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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... to.............
COMMISSION FILE NUMBER 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
incorporation or organization) Identification No.)
920 ELKRIDGE LANDING ROAD, LINTHICUM, MD 21090
(Address of principal executive offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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 [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the 99,287,653 shares of Common Stock of the
Registrant issued and outstanding as of October 31, 1997, excluding 3,968,894
shares of Common Stock held by affiliates of the Registrant was
$5,230,616,900. This amount is based on the average bid and asked price of
the Common Stock on the Nasdaq Stock Market of $54.875 per share on October
31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 1998 annual meeting of stockholders to
be filed with the Commission not later than 120 days after the end of the
fiscal year covered by this report.
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PART I
ITEM 1. BUSINESS
GENERAL
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OVERVIEW
CIENA designs, manufactures and sells dense wavelength division
multiplexing ("DWDM") systems for fiberoptic communications networks. CIENA's
first DWDM solution, the MultiWave(R) 1600 system, alleviates capacity, or
bandwidth, constraints in high traffic, long distance fiberoptic routes
without requiring the installation of new fiber. In addition, the MultiWave
1600 system enables flexible provisioning of additional bandwidth without
requiring an upgrade of existing network transmission equipment. The
MultiWave 1600 system can increase the carrying capacity of a single optical
fiber 16 fold by allowing simultaneous transmission of up to 16 optical
channels per fiber. This permits fiber currently carrying signals at
transmission speeds of up to 2.5 Gb/s to carry up to 40 Gb/s. CIENA's
MultiWave 1600 system includes optical transmission terminals, optical
amplifiers, optical add/drop multiplexers and network management software.
The MultiWave 1600 system is designed with an open architecture that allows
the MultiWave 1600 system to interoperate with carriers' existing fiberoptic
transmission systems having a broad range of transmission speeds and signal
formats. CIENA's MultiWave Sentry(TM), the second generation version of the
MultiWave 1600, includes enhancements that significantly expand the ability
of the MultiWave system to interface with data communications equipment in
addition to other types of transmission equipment and increase the distance
which can be spanned between transmission terminals. CIENA's MultiWave
Firefly(TM), designed for point-to-point short-haul applications (distances of
65km or less) not requiring optical amplifiers, allows simultaneous
transmission of up to 24 optical channels per fiber at transmission speeds of
up to 2.5 Gb/s per channel.
The Company believes it is a worldwide market leader in field deployment
of open architecture DWDM systems. For the fiscal year ended October 31,
1997, the Company recorded $373.8 million in revenue to a total of five
customers, of which $179.4 million was from sales to Sprint Corporation
("Sprint") under a three-year non-exclusive supply agreement which expires in
December 1998, and approximately $184.5 million was from sales to LDDS
WorldCom ("WorldCom") under a five-year supply agreement which, subject to
certain conditions, is exclusive through December 1997. Substantially all of
the Company's fiscal 1997 revenue was derived from sales of the MultiWave 1600
system. The Company also recently announced a five year contract to supply
MultiWave Sentry systems to AT&T Corporation ("AT&T"), subject to successful
completion of rigorous testing and evaluation which are ongoing with AT&T and
will continue over the next several months. The Company is actively seeking
additional customers among long distance, local and interoffice fiberoptic
network operators in the worldwide telecommunications market.
INDUSTRY BACKGROUND
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THE LONG DISTANCE MARKET
The four largest long distance carriers in the United States, AT&T, MCI
Communications Inc. ("MCI"), Sprint and WorldCom (MCI and WorldCom have
announced an agreement to merge), as well as many international
telecommunications carriers, have widely deployed fiberoptic cable forming the
backbone of their long distance networks. Growth in utilization of long distance
networks has increased in both type of traffic -- from voice alone to voice,
data and video -- and volume of traffic. This growth in utilization has been
caused by factors such as:
- - - the growing use of the Internet, as well as increased use of office
automation, distributed computing, electronic mail, facsimile transmission,
electronic transaction processing, video conferencing, remote access
telecommuting, and local and wide area networking;
- - - widespread deregulation of the United States telecommunications industry
and the consequent increase in competition among, and lowering of prices
by, service providers in the long distance market; and
- - - development of high-bandwidth network access technologies, such as cable
modems, hybrid fiber coaxial architectures and digital subscriber lines,
that permit commercial and consumer users to transmit and receive high
volumes of information.
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Increased utilization creates transmission bottlenecks on heavily used
routes that were originally designed for significantly less traffic. Although
exact statistics are not available, the Company believes that this increase
in type and volume of utilization has caused some long distance
telecommunications carriers to handle traffic over certain long distance
routes at or near the maximum capacity of the existing installed fiber and
electronic-based transmission systems currently in use.
The growth in demand for, and the resulting strains on, capacity of the
fiberoptic telecommunications networks have been coupled with an increasing
need for network reliability to support mission critical data communications.
As end-users become more dependent on around-the-clock network availability,
they become less tolerant of service interruptions which can be caused by
factors such as equipment failure, fiber cuts or high traffic volume.
This demand for greater reliability has led long distance carriers to
adopt "ring architecture" in which long distance routes are linked in a ring
configuration so that in the event of a fiberoptic cable cut or other
equipment failure between two points of the ring, the signal can be
immediately redirected through the reverse "protection path" of the ring. The
service break associated with a fiber cut or other equipment failure in a
network using ring architecture can be restored in approximately 50
milliseconds, which is essentially unnoticeable by the consumer. However,
many ring architectures now being deployed demand twice as much fiber
capacity (due to the need to maintain a redundant alternative path to serve
as a protection path for each fiber in use) as non-ring based architectures.
AT&T, Sprint and WorldCom have all announced an intention to implement ring
architecture for their networks, which will place greater bandwidth demand on
their existing fiberoptic networks.
THE INTEROFFICE AND LOCAL EXCHANGE MARKETS
The Company believes the factors driving growth in utilization of capacity
and the increased demand for reliability converged soonest and with the
greatest impact in the long distance "backbone" routes of fiberoptic
networks. The Company believes the same convergence is occurring and may have
a similar impact in other portions of fiberoptic networks. For example, the
increasingly heavy flow of data communications is not limited to long
distance routes, but affects local and interoffice routes as well. The local
and interoffice traffic has historically been handled predominantly by the
regional Bell operating companies ("RBOCs"), whose fiberoptic networks were
designed primarily for voice communication with a localized, or shorter reach
orientation. The Company believes transmission bottlenecks are beginning to
be experienced by the RBOCs and competitive local exchange carriers, or
"CLECs", in these shorter routes.
ALTERNATIVE HIGH-BANDWIDTH SOLUTIONS
The shortage of bandwidth available in existing fiberoptic networks can be
addressed in several ways. One solution is to install additional fiberoptic
cable along existing routes or in new fiberoptic routes. However, the
installation of additional fiber, and particularly the creation of new
fiberoptic routes, is a costly and time-consuming process, involving
extensive negotiation and acquisition of necessary rights of way, as well as
the actual construction effort. The Company believes that the average cost of
creating new underground fiberoptic routes is approximately $43,400 per
kilometer ($70,000 per mile). Another solution is to increase the
transmission speed of the installed systems. However, this approach is also
costly. Existing telecommunications routes generally use TDM fiberoptic
transmission terminals at either end of the route to send and receive
signals. In longer distance routes, opto-electronic signal regenerators
("regenerators") are placed between terminals along the fiberoptic cables,
spaced at regular intervals of 35-50 kilometers (approximately 22 to 31
miles). These regenerators process, amplify and re-time the signal through a
process that involves conversion of the optical signal to electronic form and
back to optical form. However, terminals and regenerators are "bit-rate
specific," meaning upgrade of a route segment to handle higher transmission
speeds requires replacement of all terminals and regenerators. A large number
of regenerators are needed on a route of significant length, and any upgrade
of a route segment using time division multiplexing ("TDM") technology would
require a significant investment in new equipment as well as significant
installation costs.
Certain types of existing fiber have been shown to display incompatibility
problems with very high speed TDM equipment. "Non-dispersion shifted" fiber
constitutes the majority of fiber installed in North America and Europe,
while "dispersion shifted" fiber has been popular in Japan. "Reduced
dispersion" fiber is a recent development that is beginning to see
applications in some new fiber installations. At lower transmission rates,
such as 2.5 Gb/s, TDM-based equipment is technically viable for use with
these fiber types and widely available commercially. As an
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upgrade to existing telecommunications links with transmission rates below
2.5 Gb/s, TDM at 2.5 Gb/s can represent an alternative incremental approach
to the enhancement of transmission capacity. However, at the 10 Gb/s
transmission rate, transmission over non-dispersion shifted fiber can result
in significant impairments to and distortion of the signal.
CIENA and others have observed that the potential for an alternative
technological solution to laying new fiber or upgrading capacity to higher
electronic transmission rates exists because the bandwidth intrinsic to
existing fiber is vastly underutilized. For example, transmission systems
which use TDM and transmit at 2.5 Gb/s use substantially less than one
percent of the inherent bandwidth of the fiber currently deployed in United
States fiberoptic networks. An optical multiplexing technology called
wavelength division multiplexing ("WDM") has long been recognized for its
potential to better utilize fiber bandwidth by enabling the simultaneous
transmission of multiple optical signals on discrete channels on a single
fiber. Until recently, however, technological barriers have limited
exploitation of the potential of WDM as a commercially viable solution. DWDM
is an extension of WDM technology and refers to the simultaneous transmission
of more than four channels on a single fiber.
THE CIENA SOLUTION
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CIENA's MultiWave DWDM systems enhance the transmission capacity of a
single optical fiber, without requiring significant modification or upgrade
to transmission equipment. All MultiWave systems are installed along fiber
optic routes, the beginning and end of which are defined by the presence of
the customer's transmission equipment.
DESIGN PRINCIPLES
CIENA's MultiWave DWDM systems incorporate the following design principles:
- OPEN ARCHITECTURE. MultiWave systems are designed with an open
architecture that allows the products to interoperate with carriers'
existing fiberoptic transmission systems having a broad range of
transmission speeds and signal formats. This approach is distinguished
from a closed architecture system design pursued by companies that
manufacture other telecommunications equipment and may seek to preserve
the market for their legacy network equipment.
- SCALEABILITY. The MultiWave system design is modular and allows
capacity-specific configurations and the ability to add capacity
through a modular upgrade without interrupting existing MultiWave
traffic. This capability enables a customer to select the number of
channels required on a particular fiber and preserves the customer's
ability to respond quickly to increased demand for capacity without
significant additional equipment purchases.
- FLEXIBILITY / EFFICIENCY. CIENA's MultiWave systems can be tactically
implemented on a route-by-route basis, providing relief on
capacity-constrained routes without mandating a network-wide
architectural or transmission equipment change. In the context of new
network construction, the Company believes that its ability to permit
increased capacity per fiber, together with the elimination of multiple
regenerators, make deployment of the MultiWave systems a cost-efficient
alternative to more conventional TDM approaches. MultiWave systems
configured with the Company's optical add drop multiplexer ("OADM")
enable carriers to selectively direct portions of a route's traffic to
various sites along the route without requiring extensive termination
equipment or electronic add/drop multiplexers. The Company believes the
resulting traffic route flexibility at the all optical layer of the
fiberoptic network is also potentially attractive and cost effective to
network planners.
- FIBER COMPATIBILITY. CIENA's DWDM Systems are compatible with the
various kinds of fiber (dispersion shifted, reduced dispersion and
non-dispersion shifted) deployed world-wide. The products currently
perform optimally on non-dispersion shifted fiber, which comprises the
majority of fiber installed in both North America and Europe.
ENABLING TECHNOLOGIES
CIENA developed its MultiWave DWDM systems based upon the use of three
core enabling technologies that assist in overcoming many of the constraints
that previously limited commercial introduction of DWDM
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technology:
- ERBIUM-DOPED FIBER AMPLIFIERS ("EDFAS") enable the direct
amplification of optical signals without the use of electronic
regenerators;
- IN-FIBER BRAGG GRATINGS enable precise filtering of multiple optical
signals in a single fiber; and
- WAVEWATCHER NETWORK MANAGEMENT SOFTWARE developed by the Company makes
it possible for a network operator to manage effectively the status and
functions of CIENA MultiWave systems in conjunction with the network
operator's management of other parts of its network. The Company
provides standards compliant network management systems based upon
Simple Network Management Protocol (SNMP), Transmission Control
Protocol/Internet Protocol (TCP/IP) and International
Telecommunications Union (ITU) Telecommunications Management Network
(TMN) standards.
CIENA'S STRATEGY
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The Company's strategy is to maintain and build upon its market leadership
in the deployment of DWDM systems and to leverage the Company's
high-bandwidth technologies in order to provide solutions to both voice and
data communications based network architectures. Important elements of the
Company's strategy include:
- - - MAINTAIN LEADERSHIP IN DEPLOYMENT OF DWDM IN FIBEROPTIC NETWORKS. The
Company believes that the technological, operational and cost benefits of the
Company's DWDM systems, including the MultiWave 1600, MultiWave Sentry, and
MultiWave Firefly, create competitive advantages for telecommunications
carriers worldwide, which are being pressed by their customers to deliver
more bandwidth to address the dramatic growth in Internet and other data
communications traffic. The Company also believes that achieving early
widespread operational deployment of its systems in a particular carrier's
network will provide CIENA significant competitive advantages with respect to
additional DWDM deployments and channel upgrades within that network and will
enhance its marketing to other carriers as a field proven supplier. The
Company therefore intends to continue aggressively serving its existing
customers while actively pursuing additional DWDM deployment opportunities
among fiberoptic carriers in domestic and foreign long distance, interoffice
and local exchange markets.
- - - CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. The Company
markets technically advanced systems to sophisticated customers. The nature
of the Company's systems and market require a high level of technical support
and customer service, including installation assistance. The Company is
developing a substantial customer service and installation support
organization, including full-time customer support offices in Kansas City,
Kansas (to support Sprint), Tulsa, Oklahoma (to support WorldCom), Atlanta,
Georgia and Middletown, New Jersey (to support AT&T) and other selected
locations where it develops significant customer relationships, to provide
on-going support to its customers. Internationally, the Company is working to
develop relationships with companies that can team with the Company to
provide similar service and support outside the United States. The Company
has a contract with BICC Cables, plc, to assist the Company in the delivery
of service and support to Mercury in the U.K.
- - - CONTINUE TO ENHANCE WORLD CLASS MANUFACTURING CAPABILITY. The Company's
MultiWave systems serve a mission critical role in its customers' networks.
Quality assurance and manufacturing excellence are necessary for the Company
to achieve success. CIENA believes it has developed and will continue to
enhance a world class manufacturing capability. The Company invested $5.9
million in capital improvements in fiscal 1996 and hired 125 employees in
that year to establish initial manufacturing capacity, and enhance
efficiency and quality in its manufacturing processes. An additional
$32.5 million in capital improvements were made, and 392 employees were
hired in fiscal 1997 in support of this element of CIENA's strategy.
Additional investment will be made in fiscal 1998, as the Company adds the
MultiWave Sentry, MultiWave 4000 (the Company's 40-channel system) and
MultiWave Firefly product lines to full scale production. The Company
achieved ISO 9001 certification in July 1997 in further support of this
element of its strategy. ISO 9001 is an internationally recognized
documented standard prescribing quality assurance management. The Company
believes that ISO 9001 certification not only serves as a guide for quality
management but enhances the Company's competitive position, especially among
potential customers who view such certification as an independent validation
of quality assurance.
- - - EXPAND SALES AND MARKETING EFFORTS. The nature of the target customer
base for all MultiWave product lines
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requires a focused sales effort on a customer-by-customer basis. The Company
will continue to increase its sales and marketing efforts by focusing on
the worldwide market of fiberoptic carriers. In fiscal 1996, the Company
increased its sales and marketing force by 12 persons, and increased it by
another 78 persons in fiscal 1997. The Company will continue to strengthen
its marketing programs and increase its international presence through
both direct sales and international distributors.
- - - LEVERAGE THE COMPANY'S HIGH-BANDWIDTH TECHNOLOGIES AND KNOW-HOW. The
Company believes the overall growth in demand for bandwidth in
telecommunications networks will lead to transmission bottlenecks in other
segments of the networks where the application of DWDM and other high
bandwidth enabling technologies may provide solutions, either within
existing network architectures, or as part of the design and development
of alternative data communications based network architectures. The
Company expects to leverage the core competencies it has developed in the
design, development and manufacturing of the MultiWave product lines by
pursuing new product development efforts, and strategic alliances or
acquisitions, to address these expected opportunities.
CIENA'S PRODUCTS
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LONG-DISTANCE APPLICATIONS
MULTIWAVE 1600 AND MULTIWAVE SENTRY SYSTEMS
The Company's first DWDM system, the MultiWave 1600, was designed to
help long distance service providers alleviate the bandwidth constraints
affecting their networks. The MultiWave 1600 system is a combination of
equipment and software installed on long distance route segments of up
to 600 kilometers (372 miles). For routes in excess of 600 kilometers, a
conventional fiberoptic regenerator can be used to reconstruct the
optical signals between successive MultiWave 1600 systems.
The MultiWave 1600 system enables simultaneous transmission of up to
16 optical channels on a single fiber at rates of up to 2.5 Gb/s per
channel without opto-electronic regeneration. A MultiWave 1600 system
consists of one MultiWave terminal on each end of a route segment, one
or more MultiWave optical amplifiers along the route (depending on route
length) and CIENA's WaveWatcher network management software. The CIENA
MultiWave optical amplifier is a modular Erbium-doped fiber amplifier
that provides direct composite optical amplification of the 16 optical
channels carried by the MultiWave 1600 and MultiWave Sentry systems.
Within a single MultiWave system, CIENA's MultiWave optical amplifiers
take the place of the service provider's existing regenerators on routes
of up to 600 kilometers (372 miles), and can be spaced as much as 120
kilometers (74 miles) apart. Unlike a TDM upgrade solution which
involves replacement of all transmission equipment along a fiber route,
a channel upgrade of a CIENA MultiWave system involves no replacement of
existing transmission equipment until all 16 channels are in service.
Similarly, increases in transmission rates up to a maximum of 2.5 Gb/s
do not require replacement of or modification to the optical amplifiers.
CIENA's MultiWave Sentry, the second generation version of the MultiWave
1600 system, includes enhancements which significantly expand the ability
of the MultiWave system to interface with data communications equipment in
addition to other types of transmission equipment and increase the distance
which can be spanned between transmission terminals. Up to eight MultiWave
Sentry systems can be concatenated (deployed end-to-end) together allowing
transport of up to 40 Gb/s over total route lengths of up to 4,800
kilometers (2,900 miles) without the need for conventional regenerators.
The MultiWave Sentry system incorporates DWDM optimized long-reach
receivers and uses standard low-cost short-reach input and output
interfaces to connect to a customer's equipment. MultiWave Sentry also
incorporates built-in performance monitoring capabilities which enable
network operators to identify and measure specified channels and their
characteristics. These added capabilities eliminate the need for
conventional long-reach fiberoptic transmission terminals or traditional
SONET multiplexers in data-centric networks, thereby simplifying the
construction of cell- and packet-based (IP, ATM and Frame Relay) networks.
