferred rent 46 238
---------------- ----------------
Net cash (used in) provided by operating activities (3,015) 18,128
---------------- ----------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (2,599) (8,535)
---------------- ----------------
Net cash used in investing activities (2,599) (8,535)
---------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of or subscription to mandatorily
redeemable preferred stock 25,950 -
Proceeds from issuance of common stock and warrants 47 20
Proceeds from lease financing activities 446 -
Principal payments on capital lease obligations (97) (230)
---------------- ----------------
Net cash provided by (used in) financing activities 26,346 (210)
---------------- ----------------
Net increase in cash and cash equivalents 20,732 9,383
Cash and cash equivalents at beginning of period 5,032 22,557
---------------- ----------------
Cash and cash equivalents at end of period $ 25,764 $ 31,940
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CIENA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation (the
"Company") have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, financial statements included in this report reflect all normal
recurring adjustments which the Company considers necessary for fair
presentation of the results of operations for the interim periods covered and
of the financial position of the Company at the date of the interim balance
sheet. Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
understand the information presented. The operating results for interim periods
are not necessarily indicative of the operating results for the entire year.
These financial statements should be read in conjunction with the Company's
October 31, 1996 audited financial statements and notes thereto included in the
Company's Form S-1 Registration Statement declared effective on February 7,
1997.
Revenue Recognition
The Company recognizes product revenue in accordance with the shipping terms
specified. For transactions where the Company has yet to obtain customer
acceptance or has agreements pertaining to installation services, revenue is
deferred until no significant obligations remain. Revenue for installation
services is recognized as the services are performed. Amounts received in
excess of revenue recognized are included as deferred revenue in the
accompanying balance sheets. For distributor sales where risks of ownership
have not transferred, the Company recognizes revenue when the product is
shipped through to the end user.
During the quarter ended January 31, 1997, all of the Company's revenue was
attributable to a single product and to three customers of which a majority of
the revenue was from a single customer.
Pro Forma Balance Sheet
The pro forma balance sheet as of January 31, 1997 reflects the estimated net
proceeds from the Company's initial public offering ("IPO") of 5,750,000
shares of Common Stock at $23 per share completed on February 7, 1997, the
conversion upon the closing of the IPO of all the Mandatorily Redeemable
Preferred Stock into 73,315,740 shares of the Company's Common Stock, and the
exercise of certain outstanding warrants to purchase 300,000 shares of
Mandatorily Redeemable Preferred Stock which were converted into 1,500,000
shares of Common Stock upon the closing of the IPO.
Computation of Pro Forma Net Income (loss) per Share
Pro forma net income (loss) per common and common equivalent share is
computed using the pro forma weighted average number of common and common
equivalent shares outstanding. Pro forma weighted average common and common
equivalent shares include Common Stock, stock options and warrants using the
treasury stock method and shares issued upon conversion of all outstanding
shares of Mandatorily Redeemable Preferred Stock.
Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, stock options, warrants and convertible Mandatorily Redeemable
Preferred Stock issued by the Company during the twelve months immediately
preceding the filing of the initial registration statement and through the
effective date of such registration statement have been included in the
calculation of the pro forma weighted average shares outstanding using the
treasury stock method based on the IPO price.
6
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CIENA CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1996 1997
(audited) (unaudited)
---------------- ---------------
<S> <C> <C>
Raw materials $ 8,585 $12,187
Work-in-process 3,629 4,003
Finished goods 2,951 2,415
---------------- ---------------
15,165 18,605
Less reserve for excess and obsolescence (1,937) (2,460)
---------------- ---------------
$13,228 $16,145
================ ===============
</TABLE>
(3) ACCRUED LIABILITIES - COMMITMENTS AND CONTINGENCIES
Legal and related costs
Included in general and administrative expenses for the quarter ended January
31, 1997 is an accrual of approximately $5.0 million representing management's
estimate of certain legal and related costs associated with the Company's
defense of pending litigation. See Part II, Item 1, "Legal Proceedings".
Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1996 1997
(audited) (unaudited)
---------------- ---------------
<S> <C> <C>
Warranty a Warranty and other contractual obligations $ 1,584 $ 2,653
Accrued compensation 2,314 975
Unbilled construction-in-process and leasehold improvements 50 1,728
Legal and related costs 300 5,315
Other 994 2,670
---------------- ---------------
$ 5,242 $13,341
================ ===============
</TABLE>
7
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PART I. - FINANCIAL INFORMATION [continued]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements that involve risks
and uncertainties. The Company has set forth in a Form 8-K Report, as filed
with the Securities and Exchange Commission on February 19, 1997, a detailed
statement of risks and uncertainties relating to the Company's business. In
addition, set forth below under the heading "Risk Considerations" is a further
discussion of certain of those risks as they relate to the period covered by
this report, the Company's near term outlook with respect thereto, and the
forward-looking statements set forth herein; however, the absence in this
quarterly report of a complete recitation of or update to all risk factors
identified in the Form 8-K should not be interpreted as modifying or
superseding any such risk factor, except to the extent set forth below.
Investors should review this quarterly report in combination with the Form 8-K
in order to have a more complete understanding of the principal risks
associated with an investment in the Company's Common Stock.
OVERVIEW
CIENA Corporation is a leading supplier of dense wavelength division
multiplexing ("DWDM") systems to long distance fiberoptic telecommunications
carriers. CIENA's DWDM systems alleviate capacity constraints and enable
flexible provisioning of additional bandwidth on high-traffic routes in
carriers' networks. The Company's headquarters are located in Savage, Maryland.
The Company completed its initial public offering of 5,750,000 shares,
inclusive of 750,000 shares from the exercise of the underwriters
over-allotment option, at a price of $23 per share on February 7, 1997.
Estimated net proceeds from the offering were approximately $121.9 million with
an additional $0.6 million received from the exercise of certain outstanding
warrants. The Company has added the net proceeds from the offering and from the
exercise of the warrants to working capital. Pending use of the net proceeds,
the Company has invested such funds in short-term, interest bearing investment
grade obligations.
First quarter 1997 revenues of $53.9 million were largely the result of
MultiWave(TM) 1600 systems sales to Sprint Corporation ("Sprint") as well as
the initial product acceptance and revenue recognition of MultiWave 1600
systems shipped to LDDS WorldCom ("WorldCom"). During the first quarter of
1997, the Company also shipped MultiWave 1600 systems for Teleway Japan
Corporation's ("Teleway") network in Japan. Revenue recognition for the Teleway
shipments has been deferred until completion of initial field testing and
product acceptance.
The Company is currently engaged in continued efforts to expand its
manufacturing capabilities. Approximately one-third of the Company's current
50,500 square foot facility in Savage, Maryland is used for manufacturing
operations; the Company intends to transfer other non-manufacturing operating
functions to an approximately 96,000 square foot facility, located
approximately 10 miles from Savage, near the Baltimore/Washington International
Airport, by April 30, 1997. The Company has signed a lease for an additional
facility of approximately 57,000 square feet, also near the airport. This space
is expected to be used for additional manufacturing requirements and expanded
customer service operations.
As of January 31, 1997 the Company employed 301 persons, which was an
increase of 76 persons over the prior quarter ended October 31, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1996 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
REVENUE. The Company recognized $53.9 million in Multiwave 1600 system
revenue for the first quarter ended January 31, 1997. The Company had no
revenue for the comparable quarter ended January 31, 1996. The Company began
shipping the MultiWave 1600 system for field testing in May 1996 with customer
acceptance by Sprint occurring in July 1996. The MultiWave 1600 system began
carrying live traffic in the Sprint network in October 1996, and the field
trial in the WorldCom network was successfully completed in December 1996.
First quarter 1997 revenues were
8
<PAGE> 9
largely the result of continued MultiWave 1600 systems sales to Sprint as
well as the initial product acceptance and revenue recognition of MultiWave
1600 systems shipped to WorldCom.
GROSS PROFIT. Gross profits were $33.1 million for the first quarter ended
January 31, 1997 with no comparable gross profits for the quarter ended January
31, 1996. Gross margin was 61.4% for the first quarter ended January 31, 1997.