The fully configured MultiWave Sentry is expected to be commercially
available in the first half of calendar 1998.
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MULTIWAVE OPTICAL ADD/DROP MULTIPLEXER.
When deployed as a component of a MultiWave 1600 or MultiWave Sentry
system, the CIENA optical add/drop multiplexer ("OADM") enables carriers
selectively to direct portions of a route's traffic to various sites along
the route without requiring extensive termination equipment or electronic
add/drop multiplexers. A network operator may optically remove (drop)
and/or insert (add) up to four channels from or to the composite 16
channel signal at a point along a fiber route where the optical add/drop
multiplexer is installed. The installation of an additional optical
add/drop multiplexer at a different point along that route enables the
network operator to reuse those channels. The optical add/drop multiplexer
also provides optical amplification for up to 16 channels and when used in
the MultiWave Sentry systems provides standard short-reach interfaces to
either data communications equipment or conventional fiberoptic
transmission terminals. The Company believes the resulting traffic routing
flexibility at the all-optical layer of the fiberoptic network is
potentially attractive and cost effective to network planners.
A typical MultiWave 1600 or MultiWave Sentry system, including end
terminals, EDFAs, OADMs and WaveWatcher network management software ranges
in price from $500,000 to $2,000,000, depending on such factors as
customer needs for number of channels, route length (which affects the
number of optical amplifiers required), network management software
configuration and other negotiated terms and conditions. MultiWave systems
initially configured for less than the maximum number of channels can be
upgraded to carry up to the maximum at additional cost.
MULTIWAVE 4000
CIENA's MultiWave 4000, the third generation of the MultiWave 1600, is
currently scheduled for general commercial availability in the first half
of calendar 1998. The MultiWave 4000 incorporates the basic features of
both the MultiWave 1600 and the MultiWave Sentry, but is scaleable to allow
simultaneous transmission of up to 40 optical channels per fiber at rates of
up to 2.5 Gb/s per channel for a total maximum throughput of 100 Gb/s.
SHORT-DISTANCE APPLICATIONS
MULTIWAVE FIREFLY
CIENA's MultiWave Firefly is targeted toward point-to-point short haul
applications of 65 kilometers (40 miles) or less, which do not require
signal amplification via EDFAs or channel add-drop capability. The product
is designed to handle up to 24 channels at rates of 622 Mb/s and 2.5 Gb/s
and is compatible with the Company's WaveWatcher network management
software.
CIENA believes the product is well-suited to applications at RBOCs and
CLECs as well as for certain international applications where route
lengths tend to be shorter.
The fully configured MultiWave Firefly is expected to be commercially
available for volume shipments during the first half of calendar 1998 and
will range in price from $200,000 to $900,000, depending primarily on the
number of channels deployed. As may be required, MultiWave Firefly systems
initially configured for less than the maximum number of channels can be
upgraded to carry up to the maximum at additional cost.
WAVEWATCHER NETWORK MANAGEMENT SYSTEM
WaveWatcher is the MultiWave system's integrated network management
software package. The Company's commitment to providing standards
compliant network management interfaces at all levels, from individual
network elements to the element management system, affords rapid
integration into existing telecommunication management operations.
WaveWatcher operates on a UNIX platform and has been designed to adhere
to both existing and evolving open system network management standards
such as Simple Network Management Protocol (SNMP), Transmission Control
Protocol/Internet Protocol (TCP/IP) and the International
Telecommunications Union (ITU) Telecommunications Management Network (TMN)
standards.
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WaveWatcher's network element manager uses a separate out-of-band
optical service channel to communicate network management information and
provides a single view of multiple CIENA systems through graphical user
interfaces and supported operating system interfaces. It provides
customers with early warnings of network problems and allows them to
manage and monitor network performance. WaveWatcher provides fault,
performance, security and configuration management of optical networking
systems. When used with MultiWave Sentry systems, WaveWatcher provides
additional monitoring capabilities for channel identification and
transmission quality throughout a customer's MultiWave network.
PRODUCT DEVELOPMENT
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The Company expects to continue during fiscal 1998 to enhance and refine
its MultiWave systems, while adding operational features designed to make all
of the Company's products attractive to a wide range of network operators.
The Company plans to invest considerable engineering and related resources
to developing its MultiWave Metro system, which targets campus and
interoffice rings and high bandwidth local loop services, using DWDM
technology with as many as 16 different wavelengths. MultiWave Metro is
designed to provide high aggregate bandwidth capacity for multiple
applications and data rates. The product is expected to simultaneously
aggregate multiple traffic types, including SONET/SDH (at both the SONET
levels of 622 Mb/s and 2.5 Gb/s), ATM and fast IP in a ring environment,
providing network survivability and the ability to add or drop traffic at
various locations around the ring.
The Company has signed a letter of intent to enter into an Agreement and
Plan of Merger with Astracom, Inc. ("Astracom"). Astracom is a
start-up telecommunications company located in Atlanta, Georgia. The
transaction is expected to be completed by the end of December 1997. The
Company intends for the 15 employees of Astracom to assist in the development
of its MultiWave Metro product.
The Company believes the overall growth in utilization of fiberoptic
telecommunications networks will lead to transmission bottlenecks in other
segments of the networks where the application of DWDM technologies may
provide solutions. The Company also believes there may be opportunities for
it to develop products and technologies complementary to DWDM technologies
which may broaden the Company's ability to provide, facilitate and/or
interconnect with high bandwidth solutions offered throughout fiberoptic
networks. The Company intends to focus its product development efforts and
possibly pursue strategic alliances or acquisitions to address expected
opportunities in these areas.
As of October 31, 1997, there were 128 persons working in the Company's
research and development area. The Company's research and development
expenditures were $6.4 million, $8.9 million and $23.3 million for fiscal
1995, 1996 and 1997, respectively.
CUSTOMERS
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SPRINT RELATIONSHIP
In December 1995, the Company entered into a three-year supply agreement
with Sprint, with the option for Sprint to extend the term of the agreement
for an additional year. Prices for all equipment purchased by Sprint under
the terms of the supply agreement are fixed for the initial three-year term
but the prices charged to Sprint for any deliverable under the supply
agreement will not at any time be higher than the Company's final net price
to any "similarly situated customer". The supply agreement does not obligate
Sprint to make any minimum purchases from the Company. The agreement requires
that the Company set up and maintain, at the Company's expense, certain test
facilities for a period of 10 years.
The Company warrants each deliverable provided by the Company for 60
months from the date of delivery, with Sprint having the right until December
2005 to purchase an unlimited number of one-year extensions of any or all
warranties. Upgrades are provided at no cost to Sprint during the warranty or
extended warranty periods. The supply agreement contains penalties for
failure to respond to various types of system failures in a timely manner.
The supply agreement with Sprint also provides Sprint with a perpetual,
non-exclusive license to certain software and a license to use, modify and
enhance the Company's source code under certain conditions. The Company must
maintain two years of backwards compatibility for any enhancements or
upgrades to the software.
WORLDCOM RELATIONSHIP
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In September 1996, the Company entered into a five-year supply agreement
with WorldCom. Pursuant to the terms of the supply agreement, the Company
will be, subject to certain conditions, the exclusive supplier of DWDM
systems for WorldCom through December 31, 1997. The agreement does not
require a minimum purchase commitment; if WorldCom, however, does not
purchase a certain minimum amount of equipment, all prices for equipment
purchased under the agreement increase. As of May 31, 1997, the minimum
threshold had been exceeded, and pursuant to another contract provision, the
Company implemented an approximate 5% price reduction on future purchases.
WorldCom may terminate all or any part of an outstanding purchase order upon
the payment of a termination fee.
The Company has granted to WorldCom, pursuant to the supply agreement, a
license to use certain software. The Company has also granted WorldCom the
option to purchase the source code for certain software at any time during
the term of the agreement for a one-time payment. If WorldCom exercises this
option, the Company has no further obligation to provide support or
maintenance services or to provide upgrades or enhancements with respect to
this software.
Under product and pricing attachments currently in effect, the Company
provides WorldCom with software upgrades at no charge for a period of 10
years from installation and provides a five-year warranty for products.
AT&T RELATIONSHIP
In August 1997, the Company entered into a five year agreement to supply
MultiWave Sentry systems to AT&T beginning in fiscal 1998. Due to the size
and complexity of the AT&T network, the Company has invested and expects to
continue to invest considerable financial, engineering, manufacturing and
logistics support resources in positioning the commercial relationship to be
successful, but has done so and will continue to do so without any assurance
as to the volume, duration or timing of any purchases which might ensue from
AT&T. Specifically, the agreement does not require any minimum purchase
commitment; however, certain price concessions are not available unless a
certain minimum amount of equipment is purchased under the agreement. Prices
for all equipment purchased by AT&T under the terms of the supply agreement
are fixed for the initial five-year term, but the prices charged to AT&T
under the supply agreement must be no less favorable than those offered to
other commercial customers for like products and volume of business during
the term of the agreement.
The Company warrants the equipment provided by the Company for six years
from the date of final installation, and the agreement contemplates that
installation will be provided by the Company on the terms set forth in the
agreement. The supply agreement contains penalties for failure to respond to
various types of system failures in a timely manner. The supply agreement
with AT&T also provides AT&T with a perpetual, non-exclusive license to
certain software and a license to use, modify and enhance the Company's
source code under certain conditions.
NISSHO RELATIONSHIP
The Company has entered into a two-year agreement with NISSHO Electronics
Corporation ("NISSHO") whereby NISSHO is a distributor of the Company's
MultiWave systems in Japan. Through NISSHO, the Company has shipped MultiWave
systems to Teleway Japan Corporation ("Teleway") and Japan Telecom Co., Ltd.
("Japan Telecom").
DIGITAL TELEPORT, INC. RELATIONSHIP
In April 1997, the Company signed a supply agreement with Digital
Teleport, Inc. ("DTI") of St. Louis, Missouri and has delivered MultiWave
1600 systems for installation in certain long distance routes in a fiberoptic
network being built in the Midwest. These installations represent the
Company's first deployment of the MultiWave 1600 as part of a newly built
long distance fiberoptic route.
MERCURY COMMUNICATIONS RELATIONSHIP
In June 1997, the Company signed an agreement to supply MultiWave 1600
systems to Mercury Communications Limited ("Mercury"), a U.K. based
subsidiary of Cable and Wireless Communications Group. The Company also
entered into an agreement with BICC Cables, plc, to assist the Company in the
delivery of service and support to Mercury in connection with this
installation and operation of MultiWave 1600 systems.
8
<PAGE> 10
OTHER POTENTIAL CUSTOMER RELATIONSHIPS
The RBOCs are very active in interoffice and local exchange markets and,
under the Telecommunications Act of 1996, RBOCs are newly eligible to enter
the long distance market once they have met certain requirements for opening
their local markets to competition. The Company anticipates that one or more
of the RBOCs will move aggressively to offer long distance services, although
the timing of that move is uncertain, and the question of how such a move
will be implemented is unclear -- e.g., through the establishment of owned
network facilities, through the purchase of long distance capacity from other
long distance carriers, or through some combination of the two. Regardless
of the timing of any such move, the Company believes there may be limited
opportunities for in-region deployment of the Company's long distance
MultiWave 1600 or Sentry systems in certain RBOCs. Additionally, with the
introduction of MultiWave Firefly, the Company's DWDM system targeted toward
short-haul, point-to-point applications, the Company has expanded its direct
and indirect sales efforts to include the interoffice and local exchange
markets traditionally served by the RBOCs. The Company has signed trial
evaluation agreements with certain RBOCs for testing of the MultiWave 1600
and MultiWave Firefly systems. The Company believes the CLECs are also
developing interest in DWDM solutions like MultiWave Firefly.
The Company intends to invest considerable financial, engineering,
manufacturing and logistics support resources in positioning commercial
relationships with the RBOCs and CLECs to be successful, but has done so and
will continue to do so without any assurance as to the volume, duration or
timing of any purchases which might ensue.
Internationally, the market for DWDM systems is still developing. The
deregulation and competition which have characterized the United States long
distance market are much less pronounced in most international markets, and
the data communications applications which fuel the demand for high bandwidth
transmission systems in the United States are not as widely used in most
international markets. The Company intends to concentrate its international
sales and marketing efforts in countries or regions where there is
competition among two or more long distance carriers, where there are
significant bandwidth constraints and where there is significant potential
for near term growth in telecommunications services.
MARKETING AND DISTRIBUTION
- - -------------------------------------------------------------------------------
The Company's systems require a relatively large investment, and the
Company's target customers in the fiberoptic telecommunications market --
where network capacity and reliability are critical -- are highly demanding
and technically sophisticated. There are only a small number of such
customers in any country or geographic market. Also, every network operator
has unique configuration requirements which impact the integration of DWDM
systems with existing transmission equipment. The convergence of these
factors leads to a very long sales cycle for MultiWave systems, often more
than a year between initial introduction to the Company and commitment to
purchase, and has further led CIENA to pursue sales efforts on a focused,
customer-by-customer basis.
The Company has organized its resources for the separate but coordinated
approach to United States and international customers. In the United States
market, a sales team, comprised of an account manager, systems engineers and
technical support and training personnel, is assigned responsibility for each
customer account, and for the coordination and pursuit of sales contacts. In
the international market, the Company currently pursues prospective customers
through direct sales efforts, as well as through distributors, independent
marketing representatives and independent sales consultants. The Company has
established CIENA Communications, Inc. as a wholly-owned subsidiary in the
U.S. to coordinate sales and marketing and customer service and installation
support functions. The Company has established CIENA Limited as a
wholly-owned subsidiary in the U.K. to facilitate U.K. and European sales.
The Company has distributor or marketing representative arrangements covering
Austria, Germany, Italy and Switzerland in Europe, and the Republic of Korea
and Japan in Asia. The Company has established a direct sales presence in
Belgium and intends to establish a similar presence in Asia over the next 12
to 18 months. The Company has representative support in Brazil.
In support of its worldwide selling efforts, the Company conducts
marketing programs intended to position and promote its products within the
telecommunications industry. Marketing personnel coordinate the Company's
participation in trade shows and conduct media relations activities with
trade and general business publications.
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<PAGE> 11
CUSTOMER SERVICE AND SUPPORT
The Company is developing a customer service and support organization to
provide its customers with a high level of technical support and customer
service. The Company believes that as deployment of MultiWave systems
broadens within customer networks, installation services or assistance from
the Company will increasingly be requested by customers. Additionally, as the
installed base of MultiWave systems has increased, customer needs for prompt
technical support and service as well as on site assistance, have materially
increased. The Company is developing a separate customer service and support
organization to be responsive to these needs. The Company has full-time
customer support offices in Kansas City, Kansas (to support Sprint), Tulsa,
Oklahoma (to support WorldCom), Atlanta, Georgia and Middletown, New Jersey
(both to support AT&T) and the Company intends to establish customer support
offices in other selected locations where it develops significant customer
relationships, to provide on-going support to its customers. Internationally,
the Company is working to develop relationships with companies which can team
with the Company to provide similar service and support outside the U.S. The
Company has a contract with BICC Cables, plc, to assist the Company in the
delivery of service and support to Mercury.
MANUFACTURING
- - -------------------------------------------------------------------------------
The Company manufactures the in-fiber Bragg gratings and Erbium-doped
fiber amplifiers used in all MultiWave product lines, and conducts all
optical assembly, final assembly and final component, module and system test
functions, at its manufacturing facilities in Maryland. The Company believes
its manufacturing technologies and processes represent a key competitive
advantage. The Company has accordingly invested significantly in automated
production capabilities and manufacturing process improvements and expects to
further enhance its manufacturing process with additional production process
control systems. Certain critical functions, including aspects of fiber
splicing, also require a highly skilled manual work force, and the Company
puts significant efforts into training and maintaining the quality of its
manufacturing work force.
Electronic board assemblies are currently produced both at the Company and
by third party subcontractors. The Company has not experienced any
significant delays or material unanticipated costs resulting from the use of
subcontractors; however, such a strategy involves certain risks, including
the potential absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies, and reduced control
over delivery schedules, manufacturing yields, quality and costs. In the
event that any significant subcontractor were to become unable or unwilling
to continue to manufacture and/or test the Company's assemblies in required
volumes, the Company would have to identify and qualify acceptable
replacements. This qualification process could also be lengthy and no
assurance can be given that any additional sources would become available to
the Company on a timely basis. A delay or reduction in component shipments,
or a delay or increase in costs in the assembly and testing of components by
third party subcontractors, could materially and adversely affect the
Company's business, financial condition and results of operations. The
Company has installed additional electronic board assembly equipment
in its facility in Savage, Maryland, and intends to significantly reduce its
reliance on subcontractors for this work.
The Company's MultiWave product lines utilize in excess of 1,400 parts,
many of which are customized for the Company. Component suppliers in the
specialized, high technology end of the optical communications industry are
generally not as plentiful or, in some cases, as reliable, as component
suppliers in more mature industries. Some of the component suppliers for the
MultiWave Sentry and MultiWave Firefly systems are new and have not yet had
an opportunity to demonstrate the ability to increase their production to
keep pace with the Company's needs. Certain key optical and electronic
components used in the Company's MultiWave 1600, MultiWave Sentry, MultiWave
4000, and MultiWave Firefly systems are currently available only from sole
sources. The Company has from time to time experienced minor delays in the
receipt of these components, and the lead times for some components have been
lengthening. Any future difficulty in obtaining sufficient and timely
delivery of components could result in delays or reductions in product
shipments which, in turn, could have a material adverse effect on the
Company's business, financial condition and results of operations. While
alternative suppliers have been identified for certain other key optical and
electronic components, those alternative sources have not been qualified. The
time and expense involved in qualifying each additional source are
significant. Accordingly, the Company will for the near term continue to be
dependent on sole and single source suppliers of certain key components. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk Factors."
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<PAGE> 12
COMPETITION
Competition in the telecommunications equipment industry generally is
intense, particularly in that portion of the industry devoted to delivering
higher and more cost effective bandwidth throughout the telecommunications
network. However, the Company believes that its position as a leading
supplier of open architecture DWDM systems and the field-tested design and
technology of its products give it a current competitive advantage.
The competition faced by the Company is dominated by a small number of
very large, usually multinational, vertically integrated companies, each of
which has substantially greater financial, technical and marketing resources,
and greater manufacturing capacity as well as more established customer
relationships with long distance carriers than the Company. Included among
the Company's competitors are Lucent Technologies Inc., formerly part of AT&T
("Lucent"), Northern Telecom Inc. ("Nortel"), Alcatel Alsthom Group
("Alcatel"), NEC Corporation ("NEC"), Pirelli SpA ("Pirelli"), Siemens AG
("Siemens") and Telefon AB LM Ericsson ("Ericsson"). Each of the Company's
major competitors is believed to be in various stages of development,
introduction or deployment of DWDM products directly competitive with the
Company's MultiWave systems. Pirelli, in particular, is known to have
deployed open architecture WDM equipment and has announced a 32-channel DWDM
system. A U.S. affiliate of Pirelli is currently pursuing patent infringement
litigation against the Company. See Item 3. "Legal Proceedings". Lucent has
an especially prominent role in the market because of its historical
affiliation with AT&T. Lucent has announced it is supplying closed
architecture DWDM system equipment to AT&T, and has announced an intention to
introduce in the near future an open architecture DWDM system. Although
Lucent's prior affiliation with AT&T may have inhibited its relationships as
a supplier to other carriers, the spin-off of Lucent into a separate company
may make it more attractive to potential customers as a supplier.
In addition to DWDM suppliers, traditional TDM-based transmission
equipment suppliers compete with the Company in the market for transmission
capacity. Lucent, Alcatel, Nortel and NEC are already providers of a full
complement of such equipment. These and other competitors have introduced or
are expected to introduce equipment which will offer 10 Gb/s transmission
capability, and MCI has recently announced limited deployment of such
equipment. The Company believes the viability of widescale deployment of 10
Gb/s TDM based equipment has yet to be demonstrated. Because of the
transmission rate employed, the 10 Gb/s TDM equipment requires digital
multiplexing circuits operating at microwave frequencies, which can lead to
instability. This can complicate reproducibility, which may in turn result in
delays in introduction and higher manufacturing costs. More significantly, at
the 10 Gb/s transmission rate, dispersion distortion effects in the fiber can
result in significant impairments and limitations, particularly in
transmission over non-dispersion shifted fiber, which comprises most of the
installed fiber in current long distance networks in the United States.
However, at lower rates, such as 2.5 Gb/s, TDM-based equipment is technically
viable and widely available commercially, and, as an upgrade to existing
lower transmission rate telecommunications links, can represent an
alternative incremental approach to the enhancement of transmission capacity.
Additionally, while the Company believes the open architecture of its
MultiWave systems is attractive to some customers, certain of the Company's
competitors are able to offer more extensive TDM-based product lines under
closed architectures which may provide perceived network-wide cost and operating
efficiencies not available from the Company. For example, Lucent, Alcatel,
Nortel, NEC, Pirelli, Siemens, Ericsson and others are expected to move
aggressively to capture market share in the DWDM market. The Company expects
aggressive competitive moves from these industry participants, which to date
have included early announcement of competing or alternative products, and
significant price discounting and intellectual property disputes. While
competition in general is broadly based on varying combinations of price,
manufacturing capacity, timely delivery, system reliability, service commitment
and installed customer base, as well as on the comprehensiveness of the system
solution in meeting immediate network needs and foreseeable scaleability
requirements, the Company's customers are themselves under increasing
competitive pressure to deliver their services at the lowest possible cost. This
pressure may result in pricing for DWDM systems becoming a more important factor
in customer decisions, which may favor larger competitors which can spread the
effect of price discounts in their DWDM product lines across an array of
products and services, and a customer base, which are larger than the Company's.
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<PAGE> 13
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company has licensed certain key enabling technologies with respect to
the production of in-fiber Bragg gratings, utilized publicly available
technology associated with Erbium-doped fiber amplifiers, and applied its
design, engineering and manufacturing skills to develop its MultiWave 1600,
MultiWave Sentry, MultiWave 4000 and MultiWave Firefly systems. These
licenses expire when the last of the licensed patents expires or is
abandoned. The Company also licenses from third parties certain software
components for its network management software. These software licenses are
perpetual but will generally terminate after an uncured breach of the
agreement by the Company. The Company has applied for trademark registration
for CIENA, MultiWave, and MultiWave Sentry and has a registered trademark for
WaveWatcher. The Company also relies on contractual rights, trade secrets and
copyrights to establish and protect its proprietary rights in its products.
The Company intends to enforce vigorously its intellectual property rights
if infringement or misappropriation occurs. However, the Company does not
expect its proprietary rights in its technology will prevent competitors from
developing technologies and equipment functionally similar to the Company's.
The Company's practice is to require its employees and consultants to
execute non-disclosure and proprietary rights agreements upon commencement of
employment or consulting arrangements with the Company. These agreements
acknowledge the Company's exclusive ownership of all intellectual property
developed by the individual during the course of his work with the Company
and require that all proprietary information disclosed to the individual will
remain confidential.
As of October, 1997, the Company had received ten United States patents,
had received notice of allowance of eleven more, and had twenty-three pending
patent applications. The issued patents relate to (i) an optical monitoring
channel for WDM systems capable of surviving failure of an optical amplifier,
(ii) an in-fiber Bragg grating system for optical cable television systems
that allows the network operator to remove and insert different optical
frequencies and switch video signals on demand, (iii) a WDM optical
communication system with remodulators to carry multiple optical signals of
different wavelengths simultaneously, (iv) a WDM system that can be expanded
with additional optical signals, (v) an optical system which uses optical
amplifiers with flattened gain curves, (vi) a method for removing and
inserting optical carriers in a WDM system, (vii) an optical system with
tunable in-fiber gratings (viii) an optical amplifier with add/drop
capability, (ix) switch and insertion networks in optical cable TV systems,
and (x) WDM optical communication systems with wavelength stabilized optical
selectors. Allowed patent applications relate to other aspects of in-fiber
Bragg gratings technology and other aspects of WDM system design. Patents
afford the holder the right to exclusive use for 17 years. Of the ten United
States patents that have been issued, one will expire in 2012, five will
expire in 2013, and the remaining four will expire in 2014. Pursuant to an
agreement between the Company and General Instrument Corporation dated March
10, 1997, the Company is a co-owner with General Instrument Corporation of a
portfolio of 27 United States and foreign patents relating to optical
communications, primarily for video-on-demand applications. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors" and Item 3. "Legal Proceedings."
COMPANY
- - -------------------------------------------------------------------------------
The Company was incorporated in Delaware in November 1992. The Company's
principal executive offices are located at 920 Elkridge Landing Road,
Linthicum, Maryland 21090, and its telephone number is (410) 865-8500.
EMPLOYEES
- - -------------------------------------------------------------------------------
As of October 31, 1997, the Company and its subsidiaries employed 841
persons, of whom 128 were primarily engaged in research and development
activities, 527 in manufacturing, 98 in sales, marketing, customer support
and related activities and 88 in administration. None of the Company's
employees are currently represented by a labor union. The Company considers
its relations with its employees to be good.
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<PAGE> 14
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
-------------------- ------ -----------------------------------
<S> <C> <C>
Patrick H. Nettles, Ph.D 54 President, Chief Executive Officer and Director
Steve W. Chaddick 46 Senior Vice President, Products and Technologies
Lawrence P. Huang 46 Senior Vice President, Sales and Marketing
Joseph R. Chinnici 43 Senior Vice President, Finance and Chief Financial Officer
Mark Cummings 46 Senior Vice President, Operations
Stephen B. Alexander 38 Vice President, Transport Products
G. Eric Georgatos 42 Vice President, General Counsel and Secretary
Rebecca K. Seidman 51 Vice President, Human Resources Development
Andrew C. Petrik 34 Vice President, Controller and Treasurer
Jon W. Bayless, Ph.D.(1)(2) 57 Chairman of the Board of Directors
Harvey B. Cash 59 Director
Clifford H. Higgerson(2) 58 Director
Billy B. Oliver(1) 72 Director
Michael J. Zak(1)(2) 44 Director
</TABLE>
- - ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
PATRICK H. NETTLES, PH.D., has served as Chief Executive Officer of the
Company since February 1994, as President and Chief Executive Officer since
April 1994 and as Director since February 1994. From 1992 until 1994, Dr.
Nettles served as Executive Vice President and Chief Operating Officer of
Blyth Holdings Inc., a publicly-held supplier of client/server software. From
late 1990 through 1992, Dr. Nettles was President and Chief Executive Officer
of Protocol Engines Inc., a development stage enterprise, formed as an
outgrowth of Silicon Graphics Inc., and targeted toward very large scale
integration based solutions for high-performance computer networking. From
1989 to 1990, Dr. Nettles was Chief Financial Officer of Optilink, a venture
start-up which was acquired by DSC Communications. Dr. Nettles received his
B.S. degree from the Georgia Institute of Technology and his Ph.D. from the
California Institute of Technology.
STEVE W. CHADDICK has served as Senior Vice President, Products and
Technologies since September 1996, and was previously Vice President of
Product Development for the Company since joining it in 1994. Prior to
joining the Company, Mr. Chaddick was Vice President of Engineering at AT&T
Tridom, a company he co-founded in 1983 and which was acquired by AT&T in
1988. AT&T Tridom focused on the development of very small aperture satellite
terminal systems. Mr. Chaddick was responsible for all product development at
AT&T Tridom, including hardware, embedded systems software and network
management software. Mr. Chaddick received both his B.S. and M.S. degrees in
electrical engineering from the Georgia Institute of Technology.
LAWRENCE P. HUANG has served as Senior Vice President, Sales and Marketing
of the Company since November 1996 and served as Vice President, Sales and
Marketing of the Company since joining it in April 1994. Prior to joining
CIENA, Mr. Huang was Vice President/General Manager and Vice President of
Sales and Marketing of AT&T Tridom, which he co-founded with Mr. Chaddick in
1983. Mr. Huang holds a B.S. in industrial management from the Georgia
Institute of Technology and an M.B.A. from Georgia State University.
JOSEPH R. CHINNICI joined the Company in September 1994 as Controller, and
became Vice President, Finance and Chief Financial Officer in May 1995 and
was promoted to Senior Vice President Finance and Chief Financial Officer in
August 1997. From 1993 through 1994, Mr. Chinnici served as a financial
consultant for Halston Borghese Inc. From 1977 to 1993, Mr. Chinnici held a
variety of accounting and finance assignments for Playtex Apparel Inc. (now a
division of Sara Lee Corporation), ending this period as Director of
Operations Accounting and Financial Analysis. Mr. Chinnici holds a B.S. in
accounting from Villanova University and an M.B.A. from Southern Illinois
University.
MARK CUMMINGS joined the Company in May 1996 as Vice President,
Manufacturing and was promoted to
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<PAGE> 15
Senior Vice President, Operations in August 1997. From 1985 to 1996, Mr.
Cummings was Vice President, Operations for Cray Communications, Inc., an
international manufacturer of communications equipment. From 1975 to 1985,
Mr. Cummings was Manager of Manufacturing Engineering at Taylor Instruments,
and from 1973 to 1975, an Industrial Engineer at Siemens Stromberg Carlson
Inc. Mr. Cummings holds a B.S. in electronic technology from the State
University of New York at Buffalo, and is currently in the Masters program in
advanced manufacturing systems at the University of Maryland.
STEPHEN B. ALEXANDER has served as Vice President, Transport Products
since September 1996, and was previously Director of Lightwave Systems at the
Company since joining it in 1994. From 1982 until joining the Company, he was
employed at MIT Lincoln Laboratory, where he last held the position of
Assistant Leader of the Optical Communications Technology Group. Mr.
Alexander is an Associate Editor for the Journal of Lightwave Technology and
a General Chair of the conference on Optical Fiber Communication (OFC) for
1997. He is author of the tutorial text Optical Communication Receiver
Design. Mr. Alexander received both his B.S. and M.S. degrees in electrical
engineering from the Georgia Institute of Technology.
G. ERIC GEORGATOS has served as the Company's Vice President, General
Counsel and Secretary since February 1996. From 1980 to 1995, Mr. Georgatos
was an attorney and member of Gray Cary Ware & Friedenrich, a Professional
Corporation, a law firm based in California, where he served as outside
general corporate counsel for a variety of emerging companies. Mr. Georgatos
holds a B.S. degree in business administration from the University of
Southern California and a J.D. from the University of California Los Angeles.
REBECCA K. SEIDMAN joined the Company in April 1996 as Director of Human
Resources Development, and was promoted to Vice President, Human Resources
Development in June 1996. From 1984 until joining the Company, Ms. Seidman
served consecutively as Director of Marketing, Vice President,
Administration, and Principal of Walpert, Smullian & Blumenthal, P.A., a
regional accounting and consulting firm. Ms. Seidman is a Phi Beta Kappa
graduate of Goucher College and co-author of Total Quality Distribution, a
book discussing practical applications of Total Quality in the wholesale
distribution industry.
ANDREW C. PETRIK joined the Company in July 1996 as Controller, and became
Treasurer in December 1996 and was promoted to Vice President in August
1997. From 1989 to 1996, Mr. Petrik was employed by Microdyne Corporation
where he was the Assistant Controller from 1989 to 1994 and Assistant Vice
President of Marketing and Product Planning from 1994 to 1996. Mr. Petrik
holds a B.S. in Accounting from the University of Maryland and is a Certified
Public Accountant.
JON W. BAYLESS, PH.D. has been a Director of the Company since April 1994
and has served as Chairman of the Board of Directors since November 1996. Dr.
Bayless is a general partner of various venture capital funds associated with
Sevin Rosen Funds where, since 1981, he has focused on developing business
opportunities in the fields of telecommunications and computers. Mr. Bayless
is also the controlling stockholder and sole director of Jon W. Bayless,
Inc., the general partner of Atlantic Partners L.P., which is the general
partner of Citi Growth Fund L.P., a venture capital investment firm. Dr.
Bayless currently serves as a director of 3DX Technologies Inc. and of
several private companies. Dr. Bayless is also Chairman of the Board of
Directors of Shared Resource Exchange, Inc. Shared Resource Exchange, Inc.
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in
August 1996. A plan under Chapter 11 has been approved. Dr. Bayless has held
faculty positions at Southern Methodist University, Virginia Polytechnic
Institute, and the Catholic University of America. He holds patents in the
field of digital telecommunications, and is a senior member of the Institute
of Electronic Engineers. Dr. Bayless earned his B.S. degree in electrical
engineering at the University of Oklahoma. He earned his M.S. degree in
electrical engineering at the University of Alabama, and his Ph.D. in
electrical engineering at Arizona State University.
HARVEY B. CASH has been a Director of the Company since April 1994. Mr. Cash
is a general partner of InterWest Partners, a venture capital firm in Menlo
Park, California which he joined in 1985. Mr. Cash serves on the board of
directors of Benchmarq Microelectronics, Liberte Inc., AMX Corporation,
i2 Technologies Inc. and Aurora Electronics, Inc. He is also an advisor to
Austin Ventures. Mr. Cash received a B.S. in electrical engineering
from Texas A&M University and an M.B.A. from Western Michigan University.
CLIFFORD H. HIGGERSON has been a Director of the Company since April 1994.
Mr. Higgerson has since 1991 been a general partner of Vanguard Venture
Partners, a venture capital firm specializing in high technology start-
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<PAGE> 16
ups, located in Palo Alto, California. Prior to joining Vanguard in July
1991, Mr. Higgerson was the managing partner of Communications Ventures, Inc.
and prior to that was a Managing Partner of Hambrecht & Quist. Mr. Higgerson
is also a director of Advanced Fibre Communications and Digital Microwave
Corp. Mr. Higgerson earned his B.S. in electrical engineering from the
University of Illinois and an M.B.A. in finance from the University of
California at Berkeley.
BILLY B. OLIVER has been a Director of the Company since June 1996. Since
his retirement in 1985 after nearly 40 years of services at AT&T, Mr. Oliver
has worked as a self-employed communications consultant. During his last 15
years with AT&T, he held the position of Vice President, Engineering Planning
and Design, where he was directly involved in and had significant
responsibility for the evolution of AT&T's long distance network during that
period. He was a co-recipient of the Alexander Graham Bell Medal for the
conception and implementation of Nonhierarchical Routing in AT&T's network.
Mr. Oliver is also a director of Digital Microwave Corp., Communications
Network Enhancement Inc. and Enterprise Network Services Inc. Mr. Oliver
earned his B.S.E.E. degree from North Carolina State University.
MICHAEL J. ZAK has been a Director of the Company since December 1994. He
has been employed by Charles River Ventures of Boston, Massachusetts since
1991 and has been a general partner of the general partner of Charles River
Partnership VII and its related entities since 1993. From 1986 through 1991,
he was a founder and corporate officer of Concord Communications, Inc., a
manufacturer of data communications systems. He is a director of ON
Technology Corporation as well as seven other private companies. Mr. Zak has a
B.S. degree in engineering from Cornell University and an M.B.A. from Harvard
Business School.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Andrew C. Petrik filed a late Form 3 reporting his initial statement of
beneficial ownership of the Company's stock. Joseph R. Chinnici filed a late
Form 4 reporting two transactions. Mark R. Cummings and Harvey B. Cash each
filed a late Form 4 each reporting a single transaction and Clifford H.
Higgerson filed a late Form 4 reporting four transactions.
ITEM 2. PROPERTIES
The Company's principal executive offices, sales, marketing and product
development functions are located in Linthicum, Maryland in a 96,000 square
foot facility. The Company's manufacturing facilities are located in Savage,
Maryland and consist of approximately 50,500 square feet under a lease that
will expire in December 2001, absent exercise of a renewal option for an
additional five years. The Company's systems integration and test, pilot
production and customer service and support functions are conducted in an
approximately 57,000 square foot facility near the Linthicum headquarters.
The Company has leased additional facilities of approximately 68,000 square
feet in the Linthicum area, where the Company intends to transfer its
principal executive offices in the second or third quarter of fiscal 1998.
The Company's current 96,000 square foot facility would then be converted
almost entirely to research and development functions. The Company added
leased non-manufacturing facilities during the fourth quarter of fiscal 1997
in Atlanta, Georgia and in Middletown, New Jersey to be used for product
development, sales and marketing, and customer support activities. The
Company also expects to lease additional manufacturing facilities in the
Linthicum area of approximately 50,000 to 100,000 square feet during fiscal
1998.
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<PAGE> 17
ITEM 3. 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. Following the filing of the Company's
answer, Pirelli dedicated to the public and withdrew from the lawsuit all
infringement claims relating to one of the five patents. In September 1997,
Pirelli withdrew another patent from the suit, leaving three patents at
issue. Expert discovery proceedings are ongoing, and are currently expected
to be completed by January 31, 1998, with trial expected no earlier than mid-
1998.
In February, 1997, the Company 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 infringed at least two of the
Company's patents. The Company's complaint sought a ban on the importation
by Pirelli into the U.S. of any infringing 32 channel system. A formal
investigative proceeding was instituted by the ITC on April 3, 1997. On
November 24, 1997, the parties settled the matter by entry of a Consent
Order, which is currently being reviewed by the ITC. Under the Consent Order,
Pirelli has agreed not to import into the United States WDM components and or
systems which infringe the Company's patented in fiber Bragg gratings-based
WDM systems.
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. In September
1997, the Company withdrew one of the three patents from the suit. The lawsuit
seeks treble damages, attorneys' fees and costs, as well as permanent injunctive
relief against the alleged infringement. The two patents now at issue relate to
certain of Pirelli's cable television equipment, and to certain Pirelli
fiberoptic communications equipment announced by Pirelli in January 1997 as
being deployed in a field trial in the MCI network. Motions for summary judgment
by both parties are currently pending on the issue of infringement as it relates
to the cable television patent, and Pirelli has also filed a motion for summary
judgment of invalidity on this patent. As to the second of the two patents, on
December 5, 1997, the court issued an order granting partial summary judgment
for Pirelli on the issue of non-infringement, and denying Pirelli's motion for
summary judgment of invalidity of this patent. Trial is currently scheduled for
January 1998. There is no assurance that the Company's pending motion as to the
cable television patent will be granted, or that Pirelli's motions will be
denied. In the event Pirelli's motions are granted, the Company may appeal.