The Company's gross margins in the future may be affected by a number of
factors, including competitive market pricing, manufacturing volumes and
efficiencies and fluctuations in component costs. The Company's future gross
margins may also be affected by the mix of product features and configurations
sold in a period as well as the extent of services provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$3.1 million and $2.5 million for the first quarters ended January 31, 1997 and
January 31, 1996, respectively. During the first quarter ended January 31,
1997, research and development expenses were 5.7% of revenue. The approximate
$0.6 million or 23% increase in research and development expenses from the
first quarter ended January 31, 1996 to the first quarter ended January 31,
1997 was related to increased staffing levels and outside consulting services.
The Company expects that its research and development expenditures will
continue to increase in absolute dollars during the remainder of fiscal year
1997 to support the continued development of the MultiWave system, the
exploration of new or complementary technologies, and the pursuit of various
cost reduction strategies. The Company has expensed research and development
costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
approximately $2.1 million or 429% from approximately $0.5 million for the
first quarter ended January 31, 1996 to approximately $2.6 million for the
first quarter ended January 31, 1997. The increase was primarily the result of
increased staffing levels in the areas of sales, technical assistance and field
support, and increases in commissions earned, trade show participation and
promotional costs. During the first quarter ended January 31, 1997, selling and
marketing expenses were 4.8% of revenue. The Company anticipates that its
selling and marketing expenses will increase in absolute dollars during the
remainder of fiscal year 1997 as additional personnel are hired and offices
opened to allow the Company to pursue new market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $5.8 million from approximately $0.5 million for the
first quarter ended January 31, 1996 to approximately $6.3 million for the
first quarter ended January 31, 1997. Approximately $5.0 million of the
increase was due to an accrual of estimated legal and related costs associated
with pending litigation. See Part II, Item 1 "Legal Proceedings". The remaining
balance was primarily the result of increased staffing levels and outside
consulting services. The Company believes that its general and administrative
expenses for the remainder of fiscal 1997 will increase from the $1.3 million
level ($6.3 million less the $5.0 million estimated legal and related costs
accrual) incurred in the first quarter ended January 31, 1997 due to the
expansion of the Company's administrative staff required to support its
expanding operations and an increase in expenses associated with operating as
public company.
OPERATING MARGINS. The Company's operating margin for the first quarter
ended January 31, 1997 was $21.2 million or 39.2% of revenue and would have
been $26.2 million or 48.5% of revenue exclusive of the approximate $5.0
million accrual for estimated legal and related costs. The Company expects that
its operating margins exclusive of the approximate $5.0 million accrual for
estimated legal and related costs may decrease as it continues to hire
additional personnel and increase operating expenses to support its business.
The results of operations for the first quarter of 1997 are not necessarily
indicative of results to be expected in future periods.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other income
(expense), net increased to $0.4 million for the first quarter ended January
31, 1997 from $0.2 million for the same period in 1996. The net increase was
attributable to higher invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
39% of pretax earnings, or $8.4 million for the first quarter ended January 31,
1997. Through January 31, 1996, a valuation allowance had been recorded to
offset the Company's deferred tax assets, including the possible future benefit
from the realization of tax operating loss carry forwards.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company's principal source of liquidity was its cash
and cash equivalents of $31.9 million, which increased by $9.4 million from
October 31, 1996. In November 1996, the Company established an unsecured $15.0
million bank revolving line of credit. Borrowings under this line bear interest
at the bank's prime rate. As of January 31, 1997, there were no borrowings
outstanding under the line of credit.
Cash generated from operations was $18.1 million for the first quarter ended
January 31, 1997. This amount was principally attributable to net income, the
non-cash charges of depreciation, amortization, provisions for inventory
obsolescence and warranty, increases in accounts payable, accrued expenses and
income tax payable; offset by increases in accounts receivable and inventory
due to increased revenue and to the general increase in business activity.
Investment activities in the first quarter ended January 31, 1997 were for
capital expenditures of $8.5 million. Capital equipment expenditures in the
first quarter of 1997 totaled $4.1 million and were primarily for test,
manufacturing and computer equipment. In addition, during the first quarter of
1997 the Company used $4.4 million for the construction of leasehold
improvements associated with its new facility and expects to use an additional
$6.0 million to $7.0 million of capital in the second quarter of 1997 to
complete the construction of leasehold improvements for its new facility and
the conversion to full manufacturing of its current facility. The Company has
also signed a lease for an additional facility of approximately 57,000 square
feet and intends to spend up to $5.0 million to $6.0 million in improving such
facility later in fiscal 1997. This space is expected to be used for additional
manufacturing requirements and expanded customer service operations.
The Company believes that the net proceeds from its February 7, 1997 initial
public offering of approximately $121.9 million, combined with its existing
cash balance, its line of credit and cash flows expected from future
operations, will be sufficient to meet the Company's capital requirements for
at least the next 18 to 24 months.
RISK CONSIDERATIONS
MANAGEMENT OF EXPANSION. The Company is experiencing rapid expansion in all
areas of its operations, particularly in manufacturing, and the Company
anticipates that this expansion will continue in the near future. As of
January 31, 1997, the Company employed 301 persons, which was an increase of 76
persons over the prior quarter ended October 31, 1997. The rapid pace and
volume of new hiring could adversely affect the efficiency of the Company's
manufacturing process. The Company is in the process of substantially
increasing its flow of materials, optical assembly, final assembly and final
component module and system test functions to respond to anticipated customer
demand. The Company is expanding its manufacturing capacity at its existing
facility in Savage and has leased a third facility. Any delays or difficulties
in the Company's manufacturing process caused by these factors or others could
make it difficult for the Company to meet its delivery commitments to
customers. The pace of the Company's expansion, in combination with the
complexity of the technology involved in the manufacture of the Company's
systems, demands an unusually high level of managerial effectiveness in
anticipating, planning, coordinating and meeting the operational needs of the
Company and the needs of the Company's customers for quality, reliability,
timely delivery and post-installation field support. Given the small number of
existing and potential customers for the Company's systems, the adverse effect
on the Company resulting from a lack of effective management in any of these
areas will be magnified. Inability to manage the expansion of the Company's
business would have a material adverse effect on its business, financial
condition and results of operations. In addition, the Company's manufacturing
expansion and related capital expenditures are being made in anticipation of a
level of customer orders that has not been historically experienced by the
Company and that may not be achieved. The Company is also seeking to achieve
ISO 9001 certification for its manufacturing facility. The Company's failure
to achieve such certification would have a material adverse effect on its
competitive position.
COMPETITION. The Company believes the visibility and credibility of DWDM
technologies and solutions has increased significantly in recent months, and
that as a result, competition from large, established competitors as well as
entrepreneurial, smaller competitors, can be expected to accelerate. There can
be no assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not result in lower prices for the Company's products and otherwise have a
material adverse effect on its business, financial condition and results of
operations.
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LITIGATION. See Part II, "Legal Proceedings" for a report on recent
developments in certain litigation proceedings to which the Company is a party.
INTELLECTUAL PROPERTY RIGHTS. The Company believes the increased visibility
and credibility of DWDM technologies and solutions has made more likely the
Company's expectation that DWDM technologies and know-how in general will
become increasingly valuable intellectual properties. The Company believes
this increasing value in an industry marked by a few very large competing
suppliers represents a competitive environment where intellectual property
disputes are likely. Intellectual property disputes may be initiated by
competitors against the Company for tactical purposes to gain competitive
advantage or overcome competitive disadvantage, even if the merits of specific
disputes are doubtful. The successful resolution of such disputes may depend,
in part, on the extent of the Company's portfolio of intellectual property
rights which could be available for cross-licensing as a means of settling
disputes. The Company's current portfolio of patents is not as broad or
extensive as those of its major competitors, and there is no assurance the
Company will be able to add to its patent portfolio. In the future, the
Company may be required to bring or defend against other litigation to enforce
any patents issued, assigned to, or co-owned by the Company, to protect
trademarks, trade secrets and other intellectual property rights owned by the
Company, to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any litigation, including the Pirelli litigation described in Part II,
"Legal Proceedings", could be costly and a diversion of management's attention,
which could have a material adverse effect on the company's business, financial
condition and results of operations.