The Company continues to believe its MultiWave 1600 system does not infringe
any valid claim of the three remaining Pirelli patents and believes certain of
the Pirelli patents and/or claims are invalid. The Company is defending itself
vigorously, and is planning on all remaining litigation proceeding through
trial. 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 recorded a charge of approximately $7.5 million in
estimated legal and related costs associated with these proceedings during
fiscal 1997. 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 in future periods depending on the
course of the legal proceedings.
The Pirelli proceedings have been and will continue to be costly and
involve a substantial diversion of the time and attention of some members of
management. Further, the Company believes Pirelli and other competitors
have used 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 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.
In the Delaware litigation, the so-called "Markman" hearing was conducted
in September 1997. Markman hearings are pre-trial proceedings required in
all patent infringement litigation, and result in rulings by the trial judge
on certain issues of patent claim construction. These rulings then become
the basis for later jury determination of the infringement claims, and can be
very influential in determining the outcome of the litigation. The Delaware
court's Markman ruling was issued in November. The Company believes the
Markman ruling is generally favorable to the Company's position, and nothing
in the ruling has changed the Company's view that its MultiWave 1600 system
does not infringe any valid claim of the three remaining Pirelli patents and
believes certain of the Pirelli patents and/or claims are invalid. Pirelli has
filed a motion for reargument of certain portions of the court's ruling.
16
<PAGE> 18
As the Delaware proceeding approaches trial, the Company expects pre-trial
motions, including motions for summary judgment like those filed in the Virginia
litigation, will be filed by both parties with a view to narrowing or disposing
of one or more of the claims. The Company believes that rulings on such motions,
whether the motions are made by CIENA or Pirelli, may but most likely will not
result in complete disposition of all litigation, and continues to plan on going
to trial in all litigation. The Company also anticipates that as the
proceedings converge toward trial, either or both parties may take actions to
amend or add to the patent infringement claims already pending. The Company
continues to believe that its MultiWave systems do not infringe any valid claims
of any patents held by Pirelli.
There can be no assurance that the Company will be successful in the Pirelli
litigation, and an adverse determination in the Delaware court, either on a
motion for summary judgment or in trial, could result from a finding of
infringement of only one claim of a single patent. The Company may settle the
case 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 MultiWave 1600 system until it was able to implement a non-infringing
alternative design to any portion of the system to which such a determination
applied. However, there can be no assurance that any settlement will be reached
by the parties. 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.
Kimberlin Litigation. Kevin Kimberlin and parties controlled by him (the
"Kimberlin Parties") are owners of Common Stock of the Company, the
substantial majority of which has been derived from the conversion at the
time of the Company's IPO of Series A, Series B and Series C Preferred Stock
then owned by them. On November 20, 1996, the Kimberlin Parties filed suit
in U.S. District Court for the Southern District of New York against the
Company, and certain directors of the Company, alleging that the Kimberlin
Parties were entitled to purchase additional shares of Series C Preferred
Stock at the time of the closing of the Series C Preferred Stock financing,
but were denied that opportunity by the defendants. The lawsuit alleges that
certain rights of first refusal existing under the Series B Preferred Stock
Purchase Agreement entitled the Kimberlin Parties to purchase more shares of
Series C Preferred Stock than were in fact purchased by them at the time of
the closing of the Series C Preferred Stock financing in December 1995. The
lawsuit claims breach of contract, breach of fiduciary duty and violation of
Securities and Exchange Commission Rule 10b-5 by the defendants. On January
6, 1997, the Company filed its answer to the Kimberlin Parties complaint, and
filed a counterclaim for rescission of the sale of the shares of Series C
Preferred Stock purchased by the Kimberlin Parties in the Series C Preferred
Stock financing. The Kimberlin Parties amended their complaint in May 1997,
alleging that the same facts and conduct with respect to the private
placement of Series C Preferred Stock represent a violation of federal
insider trading laws.
The number of shares to be purchased by each party to the Series C
Preferred Stock financing was communicated in writing to the Kimberlin
Parties in December 1995 prior to the Series C closing. Further, as
permitted under the Series B Preferred Stock Purchase Agreement, the Series C
Preferred Stock Purchase Agreement expressly stated that all rights of first
refusal referred to in the lawsuit were waived. The required number of
Series B investors, including the Kimberlin Parties, signed the Series C
Preferred Stock Purchase Agreement containing that waiver. In July 1996, the
Kimberlin Parties reaffirmed to the Company in writing that their beneficial
ownership of shares did not include any shares which they have subsequently
claimed in the lawsuit they were entitled to purchase. The Kimberlin Parties
allege that they were misled into waiving their right of first refusal, and
did not discover that they had been misled until October 1996.
The Company believes that the Kimberlin Parties' claims, brought as the
Company's IPO was being prepared, and the amended claims, are without merit
and intends to defend itself vigorously. The Company has moved for summary
judgment on the entire matter, including the Company's counterclaim for
rescission. The Company believes the motion for summary judgment should be
granted, but there is no assurance of that outcome. If the motion is not
granted the Company intends to proceed to trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during fiscal 1997.
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
since the Company's initial public offering on February 7, 1997 under the
Nasdaq symbol CIEN. The following table sets forth for the fiscal periods
indicated the high and low sales prices of the Common Stock, as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
Price Range of
Common Stock
------------
High Low
---- ---
<S> <C> <C>
Fiscal Year 1997
Period of February 7, 1997 to April 30, 1997.... $44.00 $22.25
Third Quarter ended July 31, 1997............... $57.25 $28.50
Fourth Quarter ended October 31, 1997........... $63.62 $43.00
</TABLE>
The closing sale price for the Common Stock on October 31, 1997 was $55.00.
The market price of the Company's Common Stock has fluctuated
significantly and may be subject to significant fluctuations in the future.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk Factors."
As of October 31, 1997, there were approximately 557 holders of record of
the Company's Common Stock and 99,287,653 shares of Common Stock outstanding.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
18
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included in Item 8. "Financial Statements
and Supplementary Data".
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 2,
1992) YEAR ENDED OCTOBER 31,(1)
THROUGH -------------------------------------------------
OCTOBER 31,
1993(1) 1994 1995 1996 1997
-------------- -------- -------- -------- ---------
(in thousands except share and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue ........................... $ - $ - $ - $ 54,838 $ 373,827
Cost of goods sold ................ - - - 21,844 136,187
-------------- -------- -------- -------- ---------
Gross Profit .................... - - - 32,994 237,640
Operating expenses
Research and development ........ - 1,287 6,361 8,922 23,308
Selling and marketing ........... - 295 481 3,780 20,899
General and administrative ...... 123 787 896 3,905 16,731
-------------- -------- -------- -------- ---------
Total operating expenses .......... 123 2,369 7,738 16,607 60,938
-------------- -------- -------- -------- ---------
Income (loss) from operations ..... (123) (2,369) (7,738) 16,387 176,702
Other income (expense), net ....... - (38) 109 581 7,256
-------------- -------- -------- -------- ---------
Income (loss) before income
Taxes ........................... (123) (2,407) (7,629) 16,968 183,958
Provision for income taxes ........ - - - 2,250 71,013
-------------- -------- -------- -------- ---------
Net income (loss) ................. $ (123) $ (2,407) $ (7,629) $ 14,718 $ 112,945
============== ======== ======== ======== =========
Pro forma net income per common and
common equivalent share (2) ..... $ 0.15 $ 1.09
======== =========
</TABLE>
<TABLE>
<CAPTION>
October 31,(1)
---------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 10 $ 1,908 $ 5,032 $ 22,557 $ 263,085
Working capital ................................ (35) 932 3,069 35,856 325,050
Total assets ................................... 13 2,497 7,383 67,301 447,228
Long-term obligations, excluding current portion - 392 856 2,673 1,200
Mandatorily redeemable preferred stock ......... - 3,492 14,454 40,404 -
Stockholders' equity (deficit) ................. (35) (2,388) (9,930) 4,970 363,584
</TABLE>
(1) The Company has a 52 or 53 week fiscal year which ends on the Saturday
nearest to the last day of October in each year. For purposes of financial
statement presentation, each fiscal year is described as having ended on
October 31. Fiscal 1994, 1995, and 1997 comprised 52 weeks and fiscal 1996
comprised 53 weeks.
(2) The pro forma weighted average common and common equivalent shares
outstanding for year ended October 31, 1996 and 1997 was 99,111,000 and
103,765,000, respectively. Net income 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 outstanding include Common Stock, stock options
and warrants using the treasury stock method and the assumed conversion of
all outstanding shares of Convertible Preferred Stock into Common Stock.
See Note 1 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's consolidated
financial statements and notes thereto included elsewhere in this report on
Form 10-K. The information in this Form 10-K contains certain
forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Risk Factors"
and "Business" as well as those discussed elsewhere in this Form 10-K.
OVERVIEW
CIENA Corporation is a leading supplier of DWDM systems for fiberoptic
communications networks. CIENA's DWDM systems alleviate capacity
constraints and enable flexible provisioning of additional bandwidth on
high-traffic routes in carriers' networks.
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 12, 1997.
Net proceeds from the initial public offering were approximately $121.8
million with an additional $0.6 million received from the exercise of
certain outstanding warrants. On July 8, 1997 the Company completed a
public offering of 10,477,216 shares of which 1,252,060 shares were sold
by the Company, inclusive of 252,060 shares from the exercise of the
underwriters' over-allotment option, at a price of $44 per share. Net
proceeds to the Company from the July public offering were approximately
$52.2 million. The Company has added the net proceeds from the public
offerings 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.
The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain
customer acceptance, revenue is deferred until the terms of acceptance are
satisfied. Revenue for installation services is recognized as the services
are performed unless the terms of the supply contract combine product
acceptance with installation, in which case revenues for installation
services are recognized when the terms of acceptance are satisfied and
installation is completed. Amounts received in excess of revenue recognized
are recorded as deferred revenue. For distributor sales where risks of
ownership have not transferred, the Company recognizes revenue when the
product is shipped through to the end user.
All of the Company's revenue of $54.8 million through October 31, 1996
was derived from MultiWave 1600 system sales to Sprint. Revenue for the
fiscal year ended October 31, 1997 was $373.8 million and consisted primarily
of MultiWave 1600 systems sales to Sprint, WorldCom, DTI, and through the
Company's Japanese distributor Nissho, to Teleway. The DTI installation
represented the Company's first deployment of the MultiWave 1600 as part
of a newly built long distance fiberoptic route.
In June 1997, the Company signed an agreement to supply MultiWave 1600
systems to Mercury, a U.K. based subsidiary of Cable and Wireless
Communications Group. The agreement calls for delivery and installation
beginning in August 1997 and continuing through December 1997. The Company
also entered into an agreement with BICC Cables, plc, to assist the
Company in the delivery of service and support to Mercury in connection
with this installation and operation. Revenue recognition for the
entirety of the Mercury shipments has been deferred until completion of
field testing.
In June 1997, the Company announced a next generation version of the
MultiWave 1600 system, the MultiWave Sentry, which includes enhancements
that significantly expand the ability of the MultiWave system to interface
with data communications equipment in addition to other types of
transmission equipment and increase the distance which can be spanned
between transmission terminals. The Company also announced a trial
evaluation agreement with AT&T, which calls for the Company to supply six
16-channel MultiWave Sentry systems for laboratory interoperability
testing. In August 1997, the Company reached agreement on a five-year
supply contract with AT&T. The supply agreement does not obligate AT&T to
make any minimum purchases from the Company.
20
<PAGE> 22
In September 1997, the Company signed an agreement through Nissho to
supply MultiWave Sentry to Japan Telecom. The agreement calls for delivery
and installation over several months beginning in October 1997. Revenue
recognition for the Japan Telecom shipments has been deferred until
completion of field testing and product acceptance.
The Company is engaged in continuing efforts to expand its
manufacturing capabilities. In April 1997 the Company moved its
non-manufacturing operating functions to an approximately 96,000 square
foot facility near the Baltimore/Washington International Airport in
Linthicum, Maryland. During the third quarter ended July 1997, the Company
completed the process of renovating the vacated areas of the 50,500 square
foot facility in Savage, Maryland for manufacturing capabilities. In March
1997, the Company signed a lease for an additional facility of
approximately 57,000 square feet located in Linthicum to be used for
manufacturing and support functions.
In September 1997 the Company leased an additional non-manufacturing facility
of approximately 68,000 square feet in the Linthicum area, which it will use to
transfer its principal executive offices in the second and third quarter of
fiscal 1998. The Company's current 96,000 square foot facility would then be
converted almost entirely to research and product development functions. The
Company added leased non-manufacturing facilities during the fourth quarter of
fiscal 1997 in Atlanta, Georgia and in Middletown, New Jersey. These facilities
will be used for product development, customer support and other selling and
marketing activities. The Company also expects to lease additional
manufacturing facilities in the Linthicum area of approximately 50,000 to
100,000 square feet during fiscal 1998.
As of October 31, 1997 the Company and its subsidiaries employed 841
persons, which was an increase of 616 persons over the 225 employed on
October 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 1995, 1996 AND 1997
REVENUE. During the fiscal year ended October 31, 1995 the Company was in
the development stage and generated no revenue. The Company recognized $373.8
million and $54.8 million in MultiWave 1600 system revenue for the years
ended October 31, 1997 and 1996, respectively. Revenue from installation
services was $0.3 million for fiscal 1997 compared to no installation service
revenue in fiscal 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. Initial field trials, customer acceptance,
and the carrying of live traffic each occurred during fiscal 1997 in the
WorldCom, Teleway, and DTI networks.
Sprint and WorldCom accounted for $179.4 million (48.0%) and $184.5
million (49.4%), respectively of the Company's revenue during fiscal 1997.
Revenue derived from foreign sales accounted for less than 2% of the
Company's revenues during fiscal 1997. The Company expects fiscal 1998
revenue from both Sprint and WorldCom to account for a lower percentage of
the Company's total fiscal 1998 revenue and also expects an increase over the
fiscal 1997 in the percentage of 1998 revenue derived from foreign sales.
The Company expects a decrease in the amount of revenues from MultiWave
1600 systems in fiscal 1998 as compared to fiscal 1997. The Company expects
this decline in MultiWave 1600 revenue will be offset by the initial product
acceptance and revenue recognition from system sales of MultiWave Sentry,
MultiWave FireFly, MultiWave 4000 and additional installation services but
given the recent introduction of these products, there can be no assurance
that this will be the case. See"-Risk Factors."
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, and overhead related to the Company's manufacturing and
installation operations. Gross profit was $237.6 million and $33.0 million
for fiscal years 1997 and 1996, respectively, with no comparable gross profit
for fiscal 1995. Gross margin was 63.6% and 60.2% for fiscal 1997 and 1996,
respectively. The increase in gross margin was affected by fixed overhead
costs being allocated over a larger revenue base, an improvement in
manufacturing efficiencies, and reductions in component costs.
21
<PAGE> 23
The Company's gross margins in the future may be under pressure by a
number of factors, including competitive market pricing, manufacturing
volumes and efficiencies and fluctuations in component costs. See "-Risk
Factors". During fiscal 1998 the Company expects that future gross margins
may be affected by the mix of product features and configurations sold in a
period as well as the extent of installation services provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$23.3 million, $8.9 million, and $6.4 million for fiscal 1997, 1996, and
1995, respectively. The approximate $14.4 million or 161% increase from
fiscal 1996 to 1997 and the approximate $2.6, million or 40% increase from
fiscal 1995 to fiscal 1996 in research and development expenses related to
increased staffing levels, purchases of materials used in development of new
or enhanced product prototypes, and outside consulting services in support of
certain developments and design efforts. During fiscal 1997 and 1996 ,
research and development expenses were 6.2% and 16.3% of revenue,
respectively. The Company expects that its research and development
expenditures will continue to increase in absolute dollars and perhaps as a
percentage of revenue during fiscal 1998 to support the continued development
of the various DWDM products, 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 were $20.9
million, $3.8 million, and $0.5 million for fiscal 1997, 1996, and 1995,
respectively. The approximate $17.1 million or 453% increase from fiscal 1996
to 1997 and the approximate $3.3 million or 686% increase from fiscal 1995 to
fiscal 1996 in selling and marketing expenses 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 fiscal 1997 and 1996, selling and marketing
expenses were 5.6% and 6.9% of revenue, respectively. The Company anticipates
that its selling and marketing expenses will increase in absolute dollars and
perhaps as a percentage of revenue during fiscal 1998 as additional
personnel are hired and additional offices are opened to allow the Company to
pursue new market opportunities. The Company also expects the portion of
selling and marketing expenses attributable to technical assistance and field
support will increase as the Company's installed base of operational
MultiWave systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $16.7 million, $3.9 million, and $0.9 million for fiscal 1997, 1996, and
1995, respectively. The approximate $12.8 million or 328% increase from
fiscal 1996 to 1997 in general and administrative expenses was primarily the
result of a $7.5 million charge for actual and estimated legal and related
costs associated with ongoing and pending litigation. See Item 3. "Legal
Proceedings". The remaining $5.3 million increase was primarily the result of
increased staffing levels and outside consulting services. The approximate
$3.0 million or 336% increase from fiscal 1995 to 1996 in general and
administrative expenses was also the result of increased staffing levels and
outside consulting services. During fiscal 1997 and 1996, general and
administrative expenses were 4.5% and 7.1% of revenue, respectively. The
Company believes that its general and administrative expenses will increase
in absolute dollars and perhaps as a percentage of revenue during fiscal 1998
as a result of the expansion of the Company's administrative staff required
to support its expanding operations and legal expenses associated with
pending litigation.
OPERATING PROFIT. During fiscal 1995 the Company was in the development
stage and generated no revenue and had a loss from operations of $7.7
million. The Company's operating profit for fiscal 1997 and 1996 was $176.7
million or 47.3% of revenue and $16.4 million or 29.9% of revenue,
respectively. The Company expects that its operating profit will decrease as
a percentage of revenue as it continues to hire additional personnel and
increase operating expenses to support its business.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on the Company's cash and cash equivalents, net of
interest expense associated with the Company's debt obligations. Other income
(expense), net, was $7.3 million, $0.6 million, and $0.1 million for fiscal
1997, 1996, and 1995, respectively. The year to year increase in other income
(expense), net, was primarily the result of the investment of the net
proceeds of the Company's stock offerings.
22
<PAGE> 24
PROVISION (BENEFIT) FOR INCOME TAXES. During fiscal 1995, a valuation
allowance had been recorded to offset the Company's net deferred tax assets,
including possible future benefit from realization of tax operating loss
carryforwards. The recording of such valuation allowance was based upon
management's determination that realization of the net deferred tax assets
was not "more likely than not" (as defined in Statement of Financial
Accounting Standards No. 109, " Accounting for Income Taxes"). During fiscal
1996, the Company received product acceptance from its initial customer and
started profitable operations, at which time the Company fully reversed its
previously established deferred tax valuation allowance. The provision for
income taxes for fiscal 1996 of $2.3 million is net of an approximate tax
benefit of $4.6 million related to the reversal of the deferred tax valuation
allowance. See Note 7 of Notes to Consolidated Financial Statements. The
Company's provision for income taxes was 38.6% of pre-tax earnings, or $71.0
million for fiscal 1997.
23
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth the operating results and percentage of
revenue represented by certain items in the Company's statements of
operations for each of the eight quarters in the period ended October 31,
1997. This information is unaudited, but in the opinion of the Company
reflects all adjustments (consisting only of normal recurring adjustments)
that the Company considers necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any
future period. Operating results as a percentage of revenue for the quarters
ended January 31 and April 30, 1996 are excluded due to the absence of
revenue for those periods:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-----------------------------------------------------------------------
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31,
1996 1996 1996 1996 1997
---------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue ............................... $ - $ - $ 16,923 $ 37,915 $ 53,933
Cost of goods sold .................... - - 7,346 14,498 20,832
-------- --------- --------- --------- ---------
Gross profit ....................... - - 9,577 23,417 33,101
-------- --------- --------- --------- ---------
Operating expenses:
Research and development ........... 2,473 1,746 1,964 2,739 3,050
Selling and marketing .............. 491 700 1,130 1,459 2,598
General and administrative ......... 499 526 1,064 1,816 6,295
-------- --------- --------- --------- ---------
Total operating expenses .............. 3,463 2,972 4,158 6,014 11,943
-------- --------- --------- --------- ---------
Income (loss) from operations ......... (3,463) (2,972) 5,419 17,403 21,158
Other income (expense), net ........... 129 237 75 140 290
-------- --------- --------- --------- ---------
Income (loss) before income taxes ..... (3,334) (2,735) 5,494 17,543 21,448
Provision (benefit) for income taxes .. - - (4,600) 6,850 8,365
-------- --------- --------- --------- ---------
Net income (loss) ..................... $ (3,334) $ (2,735) $ 10,094 $ 10,693 $ 13,083
======== ========= ========= ========= =========
Pro forma net income (loss) per
common and common equivalent
share (1) (2) ....................... $ (0.03) $ (0.03) $ 0.10 $ 0.11 $ 0.13
======== ========= ========= ========= =========
Pro forma weighted average common and
common equivalent shares
outstanding (1) ..................... 99,111 99,111 99,111 99,111 99,425
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended
---------------------------------------
April 30, Jul. 31, Oct. 31
1997 1997 1997
--------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue ............................... $ 86,669 $ 112,189 $ 121,036
Cost of goods sold .................... 32,008 40,158 43,189
--------- ---------- ----------
Gross profit ....................... 54,661 72,031 77,847
--------- ---------- ----------
Operating expenses:
Research and development ........... 4,699 7,245 8,314
Selling and marketing .............. 4,485 6,315 7,501
General and administrative ......... 2,106 2,630 5,700
--------- ---------- ----------
Total operating expenses .............. 11,290 16,190 21,515
--------- ---------- ----------
Income (loss) from operations ......... 43,371 55,841 56,332
Other income (expense), net ........... 1,877 1,453 3,636
--------- ---------- ----------
Income (loss) before income taxes ..... 45,248 57,294 59,968
Provision (benefit) for income taxes .. 17,646 22,345 22,657
--------- ---------- ----------
Net income (loss) ..................... $ 27,602 $ 34,949 $ 37,311
========= ========== ==========
Pro forma net income (loss) per
common and common equivalent
share (1) (2) ....................... $ 0.26 $ 0.33 $ 0.35
========= ========== ==========
Pro forma weighted average common and
common equivalent shares
outstanding (1) ..................... 104,457 105,296 106,308
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended
---------------------------------------------------------------------------------------
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31, Oct. 31,
1996 1996 1996 1996 1997 1997 1997 1997
---------- -------- --------- -------- -------- -------- -------- --------
(as a percentage of revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............................... - - 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold .................... - - 43.4 38.2 38.6 36.9 35.8 35.7
---------- -------- --------- ------- ------- ------- -------- -------
Gross profit ....................... - - 56.6 61.8 61.4 63.1 64.2 64.3
Operating expenses:
Research and development ........... - - 11.6 7.2 5.7 5.5 6.5 6.9
Selling and marketing .............. - - 6.7 3.8 4.8 5.2 5.6 6.2
General and administrative ......... - - 6.3 4.8 11.7 2.4 2.3 4.7
---------- -------- --------- ------- ------- ------- -------- -------
Total operating expenses .............. - - 24.6 15.8 22.2 13.1 14.4 17.8
---------- -------- --------- ------- ------- ------- -------- -------
Income (loss) from operations ......... - - 32.0 46.0 39.2 50.0 49.8 46.5
Other income (expense), net ........... - - 0.4 0.3 0.6 2.2 1.3 3.0
---------- -------- --------- ------- ------- ------- -------- -------
Income (loss) before income taxes ..... - - 32.4 46.3 39.8 52.2 51.1 49.5
Provision (benefit) for income taxes .. - - (27.2) 18.1 15.5 20.3 19.9 18.7
---------- -------- --------- ------- ------- ------- --------- -------
Net income (loss) ..................... - - 59.6 % 28.2 % 24.3 % 31.9 % 31.2 % 30.8 %
========== ======== ========= ======= ======= ======= ========= =======
</TABLE>
(1) The pro forma net income (loss) per common and common equivalent share
are presented on a pro forma basis for all periods stated, except for
the quarters ended July 31, 1997 and October 31, 1997, which is presented
on a historical basis. Pro forma weighted average common and common
equivalent shares outstanding include Common Stock, stock options and
warrants using the treasury stock method and the assumed conversion of
all outstanding shares of Convertible Preferred Stock into Common Stock.
See Note 1 of Notes to Consolidated Financial Statements.
(2) The sum of the quarterly earnings per share for fiscal 1997 does not
equal the reported annual earnings per share for fiscal 1997 due to the
effect of the Company's stock issuances during the year.
24
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS CONTINUED
The Company's quarterly operating results have varied and are expected to
vary significantly in the future. These fluctuations may be caused by many
factors, including, among others, the size and timing of customer orders and
the related field testing and product acceptance cycle times; increases in
manufacturing and operating expenses in anticipation of expected customer
demand; effective transition and market acceptance of new and multiple
product lines; competitive pricing pressures; mix of products and services
sold; intellectual property litigation; and general economic conditions. As
a result of the foregoing and other factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future
performance. See "-Risk Factors".
The Company's revenue increased significantly on a quarter-to-quarter basis
since the Company's initial customer acceptance during the quarter ended July
31, 1996 to the quarter ended July 31, 1997. The fourth quarter ended October
31, 1997 posted an increase in revenue as compared to the third quarter ended
July 31, 1997 with moderating sequential growth in percentage terms as compared
to the previous quarters. The moderating revenue growth in the fourth quarter of
fiscal 1997 was attributable to a year-end wind-down of the annual capital
equipment procurement cycle of one of the two primary customers of the Company.
The Company currently expects revenue for the first quarter of fiscal 1998
to show sequential growth, with the rate to be comparable or perhaps modestly
above that experienced between the third and fourth quarters of fiscal 1997.
However, due to the evolving nature of the markets for the Company's products
and other factors, there can be no assurance that the Company's revenues will
increase on a quarter-to-quarter basis or at all in future periods. See "-Risk
Factors".
Operating expenses have generally increased in absolute dollars over the
quarters shown as the Company has increased staffing and related infrastructure
costs in its research and development, selling and marketing, and administrative
functions. Quarter-to-quarter growth in research and development was primarily
attributable to increased staffing levels, purchases of materials used in the
development of new or enhanced prototypes, and outside services in support of
certain developments and design efforts. Quarter-to-quarter growth in selling
and marketing 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. For the quarters ended
January 31, 1997 and October 31, 1997, the increases in general and
administrative costs were primarily the result of a $5.0 and $2.5 million
charge, respectively, to accrue estimated legal and related costs associated
with pending litigation. See Item 3."Legal Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations and capital expenditures from
inception through fiscal 1996 principally through the sale of Convertible
Preferred Stock for proceeds totaling $40.6 million and capital lease
financing totaling $4.1 million. The Company completed its initial public
offering of Common Stock in February 1997 and realized net proceeds of
approximately $121.8 million with an additional $0.6 million received from
the exercise of certain outstanding warrants. In July 1997, the Company
completed a public offering of Common Stock and realized net proceeds of
approximately $52.2 million. During fiscal 1997 the Company also realized
approximately $53.1 million in tax benefits from the exercise of stock
options and certain stock warrants. As of October 31, 1997, the Company had
$263.1 million in cash and cash equivalents.
The Company's operating activities used cash of $6.6 million in fiscal
1995 and provided cash of $80.1 million and $0.6 million for fiscal 1997 and
1996, respectively. The cash used in operations in fiscal 1995 was accounted
for primarily by the Company's development stage operating losses. Cash
provided by operations in fiscal 1997 and 1996 was principally attributable
to net income adjusted for 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 inventories due to increased revenue and
to the general increase in business activity.
Cash used in investing activities in fiscal 1995, 1996 and 1997 were $2.0
million, $11.5 million and $66.6 million, respectively. Included in
investment activities were capital equipment expenditures in fiscal 1995,
1996 and 1997 of $1.9 million, $9.8 million and $51.7 million, respectively.
These capital equipment expenditures were primarily for test, manufacturing
and computer equipment. The Company expects additional capital equipment
expenditures to be made during fiscal 1998 to support selling and marketing,
manufacturing and product development activities. In addition, since its
inception the Company's investing activities have included the use of
25
<PAGE> 27
$17.3 million for the construction of leasehold improvements and expects
to use an additional $9.9 million of capital in the construction of leasehold
improvements for its new facilities. See Item 2. "Properties". The Company
intends lease additional facilities of 50,000 to 100,000 square feet in
mid-1998 and may spend up to $5.0 million to $10.0 million in improving such
facilities as and to the extent necessary to meet expansion requirements.
The Company believes that its existing cash balance 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 FACTORS
Concentration of Potential Customers; Dependence on Major Customers. The
Company is currently dependent on two customers and has relatively few
potential customers, consisting almost exclusively of long distance and other
telecommunications carriers using fiberoptic networks. The number of
potential customers may also decrease if and as customers merge with or
acquire one another. In November 1997, WorldCom and MCI announced an
agreement to merge. The distraction sometimes attendant to such mergers could
delay, limit or otherwise adversely affect the capital equipment purchasing
patterns of the parties to them, with a corresponding adverse effect on the
Company's sales. While the Company has seen little evidence of such an effect
to date, the Company's business will in any case for the foreseeable future be
dependent on a small number of existing and potential customers. Substantially
all of the Company's revenue for fiscal 1997 was derived from Sprint and
WorldCom; a substantial majority of the Company's revenue for fiscal 1998 is
expected to be derived from Sprint, WorldCom and, depending on the results of
ongoing testing and evaluation, AT&T. WorldCom may terminate all or any part of
an outstanding purchase order upon the payment of a termination fee and the
Company's agreement with WorldCom does not require minimum purchase commitments.
Although the Company now has five customers, there can be no assurance that the
Company will be able to develop additional customers or that the Company will
not continue to be dependent on Sprint and WorldCom.
Although the Company has previously announced a trial evaluation agreement
and a five year supply agreement with AT&T, before AT&T would become a
purchasing customer, the Company will have to be successful in rigorous testing
and evaluation which are ongoing over the next several months. The Company
believes it will be successful in such testing and evaluation, but there is no
assurance of that outcome, nor is there assurance as to when the period of
testing will be completed. Even if testing is successfully completed, the
Company does not expect shipments to begin until late in the first half of 1998
(with acceptance and revenue recognition to follow in the second half), and
in any event the Company is unable to predict the volume, duration or timing
of any purchases which might ensue from AT&T. The reduction, delay or
cancellation of orders, or a delay in shipment of the Company's products to
Sprint or WorldCom, or the inability to develop AT&T as a significant customer,
as well as additional customers in the telecommunications market, could and
likely would have a material adverse affect on the Company's business, financial
condition and results of operations.
The Company's dependence on sizable orders from very few customers makes
the relationship between the Company and each customer critically important
to the Company's business. While each customer relationship is typically
structured around a detailed, heavily negotiated contract, as the
relationship evolves over time, adjustments to such items as product
specifications, laboratory and field testing plans, customer forecasts and
delivery timetables, and installation and field support requirements may be
required in response to customer demands and expectations. The inability of
the Company to manage its customer relationships successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Additionally, the size and complexity of the Company's potential
customers, and the typically long and unpredictable sales cycles associated
with them, require the Company to make considerable early investments in
account management personnel, product customization efforts in both
engineering and manufacturing, and in some cases, facilities in proximity to
the customer's locations, without assurance of future revenues. For example,
due to the size and complexity of the AT&T network, the Company has invested
and expects over fiscal 1998 to continue to invest considerable financial,
engineering, manufacturing and logistics support resources in positioning the
commercial relationship to be successful, but has done so and will continue
to do so without any assurance as to the volume, duration or timing of any
purchases which might ensue from AT&T. The Company intends to make similar
investments in developing customer relationships with the RBOCs and CLECs, as
well as internationally. Over the near term, this investment of resources
will be evident in increased operating expenses and in a rise in the
Company's general overhead structure, with the result that the Company's near
term earnings may moderate or decline, even if revenues increase. If the
Company is unable to convert these investments into significant revenue
generating relationships by the second half of fiscal 1998, the Company's
business, financial condition and results
26
<PAGE> 28
of operations for the year could be materially and adversely affected.
Dependence on Effective Transition to Multiple Product Lines.
Substantially all the Company's revenues in fiscal 1997 were derived from
sales of its original product, the MultiWave 1600 system. The Company
believes the enhanced features of the 16 channel MultiWave Sentry, as well as
long distance carriers' increased interest in higher capacity systems, will
result in the largest portion of production capacity in fiscal 1998 being
shifted to the MultiWave Sentry and, to a lesser extent, the MultiWave 4000
and MultiWave Firefly systems. While much of the manufacturing process for
these systems is identical to that involved in the manufacture of the
MultiWave 1600, there are important differences in raw materials and
components, as well as even more precise performance specifications.
Manufacturing yields in the first several months of production may be
adversely impacted as the transition is made to full production of these new
systems. Additionally, not all of the component suppliers for these new
systems have demonstrated the ability to ramp up their production to keep
pace with the Company's needs. The Company must effectively manage the
transition in manufacturing with a minimum of delay or disruption in product
deliveries. The failure to do so would likely have an adverse effect on the
Company's customer relationships, with attendant risk of adverse effects on
the level and timing of ongoing customer orders, as well as on the
development of new customers. The Company believes that its experience in
accomplishing the ramp up of manufacturing capacity for the MultiWave 1600
will facilitate an effective manufacturing transition to the MultiWave
Sentry, MultiWave 4000, and MultiWave Firefly, but there can be no assurance
of that the Company will be successful in doing so.
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. Total
personnel grew from 225 at October 31, 1996 to 841 at October 31, 1997.
Total facilities' space will have increased from 50,500 square feet in one
facility as of the fiscal year ended October 31, 1996, to approximately
360,000 square feet in six facilities in Maryland by mid-1998. The Company
has leased approximately 40,000 square feet near Atlanta, Georgia to establish a
research and development support organization.
This expansion, and the attendant separation and relocation of various
functions to different facilities, has placed strains on the material,
financial and personnel resources of the Company and will continue to do
so. 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, who are among the most demanding
customers in the world in terms of requirements for quality, reliability,
timely delivery and post-installation field support. The rapid pace and
volume of new hiring, the timely build out of new facilities, and the
accelerated ramp up in manufacturing capacity, if not effectively managed,
could adversely affect the quality or efficiency of the Company's
manufacturing process. The conversion to full scale production in fiscal
1998 of the Company's new MultiWave Sentry, MultiWave 4000 and MultiWave
Firefly product lines will also present substantial management and
manufacturing challenges, as the scope of material planning and labor
involvement are different and more expansive than was the case with the
Company's original MultiWave 1600 product line.
Additionally, as the Company's installed base of equipment expands, the
Company must keep up the rapid pace and volume of new hiring and employee
training in important areas such as customer support. The Company's success
internationally may depend as much on the successful build up of support and
service functions as on product performance. Further, as the Company's base
of customers expands, particularly internationally, the number and breadth
of expertise of Company personnel needed to manage and, ultimately, satisfy
the unique requirements of each customer also increases.
The Company also continues to increase its flow of materials, optical
assembly, final assembly and final component module and system test
functions, as well as the size of its sales and marketing organization for
all product lines, 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 encountering increased demands for test
systems from various potential customers domestically and internationally.
Manufacturing capacity must be planned, and customer account management
personnel added, to accommodate these demands even though revenue for test
systems may not be realized until later, if at all.
Given the small number of existing and potential customers for the
Company's systems, as well as the widely varying volume requirements they may
have once a purchasing decision has been made, the adverse effect on the
27
<PAGE> 29
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.
Recent Product Introduction. The Company first began commercial shipments
of its MultiWave 1600 systems in May 1996 and its first operational systems
began carrying live traffic in October 1996. Accordingly, the Company's
MultiWave 1600 systems do not have a history of live traffic operation over an
extended period of time and the fully featured MultiWave Sentry and MultiWave
Firefly systems are not yet commercially deployed. The Company's history of
installation activity indicates that the newness and high precision nature of
DWDM 1600 equipment may require enhanced customer training and installation
support from the Company. The Company is aware of instances in which
installation and activation of certain MultiWave systems have been delayed due
to faulty modules or components used in these systems and, in a few cases, due
to interoperability adjustments required in the field to accommodate certain
customer operated transmission equipment. The Company is aware of few
performance issues once the systems are installed and operational. However, if
recurring or material reliability, quality or network monitoring problems should
develop, a number of material and adverse effects could result, including
manufacturing rework costs, high service and warranty expense, high levels of
product returns, delays in collecting accounts receivable, reduced orders from
existing customers and declining level of interest from potential customers.
Although the Company maintains accruals for product warranties, there can be no
assurance that actual costs will not exceed these amounts. There is a
considerable number of the Company's systems scheduled to be turned up for live
traffic operation over the next several months, and many already activated
systems may be scheduled to add new operating channels. The Company expects
there will be interruptions or delays from time to time in the activation of the
systems and the addition of channels, particularly because the Company does not
control all aspects of the installation and activation activities. If
significant interruptions or delays occur, or if their cause is not promptly
identified, diagnosed and resolved, confidence in MultiWave systems could be
undermined. An undermining of confidence in MultiWave systems would have a
material adverse effect on the Company's customer relationships, business,
financial condition and results of operations.