COMPETITORS AS SUPPLIERS. Certain of the Company's component suppliers are
both primary sources for such components and major competitors in the market
for system equipment. For example, the Company buys certain key components
from Lucent Technologies Inc. ("Lucent"), Alcatel Alsthom Group ("Alcatel"),
Northern Telecom Inc. ("Nortel"), NEC Corporation ("NEC") and Siemens AG
("Siemens"), each of which offers optical communications systems and equipment
which are competitive with the Company's MultiWave 1600 system. Lucent is the
sole source of two integrated circuits and is one of two suppliers of
Erbium-doped fiber. Alcatel and Nortel are suppliers of lasers used in the
MultiWave 1600 system. NEC is a supplier of certain testing equipment. The
Company's business, financial condition and results of operations could be
materially and adversely affected if these supply relationships were to decline
in reliability or otherwise change in any manner adverse to the Company.
Although the Company has not experienced to date any decline in reliability
among these vendors, this risk factor continues to be material to the Company
given the Company's expansion efforts and the increasingly competitive
environment in which the Company operates.
STOCK PRICE VOLATILITY. The Company's Common Stock price may experience
substantial price volatility, particularly as a result of any divergence
between the Company's actual or anticipated financial results and published
expectations of analysts and as a result of announcements by the Company and
its competitors. Such divergence is likely to occur from time to time,
particularly in light of the Company's dependence on a small number of existing
and potential customers, long and unpredictable sales cycles, and the absence
of unconditional minimum purchase commitments from any customer. In addition,
the market prices of many technology companies have experienced extreme price
and volume fluctuations in the recent stock market, and the Company's stock
price may be similarly impacted, irrespective of the Company's operating
performance.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PIRELLI LITIGATION. On December 20, 1996, a U.S. affiliate of Pirelli SpA
("Pirelli") filed suit in U.S. District Court in Delaware, alleging willful
infringement by the Company of five U.S. patents held by Pirelli. The lawsuit
seeks treble damages, attorneys' fees and costs, as well as preliminary and
permanent injunctive relief against the alleged infringement. On February 10,
1997, the Company filed its answer denying infringement, alleging inequitable
conduct on the part of Pirelli in the prosecution of certain of its patents,
and stating a counterclaim against the relevant Pirelli parties for a
declaratory judgment finding the Pirelli patents invalid and/or not infringed.
Discovery proceedings are expected to be completed by September 30, 1997, with
trial expected no earlier than February 1998.
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<PAGE> 12
The Company has filed a complaint against Pirelli with the International
Trade Commission ("ITC"), based on the Company's belief that a 32 channel DWDM
system announced by Pirelli infringes at least two of the Company's patents.
The Company's complaint seeks a ban on the importation by Pirelli into the U.S.
of any infringing 32 channel system. The complaint is currently being reviewed
by the ITC staff, with formal proceedings expected to be instituted by the ITC
in the second quarter of 1997.
On March 14, 1997, the Company filed suit against Pirelli in U.S. District
Court in the Eastern District of Virginia, alleging willful infringement by
Pirelli of three U.S. patents held or co-owned by the Company. The lawsuit
seeks treble damages, attorneys' fees and costs, as well as permanent
injunctive relief against the alleged infringement. The patents at issue relate
to certain of Pirelli's cable television equipment, to Pirelli's 4 and 8
channel WDM systems, and to certain Pirelli fiberoptic communications equipment
announced by Pirelli in January 1997 as being deployed in a field trial in the
MCI network.
The Company continues to believe its MultiWave(TM) 1600 system does not
infringe any valid claim of the Pirelli patents and intends to defend itself
vigorously. In light of the complexity and likely time-consuming nature of the
litigation, including the Company's counterclaim, the ITC proceeding, and the
Company's patent infringement lawsuit against Pirelli in the Eastern District
of Virginia, the Company accrued during the first fiscal quarter of 1997
approximately $5.0 million in estimated legal and related costs associated with
these proceedings. While the Company believes its estimate of legal and related
costs is adequate based on its current understanding of the overall facts and
circumstances, the estimate may be increased later in the fiscal year depending
on the course of the legal proceedings.