New Product Development Delays. The Company's ability to anticipate
changes in technology, industry standards, customer requirements and product
offerings and to develop and introduce new and enhanced products will be
significant factors in the Company's ability to remain a market leader in the
deployment of DWDM systems, and to maintain its financial strength. The
complexity of the technology involved in product development efforts in
the DWDM field, including product customization efforts for individual
customers, can result in unanticipated delays. The qualification and ramping
up of new suppliers for new or customized products requires extensive planning
and can result in unanticipated delays which affect the Company's ability to
deliver such products in a timely fashion. The failure in the future to
deliver new and improved products, or appropriately customized products, in a
timely fashion relative to customer expectations, including specifically the
delivery of MultiWave Sentry, MultiWave 4000 and MultiWave Firefly in the first
half of calendar 1998 so as to assure revenue recognition in the second half,
would have a material adverse effect on the Company's competitive position and
financial condition.
Competition. The Company believes the rapid pace at which the need for
higher and more cost-effective bandwidth has developed was not widely
anticipated in the global telecommunications industry. However, competition
in the global telecommunications industry historically has been dominated by
a small number of very large companies, each of which have greater financial,
technical and marketing resources, greater manufacturing capacity and more
extensive and established customer relationships with network operators than
the Company. Each of Lucent, Alcate, Nortel, NEC, Pirelli, Siemens and
Ericsson are expected to move aggressively to capture market share in the
DWDM market. The Company expects aggressive competitive moves from these
industry participants, which have to date included early announcement of
competing or alternative products, and significant price discounting. In
addition, Lucent, Alcatel, Nortel, NEC and Siemens are already providers of a
full complement of switches, fiberoptic transmission terminals and fiberoptic
signal regenerators and thereby can position themselves as vertically
integrated, "one-stop shopping" solution providers to potential customers.
Further, in certain cases, competitors have offered the Company's target
customers, on an immediate delivery basis, off-the-shelf TDM transmission
equipment at comparatively lower prices, with a promise to upgrade to DWDM or
other improved equipment in the future. Competitors have also offered the
newest TDM equipment, referred to as OC-192 (capable of 10 gigabit per second
transmission), with similar promises of upgrade.
The substantial system integration resources, sales and support staff and
manufacturing capability of the TDM suppliers, in combination with any
difference in timeliness of delivery, can be important to network operators.
As and when these competitors are able to offer DWDM systems in combination
with their own fiberoptic transmission terminals, they can be expected to
press further on the attractiveness of a "one-stop shopping" solution. While
28
<PAGE> 30
competition in general is broadly based on varying combinations of price,
manufacturing capacity, timely delivery, system reliability, service
commitment and installed customer base, as well as on the comprehensiveness
of the system solution in meeting immediate network needs and foreseeable
scaleability requirements, the Company's customers are themselves under
increasing competitive pressure to deliver their services at the lowest
possible cost. This pressure may result in pricing for DWDM systems becoming
a more important factor in customer decisions, which may favor larger
competitors which can spread the effect of price discounts in their DWDM
product lines across an array of products and services, and a customer base,
which are larger than the Company's.
Intellectual property disputes may also be asserted as part of a
competitive effort to reduce the Company's leadership position and limit its
ability to achieve greater market share, even if the merits of specific
disputes are doubtful. See "Proprietary Rights".
There can be no assurance that the Company will be able to compete
successfully with its competitors or that aggressive competitive moves faced
by the Company will not result in lower prices for the Company's products,
decreased gross profit margins, and otherwise have a material adverse effect
on its business, financial condition and results of operations.
Pirelli Litigation; Other Legal Proceedings. 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. Following the filing of the
Company's answer, Pirelli dedicated to the public and withdrew from the
lawsuit all infringement claims relating to one of the five patents. In
September 1997, Pirelli withdrew another patent from the suit, leaving three
patents at issue. Expert discovery proceedings are ongoing, and are
currently expected to be completed by January 31, 1998, with trial expected
no earlier than mid-1998.
In February, 1997, the Company 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 infringed at least two of the
Company's patents. The Company's complaint sought a ban on the importation
by Pirelli into the U.S. of any infringing 32 channel system. A formal
investigative proceeding was instituted by the ITC on April 3, 1997. On
November 24, 1997, the parties settled the matter by entry of a Consent
Order, which is currently being reviewed by the ITC. Under the Consent Order,
Pirelli has agreed not to import into the United States WDM components and or
systems which infringe the Company's patented in fiber Bragg gratings-based WDM
systems.
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. In September
1997, the Company withdrew one of the three patents from the suit. The lawsuit
seeks treble damages, attorneys' fees and costs, as well as permanent injunctive
relief against the alleged infringement. The two patents now at issue relate to
certain of Pirelli's cable television equipment, and to certain Pirelli
fiberoptic communications equipment announced by Pirelli in January 1997 as
being deployed in a field trial in the MCI network. Motions for summary judgment
by both parties are currently pending on the issue of infringement as it relates
to the cable television patent, and Pirelli has also filed a motion for summary
judgment of invalidity on this patent. As to the second of the two patents, on
December 5, 1997, the court issued an order granting partial summary judgment
for Pirelli on the issue of non-infringement, and denying Pirelli's motion for
summary judgment of invalidity of this patent. Trial is currently scheduled for
January 1998. There is no assurance that the Company's pending motion as to the
cable television patent will be granted, or that Pirelli's motions will be
denied. In the event Pirelli's motions are granted, the Company may appeal.
The Company continues to believe its MultiWave 1600 system does not infringe
any valid claim of the three remaining Pirelli patents and believes certain of
the Pirelli patents and/or claims are invalid. The Company is defending itself
vigorously, and is planning on all remaining litigation proceeding through
trial. 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 recorded a charge of approximately $7.5 million in
estimated legal and related costs associated with these proceedings during
fiscal 1997. 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 in future periods depending on the
course of the legal proceedings.
The Pirelli proceedings have been and will continue to be costly and
involve a substantial diversion of the time
29
<PAGE> 31
and attention of some members of management. Further, the Company believes
Pirelli and other competitors have used 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 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.
In the Delaware litigation, the so-called "Markman" hearing was conducted
in September 1997. Markman hearings are pre-trial proceedings required in
all patent infringement litigation, and result in rulings by the trial judge
on certain issues of patent claim construction. These rulings then become
the basis for later jury determination of the infringement claims, and can be
very influential in determining the outcome of the litigation. The Delaware
court's Markman ruling was issued in November. The Company believes the
Markman ruling is generally favorable to the Company's position, and nothing
in the ruling has changed the Company's view that its MultiWave 1600 system
does not infringe any valid claim of the three remaining Pirelli patents and
believes certain of the Pirelli patents and/or claims are invalid. Pirelli has
filed a motion for reargument of certain portions of the court's ruling.
As the Delaware proceeding approaches trial, the Company expects pre-trial
motions, including motions for summary judgment like those filed in the Virginia
litigation, will be filed by both parties with a view to narrowing or disposing
of one or more of the claims. The Company believes that rulings on such motions,
whether the motions are made by CIENA or Pirelli, may but most likely will not
result in complete disposition of all litigation, and continues to plan on going
to trial in all litigation. The Company also anticipates that as the
proceedings converge toward trials, either or both parties may take actions to
amend or add to the patent infringement claims already pending. The Company
continues to believe that its MultiWave systems do not infringe any valid claims
of any patents held by Pirelli.
There can be no assurance that the Company will be successful in the
Pirelli litigation, and an adverse determination in the Delaware court,
either on a motion for summary judgment or in trial, could result from a
finding of infringement of only one claim of a single patent. The Company
may settle the case 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 MultiWave 1600 system until it was able to
implement a non-infringing alternative design to any portion of the system to
which such a determination applied. However, there can be no assurance that
any settlement will be reached by the parties. 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.
The Company and certain directors are defendants in another lawsuit
brought by entities controlled by a stockholder of the Company concerning
alleged entitlement to additional shares of Convertible Preferred Stock. No
assurance can be given that this lawsuit will not result in an adverse effect
on the Company's business, financial condition and results of operations.
See Item 3. "Legal Proceedings".
Proprietary Rights. The Company relies on patents, contractual rights,
trade secrets, trademarks and copyrights to establish and protect its
proprietary rights in its product. While the Company does not expect that
its proprietary rights in its technology will prevent competitors from
developing technologies and products functionally similar to the Company's,
the Company believes many aspects of its DWDM technologies and know-how are
proprietary, and intends to monitor closely the DWDM products introduced by
competitors for any infringement of the Company's proprietary rights.
Additionally, the Company expects that DWDM technologies and know-how in
general will become increasingly valuable intellectual properties as the
competition to achieve higher and more cost effective bandwidth intensifies.
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. On December 20, 1996, a U.S.
affiliate of Pirelli filed a lawsuit against the Company alleging
infringement of certain U.S. patents held by Pirelli (the "Pirelli
Litigation"). 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. In the future, the Company may be required to bring or defend
against other litigation to enforce any patents issued or assigned to 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, 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. Adverse
30
<PAGE> 32
determinations in litigation, including in the Pirelli Litigation, could
result in the loss of the Company's proprietary rights, subject the Company
to significant liabilities, require the Company to seek licenses from third
parties or prevent the Company from manufacturing or selling its products,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has received, and may receive in the future, notices from
holders of patents in the optical technology field that raise issues as to
possible infringement by the Company's products. Pirelli sent a notice in
December 1995 identifying eleven patents it possesses in the field of optical
communications. The Company believes the MultiWave 1600 system does not
infringe any valid patents cited in any notices received. However, questions
of infringement in the field of DWDM technologies involve highly technical
and subjective analyses. There can be no assurance that any such patent
holders or others will not in the future initiate legal proceedings against
the Company or that, if any such proceedings were initiated, the Company
would be successful in defending against these actions. On December 20,
1996, a U.S. affiliate of Pirelli filed a lawsuit against the Company
alleging infringement of certain U.S. patents. Even if the Company is
successful in defending against the Pirelli Litigation or any other such
actions, these actions could have an adverse effect on existing and potential
customer relationships and therefore could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's existing customer agreements provide for indemnification of
customers for liability that may be incurred in connection with the
infringement of a third party's intellectual property rights, and the Company
expects that it will be requested to agree to indemnify other potential
customers in the future. There can be no assurance that such indemnification
against alleged liability will not be required from the Company in the
future.
Patent applications in the United States are not publicly disclosed until
the patent issues. The Company anticipates, based on the size and
sophistication of its competitors and the history of rapid technological
advances in its industry, that several competitors may have patent
applications in progress in the United States that, if issued, could relate
to the Company's products. If such patents were to issue, there can be no
assurance that the patent holders or licensees will not assert infringement
claims against the Company or that such claims will not be successful. The
Company could incur substantial costs in defending itself and its customers
against any such claims, regardless of the merits of such claims. Parties
making such claims may be able to obtain injunctive or other equitable relief
which could effectively block the Company's ability to sell its products, and
each claim could result in an award of substantial damages. In the event of
a successful claim of infringement, the Company and its customers may be
required to obtain one or more licenses from third parties. There can be no
assurance that the Company or its customers could obtain necessary licenses
from third parties at a reasonable or acceptable cost or at all.
Substantial inventories of intellectual property are held by a few
industry participants, such as Bell Laboratories (now owned by Lucent) and
major universities and research laboratories. This concentration of
intellectual property in the hands of few major entities also poses certain
risks to the Company in seeking to hire qualified personnel. The Company has
on a few occasions recruited such personnel from competitors. The Company in
the past received letters from counsel to Lucent asserting that the hiring of
their personnel compromises Lucent's intellectual property. There can be no
assurance that other companies will not claim the misappropriation or
infringement of their intellectual property, particularly when and if
employees of these companies leave to work for the Company. To date, the
Company has not experienced litigation concerning the assertions by Lucent,
and believes there is no basis for claims against the Company. Nevertheless,
there can be no assurance that the Company will be able to avoid litigation
in the future, particularly if new employees join the Company after having
worked for a competing company. Such litigation could be very expensive to
defend, regardless of the merits of the claims.
The successful resolution of intellectual property 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.
As the Company seeks to expand internationally, the Company will need to
take steps to protect its proprietary rights under foreign patent and
trademark laws. Many of these laws are not as well developed or do not
afford the same degree of protection as United States laws and no assurance
can be given that the Company will not encounter difficulties in protecting
its proprietary rights outside the United States or will not infringe the
rights of others outside the United States.
31
<PAGE> 33
Fluctuation in Quarterly and Annual Results. The Company's revenue and
operating results are likely to vary significantly from quarter to quarter
and from year to year as a result of a number of factors, including the size
and timing of orders, product mix and shipments of systems. The timing of
order placement, size of orders, satisfaction of contractual customer
acceptance criteria, as well as order delays or deferrals and shipment delays
and deferrals, may cause material fluctuations in revenue. Delays or
deferrals in purchasing decisions may increase as the Company develops or
introduces other DWDM products, such as the MultiWave Sentry, MultiWave 4000,
MultiWave Firefly and the MultiWave Metro. The Company's dependence on a
small number of existing and potential customers increases the revenue impact
of each customer's actions relative to these factors. Delivery of new
equipment for installation may also be deferred during the high
telecommunications traffic periods in November and December so as not to risk
network reliability problems. The Company's expense levels in the future
will be partially based on its expectations of long term future revenue and
as a result net income any quarterly period in which material orders are
shipped or delayed or not forthcoming could vary significantly. The
Company's expense levels for the next two quarters are expected to reflect
substantially increased investment in financial, engineering, manufacturing
and logistics support resources in positioning the AT&T and other potential
commercial relationships to be successful, even though there is no assurance
as to the volume, duration or timing of any purchases which might ensue from
AT&T or others. Over the near term, this investment of resources will be
evident in increased operating expenses and in a rise in the Company's
general overhead structure, with the result that the Company's near term
earnings may moderate or decline, even if revenues increase. In general,
quarter-to-quarter sequential revenue growth rates in the first two or three
years of operations are likely to vary widely and therefore may not be
reliable indicators of annual performance.
Dependence on Suppliers. Suppliers in the specialized, high technology
sector of the optical communications industry are generally not as plentiful
or, in some case, as reliable, as suppliers in more mature industries. The
Company is dependent on a limited number of suppliers for components of the
MultiWave systems as well as equipment used to manufacture the MultiWave
systems. The MultiWave 1600 system has over 600 components, and the
commencement of full production of the MultiWave Sentry, MultiWave Firefly
and MultiWave 4000 systems will increase the number by more than double (to
approximately 1400 parts) and also the variety of components significantly.
Not all of the component suppliers for these new systems have demonstrated the
ability to ramp up their production to keep pace with the Company's needs.
Certain key optical and electronic components are currently available only from
a sole source, where the Company has identified no other suppliers for the
component. While alternative suppliers have been identified for certain other
key optical and electronic components, those alternative sources have not been
qualified by the Company. The Company has to date conducted the majority of its
business with suppliers through the issuance of conventional purchase orders
against the Company's forecasted requirements. The Company is seeking to
negotiate long term supply agreements with key suppliers, but currently has only
a few such agreements. The Company has from time to time experienced minor
delays in the receipt of key components, and has noticed a lengthening of lead
times in the ordering of certain components. Any future difficulty in obtaining
sufficient and timely delivery of components could and likely would result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on the company's business, financial condition and results of
operations. In addition, the Company's strategy to have portions of its product
assembled and, in certain cases, tested by third parties involves certain risks,
including the potential absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies, and reduced control
over delivery schedules, manufacturing yields, quality and costs. In the event
that any significant supplier or subcontractor were to become unable or
unwilling to continue to manufacture and/or test the Company's systems in
required volumes, the Company would have to identify and qualify acceptable
replacements. This process could also be lengthy and no assurance can be given
that any additional sources would become available to the Company on a timely
basis. A key item of equipment, the E-2000 Diamond connector, which is used to
manufacture a portion of the MultiWave system, is available only from a sole
source--the Diamond Company. A delay or reduction in component or equipment
shipments, an increase in component or equipment costs or a delay or increase in
costs in the assembly and testing of products by third party subcontractors
could materially and adversely affect 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, Alcatel, Nortel, NEC and Siemens, each of which
offers optical communications systems and equipment which are competitive
with the Company's DWDM systems. 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 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
32
<PAGE> 34
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 increases in importance
given the Company's expansion efforts, new products, and the increasingly
competitive environment in which the Company operates.
Stock Price Volatility. The Company's Common Stock price has experienced
substantial price volatility, and is likely to continue to do so. Such
volatility can arise 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. The Company attempts to address this possible divergence
through its public announcements; however, the degree of specificity the
Company can offer in such announcements, and the likelihood that any
forward-looking statements made by the Company will prove correct in actual
results, can and will vary, due primarily to the uncertainties associated
with the Company's dependence on a small number of existing and potential
customers, long and unpredictable sales cycles and customer purchasing
programs, the absence of unconditional minimum purchase commitments from any
customer, a declining level of visibility into its customers' deployment
plans over the course of the capital equipment procurement year, and the lack
of reliable data on which to anticipate core demand for high bandwidth
transmission capacity. Such divergence may therefore occur from time to
time, with resulting stock price volatility, irrespective of the Company's
overall year to year performance or long term prospects. In addition, the
market prices of the common stock of many technology companies have
experienced extreme price and volume fluctuations while trending downward in
the recent stock market, and the Company's stock price may be similarly
impacted, irrespective of the Company's operating performance or long term
prospects.
Long and Unpredictable Sales Cycles. The purchase of network equipment
such as DWDM equipment is typically carried out by network operators pursuant
to multiyear purchasing programs which may increase or decrease annually as
the operators adjust their capital equipment budgets and purchasing
priorities. The Company's customers do not typically share detailed
information on the duration or magnitude of planned purchasing programs, nor
do they consistently provide to the Company advance notice of contemplated
changes in their capital equipment budgets and purchasing priorities.
Additionally, a typical year end wind-down of customers' annual capital
equipment procurement cycles, or a seasonal slow down in purchasing at year
end, neither of which was experienced by the Company in its first year of
product shipments, may be experienced in this and future years. These
uncertainties substantially complicate the Company's manufacturing planning,
and may lead to substantial and unanticipated fluctuations in the timing of
orders and revenue. Curtailment or termination of customer purchasing
programs, decreases in customer capital budgets or reduction in the
purchasing priority assigned to equipment such as DWDM equipment,
particularly if significant and unanticipated by the Company, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Long distance carriers may also encounter delays in
their build out of new routes or in their installation of new equipment in
existing routes, with the result that orders for the MultiWave systems may
be delayed or deferred. Any such delay with any major customer, as well as
any other delay or deferral of orders for MultiWave systems, could result in
material fluctuations in the timing of orders and revenue, and could have
material adverse effect on the Company's business, financial condition and
results of operations.
Anticipating Demand for Bandwidth. The Company's systems enable high
capacity transmission over long distance, and with the introduction of
MultiWave Firefly, certain short-haul portions of, optical communications
networks; however, the Company's customers and target customers determine how
much capacity will be deployed by what time using what equipment
configurations. The Company has encountered a wide variety of customer views
of how much capacity will be needed over what periods of time and, more
importantly, how to convert such capacity into revenue. Those views reflect
the carriers' differing competitive strategies and financial and marketing
resources, and result in widely varying patterns and timing of evaluation,
purchase and deployment of the Company's systems. Certain carriers have
believed the deployment of maximum capacity quickly will be a competitive
advantage--i.e., they have assumed the accelerating demand for bandwidth will
continue and the capacity will be utilized quickly. This viewpoint leads to
prompt and widespread deployment of high-channel count DWDM systems. Other
carriers have adopted more of a wait-and-see approach, which dictates a more
gradual channel by channel deployment of higher capacity systems. These
views are also subject to abrupt change, as competition and the evolving
marketplace may demand.
Under these circumstances, for so long as the Company remains dependent on
two or even three customers, the Company will be vulnerable to quarterly
fluctuations, and to misreading the direction or magnitude of future demand
for the Company's systems. While the Company remains very positive about the
year to year outlook for
33
<PAGE> 35
growth in demand for DWDM systems, the Company is less certain whether it
will be able to accurately anticipate changes in direction or magnitude of
near term demand. Unanticipated reductions in demand would adversely affect
the Company's profitability and, depending on the size of the gap between
actual, reduced demand, and investor expectation of such demand, could result
in further stock price volatility irrespective of the Company's overall
competitive position and long term prospects.
Technological Change and New Products. The Company expects that new
technologies will emerge as competition in the telecommunications industry
increases and the need for higher and more cost efficient bandwidth expands.
The Company's ability to anticipate changes in technology, industry
standards, customer requirements and product offerings and to develop and
introduce new and enhanced products will be significant factors in the
Company's ability to remain the leader in the deployment of open architecture
DWDM systems. The market for telecommunications equipment is characterized
by substantial capital investment and diverse and competing technologies such
as fiberoptic, cable, wireless and satellite technologies. The accelerating
pace of deregulation in the telecommunications industry will likely intensify
the competition for improved technology. Many of the Company's competitors
have substantially greater financial, technical and marketing resources and
manufacturing capacity with which to compete for new technologies and for
market acceptance of their products. The introduction of new products
embodying new technologies or the emergence of new industry standards could
render the Company's existing product uncompetitive from a pricing
standpoint, obsolete or unmarketable. Any of these outcomes would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel. The Company's success will also depend in
large part upon its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel, particularly those skilled and
experienced with optical communications equipment. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in retaining its existing key personnel and in attracting and
retaining the personnel it requires. Failure to attract and retain key
personnel will have a material adverse effect on the Company's business,
financial condition and results of operations.
Effect of Certain Charter, Bylaw and Other Provisions. Certain provisions
of the Company's Third Amended and Restated Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), and bylaws and certain other
contractual provisions could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of these provisions allow the Company to
issued preferred stock with rights senior to those of the Common Stock
without any further vote or action by the stockholders, provide for a
classified board of directors, eliminate the right of the stockholders to
call a special meeting of stockholders, eliminate the right of stockholders
to act by written consent, and impose various procedural and other
requirements which could make it difficult for stockholders to effect certain
corporate actions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reporting requirements are not applicable to the registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following is an index to the consolidated financial statements and
supplementary data :
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Accountants...................................................... 35
Consolidated Balance Sheets............................................................ 36
Consolidated Statements of Operations.................................................. 37
Consolidated Statements of Changes in Stockholders' Equity (Deficit) .................. 38
Consolidated Statements of Cash Flows.................................................. 39
Notes to Consolidated Financial Statements............................................. 40
</TABLE>
34
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CIENA Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity (deficit) present fairly, in all material respects, the
financial position of CIENA Corporation and subsidiaries at October 31, 1997
and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Falls Church, VA
November 26, 1997
35
<PAGE> 37
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 22,557 $ 263,085
Accounts receivable (net of allowance of $ - and $200) ........................... 16,759 63,227
Inventories, net ................................................................. 13,228 41,109
Deferred income taxes ............................................................ 1,834 9,006
Prepaid expenses and other ....................................................... 634 2,220
--------- ---------
Total current assets ........................................................ 55,012 378,647
Equipment, furniture and fixtures, net ................................................. 11,863 67,412
Other assets ........................................................................... 426 1,169
--------- ---------
Total assets ..................................................................... $ 67,301 $ 447,228
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 6,278 $ 20,373
Accrued liabilities .............................................................. 5,242 31,463
Income taxes payable ............................................................. 3,342 -
Deferred revenue ................................................................. 3,265 776
Other current obligations ........................................................ 1,029 985
--------- ---------
Total current liabilities ................................................... 19,156 53,597
Deferred income taxes ............................................................ - 28,167
Other long-term obligations ...................................................... 2,771 1,880
--------- ---------
Total liabilities ........................................................... 21,927 83,644
Commitments and contingencies .......................................................... - -
Mandatorily redeemable preferred stock - par value $.01, 16,250,000 shares authorized:
Series A - 4,500,000 shares authorized; 3,590,157 and zero shares
issued and outstanding ........................................................... 3,492 -
Series B - 8,000,000 shares authorized; 7,354,092 and zero shares
issued and outstanding ........................................................... 10,962 -
Series C - 3,750,000 shares authorized; 3,718,899 and zero shares issued and
outstanding ...................................................................... 25,950 -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized; zero shares issued
and outstanding .................................................................. - -
Common stock - par value $.01; 180,000,000 shares authorized;
13,191,585 and 99,287,653 shares issued and outstanding .......................... 132 993
Additional paid-in capital ....................................................... 339 245,151
Notes receivable from stockholders ............................................... (60) (64)
Retained earnings ................................................................ 4,559 117,504
--------- ---------
Total stockholders' equity .................................................. 4,970 363,584
--------- ---------
Total liabilities, mandatorily redeemable preferred stock and stockholders'
equity ........................................................................ $ 67,301 $ 447,228
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
36
<PAGE> 38
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue .................................... $ - $ 54,838 $ 373,827
Cost of goods sold ......................... - 21,844 136,187
--------- --------- ---------
Gross profit ........................ - 32,994 237,640
--------- --------- ---------
Operating expenses:
Research and development ............ 6,361 8,922 23,308
Selling and marketing ............... 481 3,780 20,899
General and administrative .......... 896 3,905 16,731
--------- --------- ---------
Total operating expenses ..... 7,738 16,607 60,938
--------- --------- ---------
Income (loss) from operations .............. (7,738) 16,387 176,702
Interest and other income (expense), net ... 195 877 7,599
Interest expense ........................... (86) (296) (343)
--------- --------- ---------
Income (loss) before income taxes .......... (7,629) 16,968 183,958
Provision for income taxes ................. - 2,250 71,013
--------- --------- ---------
Net income (loss) .......................... $ (7,629) $ 14,718 $ 112,945
========= ========= =========
Pro forma net income per common
and common equivalent share ............. $ 0.15 $ 1.09
========= =========
Pro forma weighted average common and common
equivalent shares outstanding ........... 99,111 103,765
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
37
<PAGE> 39
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK RECEIVABLE RETAINED STOCKHOLDERS'
--------------------------- ADDITIONAL FROM EARNINGS EQUITY
SHARES AMOUNT PAID-IN-CAPITAL STOCKHOLDERS (DEFICIT) (DEFICIT)
----------- ------------ --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994...... 10,816,665 $ 108 $ 99 $ (65) $ (2,530) $ (2,388)
Exercise of warrants............. 1,075,000 11 11 - - 22
Exercise of stock options........ 43,750 - - - - -
Repayment of receivables from
stockholders................... - - - 65 - 65
Net loss......................... - - - - (7,629) (7,629)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1995...... 11,935,415 119 110 - (10,159) (9,930)
Exercise of warrants............. 676,425 7 - - - 7
Exercise of stock options........ 579,745 6 71 (60) - 17
Compensation cost of stock
options........................ - - 2 - - 2
Issuance of warrant for
settlement of certain equity
rights......................... - - 156 - - 156
Net income....................... - - - - 14,718 14,718
---------- ---------- ---------- ---------- ---------- ----------
BALANCE OF OCTOBER 31, 1996...... 13,191,585 132 339 (60) 4,559 4,970
Issuance of common stock, net
of issuance costs.............. 7,002,060 70 173,947 - - 174,017
Conversion of Preferred
Stock.......................... 74,815,740 748 40,256 - - 41,004
Exercise of warrants............. 666,086 7 - - - 7
Exercise of stock options........ 3,612,182 36 859 (73) - 822
Tax benefit from the exercise of
stock options.................. - - 29,709 - - 29,709
Repayment of receivables from
stockholders................... - - - 69 - 69
Compensation cost of stock
options........................ - - 41 - - 41
Net income....................... - - - - 112,945 112,945
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1997...... 99,287,653 $ 993 $ 245,151 $ (64) $ 117,504 $ 363,584
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
38
<PAGE> 40
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (7,629) $ 14,718 $ 112,945
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash charges from equity transactions ................... - 158 41
Write down of leasehold improvements and equipment .......... - 883 923
Depreciation and amortization ............................... 355 1,007 10,155
Provision for doubtful accounts ............................. - - 200
Provision for inventory excess and obsolescence ............. - 1,937 7,585
Provision for warranty and other contractual
obligations ............................................. - 1,584 11,866
Changes in assets and liabilities:
Increase in accounts receivable ......................... (8) (16,753) (46,668)
Increase in inventories ................................. - (15,165) (35,466)
Increase in deferred income tax assets .................. - (1,834) (7,172)
Increase in prepaid expenses and other assets ........... (72) (955) (2,329)
Increase in accounts payable and accruals ............... 757 8,311 28,450
(Decrease) increase in income taxes payable ............. - 3,342 (3,342)
Increase in deferred income tax liabilities ............. - - 4,793
(Decrease) increase in deferred revenue and other
obligations ......................................... (11) 3,353 (1,907)
--------- --------- ---------
Net cash provided by (used in) operating activities ......... (6,608) 586 80,074
Cash flows from investing activities:
Additions to equipment, furniture and fixtures .............. (2,036) (11,514) (66,627)
--------- --------- ---------
Net cash used in investing activities ................... (2,036) (11,514) (66,627)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations .......... 719 2,479 (1,517)
Net proceeds from issuance of or subscription to
mandatorily redeemable preferred stock .................. 10,962 25,950 -
Net proceeds from issuance of common stock .................. 22 24 175,446
Tax benefit related to exercise of stock options and warrants - - 53,083
Repayment of notes receivable from stockholders ............. 65 - 69
--------- --------- ---------
Net cash provided by financing activities ............... 11,768 28,453 227,081
--------- --------- ---------
Net increase in cash and cash equivalents ............... 3,124 17,525 240,528
Cash and cash equivalents at beginning of period ................ 1,908 5,032 22,557
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 5,032 $ 22,557 $ 263,085
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................. $ 86 $ 296 $ 343
========= ========= =========
Income taxes ............................................. $ - $ 742 $ 24,825
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from
stockholders ............................................. $ - $ 60 $ 73
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
39
<PAGE> 41
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CIENA Corporation (the "Company" or "CIENA"), a Delaware corporation,
designs, manufactures and sells dense wavelength division multiplexing
systems for fiberoptic telecommunications networks. During the period from
November 2, 1992 to October 31, 1995, CIENA was a development stage company
as defined in Statement of Financial Accounting Standards No. 7, "Development
Stage Enterprises". Planned principal operations commenced during fiscal 1996
and, accordingly, CIENA is no longer considered a development stage company.
Principles of Consolidation
During the fiscal year ended October 31, 1997, the Company formed four
wholly owned subsidiaries for the purpose of segregating aspects of the
Company's business. The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year
The Company has a 52 or 53 week fiscal year which ends on the Saturday
nearest to the last day of October in each year (November 1, 1997; November
2, 1996; and October 28, 1995). For purposes of financial statement
presentation, each fiscal year is described as having ended on October 31.
Fiscal 1997 and 1995 comprised 52 weeks and fiscal 1996 comprised 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, together with amounts disclosed in the
related notes to the financial statements. Particularly sensitive estimates
include reserves for warranty and other contractual obligations and for
excess and obsolete inventories. Actual results could differ from the
recorded estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. The Company records a provision
for excess and obsolete inventory whenever such an impairment has been
identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are computed using the straight-line method over useful lives of
2-5 years for equipment, furniture and fixtures and of 6-10 years for
leasehold improvements.
40
<PAGE> 42
Concentrations
Substantially all of the Company's cash and cash equivalents are custodied
with four major U.S. financial institutions. The majority of the Company's
cash equivalents include U.S. Government Federal Agency Securities and
overnight repurchase agreements. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally these deposits may
be redeemed upon demand and therefore, bear minimal risk.
Historically, the Company has relied on a limited number of customers for
a substantial portion of its revenue. In terms of total revenue, the
Company's largest two customers have been Sprint and WorldCom who combined
for greater than 90% of the Company's fiscal 1997 revenue. The Company
expects that a significant portion of its future revenue will continue to be
generated by a limited number of customers. The loss of any of these
customers or any substantial reduction in orders by any of these customers
could materially adversely affect the Company's operating results.
Additionally, the Company's access to certain raw materials is dependent upon
single and sole source suppliers. The inability of any supplier to fulfill
supply requirements of the Company could impact future results.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Company
maintains allowances for potential losses, and has not incurred any
significant losses to date. As of October 31, 1996 all of the Company's
trade accounts receivable were derived from Sprint, and both Sprint and
WorldCom accounted for more than 90% of the trade accounts receivable as of
October 31, 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, revenue is deferred until the terms of acceptance are
satisfied. Revenue for installation services is recognized as the services
are performed unless the terms of the supply contract combine product
acceptance with installation, in which case revenues for installation
services are recognized when the terms of acceptance are satisfied and
installation is completed. Amounts received in excess of revenue recognized
are recorded as deferred revenue. For distributor sales where risks of
ownership have not transferred, the Company recognizes revenue when the
product is shipped through to the end user.
Revenue-Related Accruals
The Company provides for the estimated costs to fulfill customer warranty
and other contractual obligations upon the recognition of the related
revenue. Such reserves are determined based upon actual warranty cost
experience, estimates of component failure rates, and management's industry
experience. The Company's contractual sales arrangements generally do not
permit the right of return of product by the customer after the product has
been accepted.
Research and Development
The Company charges all research and development costs to expense as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future
tax consequences attributable to differences between the carrying amounts of
assets and liabilities for financial reporting purposes and their respective
tax bases, and for operating loss and tax credit carryforwards. In estimating
future tax consequences, SFAS No. 109 generally considers all expected future
events other than the enactment of changes in tax laws or rates. Tax savings
resulting from deductions associated with stock options and certain stock
warrants are credited directly to additional paid in capital when realization
of such benefit is fully assured and to deferred tax liabilities prior to
such point. See Note 7.
41
<PAGE> 43
Foreign Currency Translation
The Company's foreign branches and subsidiaries use the U.S. dollar as
their functional currency as the U.S. parent exclusively funds the branches
and subsidiaries' operations with U.S. dollars. The net gain (loss) on
foreign currency remeasurement and exchange rate changes for fiscal 1995 ,
1996, and 1997 was immaterial.
Computation of Pro Forma Net Income per Share
Pro forma net income 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 the assumed conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock. Since the conversion of the
Convertible Preferred Stock at the initial public offering date had a
significant effect on the earnings per share calculation, historical loss per
share for the fiscal year ended October 31, 1995 has not been calculated on
the basis that it is irrelevant.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, Common Stock, stock options, warrants and Convertible 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 initial public offering price.
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
requires the capitalization of certain software development costs incurred
subsequent to the date technological feasibility is established and prior to
the date the product is generally available for sale. The capitalized cost is
then amortized over the estimated product life. The Company defines
technological feasibility as being attained at the time a working model is
completed. To date, the period between achieving technological feasibility
and the general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any software development costs.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation," which is effective for the Company's consolidated
financial statements for fiscal years 1996 and 1997. SFAS No. 123 allows
companies to either account for stock-based compensation under the new
provision of SFAS No. 123 or using the intrinsic value method provided by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for
Stock Issued to Employees," but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. The Company has elected to continue to
account for its stock based compensation in accordance with the provisions of
APB No.25 and present pro forma disclosures required by SFAS No. 123. See
Note 6.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 simplifies the earnings per share (EPS)
computation and replaces the presentation of primary EPS with a presentation
of basic EPS. This statement also requires dual presentation of basic and
diluted EPS on the face of the income statement for entities with a complex
capital structure and requires a reconciliation of the numerator and
denominator used for the basic and diluted EPS computations. The Company will
implement SFAS No. 128 in fiscal 1998, as required. Accordingly, all prior
period EPS data will be restated. To illustrate the effect of adoption, the
Company has elected to disclose pro forma basic and diluted EPS amounts
computed using SFAS No. 128, as permitted by the standard. On a pro forma
basis, the weighted average shares outstanding for basic EPS and the
resulting EPS would be 12,840,000 and $1.15 for the fiscal year ended October
31, 1996, and 95,357,000 and $1.18 for the fiscal year ended October 31,
1997. Diluted
42
<PAGE> 44
EPS under SFAS No. 128 would be the same as currently presented.
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS
No. 130 becomes effective for the Company's fiscal year 1999 and requires
reclassification of earlier financial statements for comparative purposes.
SFAS No. 130 requires that changes in the amounts of certain items, including
foreign currency translation adjustments and gains and losses on certain
securities be shown in the financial statements. SFAS No. 130 does not
require a specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement. The Company believes the
adoption of SFAS No. 130 will not have a material effect on the consolidated
financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement will
change the way public companies report information about segments of their
business in annual financial statements and requires them to report selected
segment information in their quarterly reports issued to stockholders. It
also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement is effective for the
Company's fiscal year 1999. The Company believes the adoption of SFAS No. 131
will not have a material effect on the consolidated financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year consolidated financial statement presentation.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
-------------------------
1996 1997
--------- ---------
<S> <C> <C>
Raw materials .......................... $ 8,585 $ 27,716
Work-in-process ........................ 3,629 5,679
Finished goods ......................... 2,951 15,180
--------- ---------
15,165 48,575
Less reserve for excess and obsolescence (1,937) (7,466)
--------- ---------
$ 13,228 $ 41,109
========= =========
</TABLE>
The following is a table depicting the activity in the Company's reserve for
excess and obsolescence (in thousands):
<TABLE>
<CAPTION>
October 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Beginning balance ............. $ - $ 1,937
Provision charged to operations 1,937 7,585
Amounts written off to reserve - (2,056)
-------- --------
Ending balance ................ $ 1,937 $ 7,466
======== ========
</TABLE>
43
<PAGE> 45
(3) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
October 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Equipment, furniture and fixtures ....... $ 11,647 $ 64,502
Leasehold improvements .................. 1,141 13,953
--------- ---------
12,788 78,455
Accumulated depreciation and amortization (1,388) (11,543)
Construction-in-progress ................ 463 500
--------- ---------
$ 11,863 $ 67,412
========= =========
</TABLE>
(4) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Warranty and other contractual obligations ... $ 1,584 $ 12,205
Accrued compensation ......................... 2,314 7,725
Legal and related costs ...................... 300 4,577
Consulting and outside services .............. - 3,219
Unbilled construction-in-process and leasehold
improvements ............................ 50 1,427
Other ........................................ 994 2,310
--------- ---------
$ 5,242 $ 31,463
========= =========
</TABLE>
(5) LINE OF CREDIT
In November 1996, the Company entered into an unsecured line of credit
agreement with a bank, which provided for borrowings of up to $15,000,000.