The Company expects that the Pirelli proceedings will not only be costly but
will also involve a substantial diversion of the time and attention of some
members of management. Further, Pirelli and other competitors may use the
existence of the Delaware litigation to raise questions in customers' and
potential customers' minds as to the Company's ability to manufacture and
deliver the MultiWave(TM) 1600 system. There can be no assurance that such
efforts by Pirelli and others will not disrupt the Company's existing and
prospective customer relationships.
There can be no assurance that the Company will be successful in the Pirelli
litigation, and an adverse determination in the Delaware court could result
from a finding of infringement of only one claim of a single patent. The
Company may consider settlement due to the costs and uncertainties associated
with litigation in general and patent infringement litigation in particular and
due to the fact that an adverse determination in the litigation could preclude
the Company from producing the MultiWave(TM) 1600 system until it were able to
implement a non-infringing alternative design to any portion of the system to
which such a determination applied. There can be no assurance that any
settlement will be reached by the parties, and the Company is planning on all
litigation proceeding through trial. An adverse determination in, or settlement
of, the Pirelli litigation could involve the payment of significant amounts, or
could include terms in addition to such payments, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 2. CHANGE IN SECURITIES
During the quarter ended January 31, 1997, the Company issued an aggregate of
321,350 shares of Common Stock in connection with the exercise of stock options
by optionees under the Company's Amended and Restated 1994 Stock Option Plan.
The Company received an aggregate of $25,419.00 in payment of the exercise
prices of the options. The exercises occurred at various times throughout the
quarter and the shares sold in connection with those exercised were not
registered in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following are annexed as Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Certificate of Amendment to Third Restated Certificate of Incorporation
3.2* Third Restated Certificate of Incorporation
3.3* Amended and Restated Bylaws
11.0 Statement of Computation of Per Share Earnings
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Form 8-K filed February 19, 1997
* Filed with the Company's Registration Statement No. 333-17729.
13
<PAGE> 14
SIGNATURES
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.
CIENA CORPORATION
Date: March 17, 1997 By: /s/ Patrick H. Nettles
-------------- ----------------------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: March 17, 1997 By: /s/ Joseph R. Chinnici
-------------- ----------------------------------
Joseph R. Chinnici
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description Page
<S> <C> <C>
11.0 Statements Regarding Computation of Per Share
Earnings (loss) for the three months ended January
31, 1997 and three months ended January 31, 1996 16
27.0 Financial Data Schedule 17
</TABLE>
15
<PAGE> 1
CIENA CORPORATION
EXHIBIT 11
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three months ended January 31,
1996 1997
-------------------- ---------------------
<S> <C> <C>
Net income (loss) $ (3,334,000) $ 13,083,000
==================== =====================
Weighted average shares of common
stock outstanding 12,110,000 13,245,000
Weighted average effect of convertible
preferred stock on as-if-converted
basis 62,551,000 73,316,000
Weighted average effect of common
stock equivalents 6,981,000 11,893,000
Staff Accounting Bulletin No. 83
issuances and grants:
Common shares issued within one
year of initial filing 1,081,000 268,000
Common stock equivalents issued within
one year of initial filing 5,623,000 703,000
Convertible preferred stock issued within
one year of initial filing 10,765,000 -
-------------------- ---------------------
99,111,000 99,425,000
==================== =====================
Pro forma net income (loss) per common
and common equivalent share $ (0.03) $ 0.13
==================== =====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATION AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 31,940
<SECURITIES> 0
<RECEIVABLES> 26,131
<ALLOWANCES> 0
<INVENTORY> 16,145
<CURRENT-ASSETS> 79,521
<PP&E> 21,786
<DEPRECIATION> 2,424
<TOTAL-ASSETS> 99,611
<CURRENT-LIABILITIES> 38,272
<BONDS> 0
40,404
0
<COMMON> 135
<OTHER-SE> 17,948
<TOTAL-LIABILITY-AND-EQUITY> 99,611
<SALES> 53,933
<TOTAL-REVENUES> 53,933
<CGS> 20,832
<TOTAL-COSTS> 20,832
<OTHER-EXPENSES> 11,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 21,448
<INCOME-TAX> 8,365
<INCOME-CONTINUING> 13,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,083
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