The Company had no borrowings against the line of credit during fiscal 1997.
In November 1997, the line of credit agreement expired.
(6) STOCKHOLDERS' EQUITY
Changes in and Conversion of Mandatorily Redeemable Convertible Preferred
Stock
As a result of the February 1997 initial public offering, all shares of
Convertible Preferred Stock converted into 73,315,740 shares of Common Stock
and warrants to purchase 300,000 shares of Convertible Preferred Stock were
exercised for $600,000 and converted into 1,500,000 shares of Common Stock.
Public Offerings
In February 1997, the Company successfully completed its initial public
offering of Common Stock. The Company sold 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. Net proceeds from the offering were
approximately $121,800,000 with an additional $600,000 received from the
exercise of 300,000 shares of outstanding Convertible Preferred Stock
warrants.
In July 1997 the Company completed a public offering of 10,477,216 shares
of Common Stock of which 1,252,060 shares were sold by the Company inclusive
of 252,060 shares from the exercise of the underwriters over-
44
<PAGE> 46
allotment option, at a price of $44 per share. Net proceeds to the Company
from the public offering were approximately $52,200,000.
Stock Incentive Plans
The Company has an Amended and Restated 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, 20,050,000 shares of the Company's authorized
but unissued Common Stock are reserved for options issuable to employees.
These options are immediately exercisable upon grant, and both the options
and the shares issuable upon exercise of the options generally vest to the
employee over a four year period. The Company has the right to repurchase any
exercised and non-vested shares at the original purchase price from the
employees upon termination of employment. In June 1996 the Company approved
the 1996 Outside Directors Stock Option Plan (the "1996 Plan"). Under the
1996 Plan, 750,000 shares of the Company's authorized but unissued Common
Stock are reserved for options issuable to outside members of the Company's
Board of Directors. These options vest to the director over periods from one
to three years, depending on the type of option granted, and are exercisable
once vested. Under the 1994 Plan and the 1996 Plan, options may be incentive
stock options or non-statutory options, and the exercise price for each
option shall be established by the Board of Directors provided, however, that
the exercise price per share shall not be not less than the fair market value
for incentive stock options and not less than 85% of fair market value for
non-statutory stock options.
Following is a summary of the Company's stock option activity:
<TABLE>
<CAPTION>
Shares Weighted Average
(in thousands) Exercise Price
--------------- -----------------
<S> <C> <C>
Balance at October 31, 1994 .......... 3,560 $ 0.02
Granted .............................. 3,856 0.03
Exercised ............................ (44) 0.02
Canceled ............................. (431) 0.02
------
Balance at October 31, 1995 .......... 6,941 0.03
Granted .............................. 5,901 1.85
Exercised ............................ (579) 0.14
Canceled ............................. (1,180) 0.18
------
Balance at October 31, 1996 .......... 11,083 0.97
Granted .............................. 1,737 32.81
Exercised ............................ (3,612) 0.27
Canceled ............................. (98) 0.52
------
Balance at October 31, 1997 .......... 9,110 $ 7.33
======
</TABLE>
45
<PAGE> 47
At October 31, 1997 approximately 156,000 shares of Common Stock subject
to repurchase by the Company had been issued upon the exercise of options and
approximately 1.7 million of the total outstanding options were vested and
not subject to repurchase by the Company upon exercise.
The following table summarizes information with respect to stock options
outstanding at October 31, 1997:
<TABLE>
<Capiton>
Options Not Subject to
Options Outstanding Repurchase Upon Exercise
---------------------------------------------------- -------------------------------
Weighted
Average
Number Remaining Weighted Weighted
Range of Outstanding Contractual Average Number Average
Exercise at Oct. 31, Life Exercise at Oct. 31, Exercise
Price 1997 (Years) Price 1997 Price
- - -------------------- ------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.03 2,586,000 7.14 $ 0.03 1,203,000 $ 0.03
$ 0.06 - $ 0.40 810,000 8.22 $ 0.26 165,000 $ 0.28
$ 0.52 - $ 1.66 983,000 8.53 $ 1.18 152,000 $ 1.21
$ 2.34 - $ 4.34 2,839,000 8.66 $ 2.52 89,000 $ 3.12
$ 4.44 - $18.00 935,000 9.07 $15.52 47,000 $ 9.17
$23.88 - $58.88 957,000 9.71 $45.61 - $ -
------------- -----------
9,110,000 8.33 $ 7.33 1,656,000 $ 0.58
============= ===========
</TABLE>
Pro forma Stock-Based Compensation
The Company has elected to continue to follow the provisions of APB No. 25
for financial reporting purposes and has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the Company's stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at
the grant date for awards in fiscal years 1996 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
for fiscal years 1996 and 1997 would have been decreased to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------
1996 1997
---------------- -----------------
<S> <C> <C>
Net income applicable to common stockholders -
as reported...................................... $ 14,718 $ 112,945
================ =================
Net income applicable to common stockholders -
pro forma......................................... $ 14,225 $ 107,382
================ =================
Net income per share - as reported................. $ 0.15 $ 1.09
================ =================
Net income per share - pro forma................... $ 0.14 $ 1.03
================ =================
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
46
<PAGE> 48
The aggregate fair value and weighted average fair value of each option
granted in fiscal years 1996 and 1997 were approximately $6.7 million and
$33.6 million, and $1.14 and $19.33, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes Option
Pricing Model with the following weighted average assumptions for fiscal
years 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected volatility 60% 60%
Risk-free interest rate 6.1% 5.8%
Expected life 3 yrs. 3 yrs.
Expected dividend yield 0% 0%
</TABLE>
(7) INCOME TAXES
Income before income taxes and the provision for income taxes consists
of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
---------------------------
1996 1997
---------- ---------
<S> <C> <C>
Income before income taxes................... $ 16,968 $ 183,958
========= =========
Provision for income taxes:
Current:
Federal.................................... $ 3,452 $ 66,154
State...................................... 632 7,238
--------- ---------
Total current....................... 4,084 73,392
--------- ---------
Deferred:
Federal.................................... (1,690) (1,882)
State...................................... (144) (497)
--------- ---------
Total deferred...................... (1,834) (2,379)
--------- ---------
Provision for income taxes................... $ 2,250 $ 71,013
========= =========
</TABLE>
In fiscal 1995, the tax provision was comprised primarily of a tax benefit
of approximately $3.1 million which was offset by a valuation allowance of
the same amount.
In fiscal 1995, the tax provision differed from the expected tax benefit,
computed by applying the U.S. federal statutory rate of 35% to the loss
before income taxes, principally due to the effect of increases in the
valuation allowance. In fiscal 1997 and 1996, the tax provision reconciles to
the amount computed by multiplying income before income taxes by the U.S.
federal statutory rate of 35% as follows:
<TABLE>
<CAPTION>
October 31,
---------------------------
1996 1997
--------- ----------
<S> <C> <C>
Provision at statutory rate.................. 35.0% 35.0%
Reversal of valuation allowance.............. (24.3) -
State taxes, net of federal benefit.......... 2.9 2.6
Other........................................ (0.3) 1.0
--------- ---------
13.3% 38.6%
========= =========
</TABLE>
47
<PAGE> 49
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
October 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accrued liabilities........... $ 1,452 $ 9,006
Depreciation and other..................... 382 -
--------- ---------
Deferred tax assets.................... $ 1,834 $ 9,006
========= =========
Deferred tax liabilities:
Equipment leases........................... $ - $ 3,985
Services................................... - 19,389
Depreciation and other..................... - 4,793
--------- ---------
Deferred tax liabilites................ $ - $ 28,167
========= =========
</TABLE>
The income tax provisions do not reflect the tax savings resulting from
deductions associated with the Company's stock option plans or the exercise
of certain stock warrants. Tax benefits of approximately $29.7 million and
$23.4 million from exercises of stock options and certain stock warrants,
respectively, were credited directly to additional paid-in-capital and to
long-term deferred income taxes for fiscal 1997, respectively.
(8) EMPLOYEE BENEFIT PLANS
In January 1995, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21
years of age, have completed three months of service and are not covered by a
collective bargaining agreement where retirement benefits are subject to good
faith bargaining. Participants may contribute up to 15% of pre-tax
compensation, subject to certain limitations. The Company may make
discretionary annual profit sharing contributions of up to the lesser of
$30,000 or 25% of each participant's compensation. In fiscal 1997 the Company
revised the plan to include an employer matching contribution equal to 100%
of the first 3% of participating employee contributions, with a five year
vesting plan applicable to the Company's contribution. The Company has made
no profit sharing contributions to date. During fiscal 1997 the Company made
matching contributions of approximately $300,000.
(9) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has certain minimum obligations under noncancelable operating
leases expiring on various dates through 2006 for equipment and facilities.
Future annual minimum rental commitments under noncancelable operating leases
at October 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending October 31,
- - ------------------------------
<S> <C>
1998..................................... $ 4,429
1999..................................... 4,900
2000..................................... 4,805
2001..................................... 4,627
2002..................................... 4,003
Thereafter............................... 13,015
----------------
$ 35,779
================
</TABLE>
Rental expense for fiscal 1995, 1996 and 1997 was approximately $111,000,
$602,000 and $2,511,000, respectively.
48
<PAGE> 50
Litigation
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. Two of the
five patents in suit have since been removed from the litigation. Discovery
proceedings are ongoing, and are currently expected to be completed by January
31, 1998, with trial expected no earlier than mid 1998.
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, one of which
was withdrawn in September 1997. The lawsuit seeks treble damages,
attorneys' fees and costs, as well as permanent injunctive relief against the
alleged infringement. The patents relate to certain of Pirelli's cable
television equipment and fiberoptic communications equipment. Motions for
summary judgment by both parties are currently pending on the issue of
infringement as it relates to the cable television patent, and Pirelli has also
filed a motion for summary judgment of invalidity on this patent. As to the
second of the two patents, on December 5, 1997, the court issued an order
granting partial summary judgment for Pirelli on the issue of non-infringement,
and denying Pirelli's motion for summary judgment of invalidity of this patent.
Trail is currently scheduled for January 1998.
In February 1997, the Company 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 infringed at least two of the
Company's patents. The Company's complaint sought a ban on the importation
of this product into the U.S. A formal investigative proceeding was
instituted by the ITC on April 3, 1997. On November 24, 1997, the parties
settled the matter by entry of a Consent Order. Under the Consent Order,
Pirelli has agreed not to import into the United States WDM systems which
infringe upon the Company's patented in fiber Bragg gratings-based WDM
systems.
The Company has accrued $7.5 million for legal fees associated with their
involvement in the above litigation; $4.3 million of that accrual is
remaining at October 31, 1997, which the Company considers sufficient to
account for all anticipated legal fees. The Company continues to believe its
MultiWave systems do not infringe any valid claim of the three remaining
Pirelli patents and believes certain Pirelli patents and/or claims are
invalid. The Company is defending itself vigorously and is planning on all
remaining litigation proceeding through trial.
However, 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 1600
system until it were able to implement a non-infringing alternative design to
any portion of the system to which such determination applied. There can be
no assurance that any settlement will be reached by the parties. 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.
Kimberlin Litigation. On November 20, 1996, a stockholder and entities
controlled by that stockholder (the "plaintiffs") who provided initial equity
capital during the formation of the Company and participated in the Series C
Preferred Stock financing, filed suit in U. S. District Court for the
Southern District of New York against the Company and certain directors of
the Company (the "defendants"), alleging that the plaintiffs were entitled to
purchase additional shares of Series C Preferred Stock at the time of the
closing of the Series C Preferred Stock financing, but were denied that
opportunity by the defendants. The lawsuit claims breach of contract, breach
of fiduciary duty and violation of Securities Commission Rule 10b-5 by the
defendant. On January 6, 1997, the Company filed its answer to the
plaintiffs' complaint, and filed a counterclaim. The plaintiffs amended
their complaint in May 1997 alleging a violation of federal insider trading
laws. There has not been a trial date set by the judge.
The Company believes that the Plaintiffs' claims and amended claims are
without merit and intends to defend itself vigorously. The Company has moved
for summary judgment on the entire matter, but there is no assurance the
judgment will be granted.
49
<PAGE> 51
The Company has agreed to indemnify its customers for liability incurred
in connection with the infringement of a third-party's intellectual property
rights. Although the Company has not received notice from any customer
advising the Company of any alleged infringement of a third-party's
intellectual property rights, there can be no assurance that such
indemnification of alleged liability will not be required from the Company
in the future.
(10) FOREIGN SALES
The Company has sales and marketing operations located outside the United
States in the United Kingdom, Belgium and Japan. The Company has distributor
or marketing representative arrangements covering Austria, Germany, Italy and
Switzerland in Europe, and the Republic of Korea and Japan in Asia. The
Company also has representative support in Brazil. Included in revenues are
export sales of approximately $0 and $5.5 million in fiscal years 1996 and
1997, respectively.
(11) SUBSEQUENT EVENTS (UNAUDITED)
Acquisitions
The Company has signed a letter of intent to enter into an Agreement
and Plan of Merger with Astracom, Inc. ("Astracom"), an early stage
telecommunications company which was incorporated on November 20, 1996, and is
located in Atlanta, Georgia. The transaction is expected to be completed
during the December 1997 period. The purchase price is expected to be
approximately $13.1 million and consists of the issuance of 169,754 shares of
CIENA common stock, the payment of $2.4 million in cash, and the assumption of
certain stock options. Based on preliminary estimates, the Company believes the
purchase price represents approximately $11.4 million in goodwill and other
intangibles, and approximately $1.7 million in net assets assumed, and that the
amortization period for the intangibles, based on management's estimate of the
useful life of the acquired technology, is between five to seven years.
The operations of the acquired company are not material to the
consolidated financial statements of the Company, and accordingly, separate
pro forma financial information has not been presented for fiscal year 1997
as if Astracom had been acquired as of November 20, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the
Company is set forth in Part I of this report under the caption Item 1.
Business- "Directors, and Executive Officers" and is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information is incorporated herein by reference to the Company's
definitive 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is incorporated herein by reference to the Company's
definitive 1998 Proxy Statement.
50
<PAGE> 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is incorporated herein by reference to the Company's
definitive 1998 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
2. Exhibits: See Index to Exhibits on page 53. The Exhibits listed in
the accompanying Index to Exhibits are filed or incorporated by
reference as part of this report.
(b) Reports on Form 8-K
On August 6, 1997, and September 22, 1997, the Company filed a report
on Form 8-K supplementing its report on Form 8-K dated February 19, 1997,
relating to risk factors to be considered in connection with the disclosure
of forward-looking statements.
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Linthicum, County of Anne Arundel, State of Maryland, on the 10th
day of December 1997.
CIENA CORPORATION
By: /s/ Patrick H. Nettles
----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Patrick H. Nettles President, Chief Executive Officer December 10, 1997
- - ------------------------- and Director
Patrick H. Nettles (Principal Executive Officer)
/s/ Joseph R. Chinnici Sr. Vice President, Finance and December 10, 1997
- - ------------------------- Chief Financial Officer
Joseph R. Chinnici (Principal Financial Officer)
/s/ Andrew C. Petrik Vice President, Controller December 10, 1997
- - ------------------------- and Treasurer
Andrew C. Petrik (Principal Accounting Officer)
/s/ Jon W. Bayless Director December 10, 1997
- - -------------------------
Jon W. Bayless
/s/ Harvey B. Cash Director December 10, 1997
- - -------------------------
Harvey B. Cash
/s/ Clifford H. Higgerson Director December 10, 1997
- - -------------------------
Clifford H. Higgerson
/s/ Billy B. Oliver Director December 10, 1997
- - -------------------------
Billy B. Oliver
/s/ Michael J. Zak Director December 10 ,1997
- - -------------------------
Michael J. Zak
</TABLE>
52
<PAGE> 54
INDEX TO 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
4.1* Specimen Stock Certificate
10.1* Form of Indemnification Agreement for Directors and
Officers
10.2* Amended and Restated 1994 Stock Option Plan
10.3* Form of Employee Stock Option Agreements
10.4* 1996 Outside Directors Stock Option Plan
10.5* Forms of 1996 Outside Directors Stock Option Agreement
10.6* Series C Preferred Stock Purchase Agreement dated
December 20, 1995
10.7* Lease Agreement dated October 5, 1995 between the
Company and CS Corridor-32 Limited Partnership
10.8+* Purchase Agreement Between Sprint/United Management
Company and the Company dated December 14, 1995
10.9+* Basic Purchase Agreement between WorldCom Network
Services, Inc. and the Company dated September 19, 1996
10.10* Settlement Agreement and Mutual Release, between the
Company and William K. Woodruff & Company, dated
August 26, 1996
10.13* Employment Agreement dated April 9, 1994 between the
Company and Patrick Nettles
10.14* Lease Agreement dated November 1, 1996 by and between
the Company and Aetna Life Insurance Company
10.15* Revolving Note and Business Loan Agreement dated
November 25, 1996 between the
Company and Mercantile-Safe Deposit & Trust Company
10.16+* First Addendum to Procurement Agreement between the
Registrant and Sprint/United
Management Company dated December 19, 1996
11.1 Statement of Computation of Per Share Earnings
21** Subsidiaries of registrant
23.1 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (333-17729).
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (333-28525).
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain portions of these exhibits. The
confidential portions have been filed separately with the Securities and
Exchange Commission.
53
<PAGE> 1
Exhibit 11.1
CIENA CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
October 31, October 31,
1996 1997
------------ ------------
<S> <C> <C>
Net income ........................... $ 14,718,000 $112,945,000
============ ============
Weighted average shares of common
stock outstanding ................ 12,840,000 94,890,000
Weighted average effect of common
stock equivalents ................ 80,352,000 8,408,000
Staff Accounting Bulletin No. 83
issuances and grants:
Common shares issued within one
year of initial filing ........... 352,000 467,000
Common stock equivalents issued within
one year of initial filing ....... 5,567,000 -
------------ ------------
99,111,000 103,765,000
============ ============
Pro forma net income per common
and common equivalent share ....... $ 0.15 $ 1.09
============ ============
</TABLE>
54
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-27131) of CIENA Corporation of our report dated
November 26, 1997 appearing on page 35 of this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Falls Church, VA
December 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATION AND CONSOLIDATED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE PERIOD
ENDING OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 263,085
<SECURITIES> 0
<RECEIVABLES> 63,227
<ALLOWANCES> 200
<INVENTORY> 41,109
<CURRENT-ASSETS> 378,647
<PP&E> 78,956
<DEPRECIATION> 11,543
<TOTAL-ASSETS> 447,228
<CURRENT-LIABILITIES> 53,597
<BONDS> 0
0
0
<COMMON> 993
<OTHER-SE> 362,591
<TOTAL-LIABILITY-AND-EQUITY> 447,228
<SALES> 373,827
<TOTAL-REVENUES> 373,827
<CGS> 136,187
<TOTAL-COSTS> 136,187
<OTHER-EXPENSES> 60,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343
<INCOME-PRETAX> 183,958
<INCOME-TAX> 71,013
<INCOME-CONTINUING> 112,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,945
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
