<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
FEBRUARY 19, 1998
Date of Report (Date of earliest event reported)
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-21969 23-2725311
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
1201 WINTERSON ROAD, , LINTHICUM, MD 21090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(410) 865-8500
NOT APPLICABLE
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
This current report on Form 8-K provides financial information pertaining to
the retroactive effect of the February 19, 1998 business combination of Ciena
Corporation and ATI Telecom International Ltd., which was accounted for under
the pooling of interest method of accounting.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included in "Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,(1)
-----------------------------------------------------------
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 2,
1992) THROUGH
OCTOBER 31,
1993(1) 1994 1995 1996 1997
-------------- ------------ ----------- ----------- -----------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue ............................... $ 4,074 $ 20,890 $ 21,691 $ 88,463 $ 413,215
Cost of goods sold..................... 2,757 15,638 16,185 47,315 166,472
-------------- ------------ ----------- ----------- -----------
Gross profit ........................ 1,317 5,252 5,506 41,148 246,743
Operating expenses
Research and development............. - 1,287 6,361 8,922 23,308
Selling and marketing................ 253 1,339 1,907 5,641 22,627
General and administrative........... 473 2,352 3,034 6,422 19,323
-------------- ------------ ----------- ----------- -----------
Total operating expenses............... 726 4,978 11,302 20,985 65,258
-------------- ------------ ----------- ----------- -----------
Income (loss) from operations.......... 591 274 (5,796) 20,163 181,485
Other income (expense), net............ (8) (180) 172 653 7,185
-------------- ------------ ----------- ----------- -----------
Income (loss) before income
Taxes................................ 583 94 (5,624) 20,816 188,670
Provision for income taxes............. 254 942 824 3,553 72,703
-------------- ------------ ----------- ----------- -----------
Net income (loss)...................... $ 329 $ (848) $ (6,448) $ 17,263 $ 115,967
============== ============ =========== =========== ===========
Basic net income (loss) per common
share................................ $ 0.06 $ (0.12) $ (0.51) $ 1.25 $ 1.53
============== ============ =========== =========== ===========
Diluted net income (loss) per common
and dilutive potential common
share.................................. $ 0.06 $ (0.12) $ (0.51) $ 0.19 $ 1.11
============== ============ =========== =========== ===========
Weighted average basic common shares
outstanding.......................... 5,331 7,317 12,717 13,817 75,802
============== ============ =========== =========== ===========
Weighted average basic common and
dilutive potential common shares
outstanding.......................... 5,331 7,317 12,717 92,407 104,664
============== ============ =========== =========== ===========
</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.................. $ 2,447 $ 4,440 $ 8,261 $ 24,040 $ 268,588
Working capital............................ 2,172 5,485 7,221 42,240 333,452
Total assets............................... 4,897 12,076 17,706 79,676 463,279
Long-term obligations, excluding current
portion.................................. 2,201 1,901 2,074 3,465 1,885
Mandatorily redeemable preferred stock..... - 3,492 14,454 40,404 -
Stockholders' equity (deficit)............. 461 (300) (6,662) 10,783 372,414
</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
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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 8-K.
The information in this Form 8-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,
the risk factors disclosed in the Company's annual report on Form 10-K for the
fiscal year ended October 31, 1997 and risk factors contained in the Company's
quarterly reports on Form 10-Q and current reports on Form 8-K filed
thereafter. The information presented in this report is presented as of
October 31, 1997 and has not been updated or changed to reflect any events
subsequent to that date, other than the acquisition of ATI Telecom International
Ltd.
OVERVIEW
This management discussion and analysis of financial condition and
results of operations has been restated to give retroactive effect to the
Company's February 1998 acquisition of ATI Telecom International Ltd.,
("Alta"), a Canadian corporation headquartered in Norcross, Georgia, in a
transaction valued at approximately $52.5 million. Alta provides a range of
engineering, furnishing and installation services for telecommunications
service providers in the areas of transport, switching and wireless
communications. Under the terms of the agreement, the Company acquired all of
the outstanding shares of Alta in exchange for 1,000,000 shares of CIENA common
stock. The transaction constituted a tax-free reorganization and has been
accounted for as a pooling of interest under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Alta as though it had been a part of
CIENA.
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.
Revenues from installation service fixed price contracts are recognized on the
percentage of costs incurred to date compared to estimated total costs for each
contract. 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 $21.7 million for the fiscal year ended
October 31, 1995 was derived from engineering, furnishing and installation
services sales. The Company's revenue of $88.5 million for the fiscal year
ended October 31, 1996 was derived from MultiWave 1600 system sales to Sprint
and from engineering, furnishing and installation services sales. Revenue for
the fiscal year ended October 31, 1997 was $413.2 million and consisted
primarily of MultiWave 1600 systems sales to Sprint, WorldCom, DTI, and through
the Company's Japanese distributor Nissho, to Teleway, and from engineering,
furnishing and installation services sales. The DTI installation represented
the Company's first deployment of the MultiWave 1600 as part of a newly built
long distance fiberoptic route.
3
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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.
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
approximately 990 persons, which was an increase of 615 persons over the
approximate 375 employed on October 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 1995, 1996 AND 1997
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 engineering, furnishing and installation services
was $39.4 million and $33.7 million for fiscal 1997 and fiscal 1996,
respectively. During the fiscal year ended October 31, 1995 the Company's
$21.7 million in revenue was derived exclusively from engineering, furnishing
and installation services sales. 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 (43.4%) and $184.5 million
(44.7%), respectively of the Company's revenue during fiscal 1997. Revenue
derived from foreign sales accounted for less than 3% 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.
4
<PAGE> 5
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.
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
engineering, furnishing and installation operations. Gross profit was $246.7
million, $41.1 million, and 5.5 million for fiscal years 1997, 1996, and 1995,
respectively. Gross margin was 59.7%, 46.6%, and 25.4% for fiscal 1997, 1996,
and 1995, respectively. The year to year increase in gross margin was primarily
the result of a change in product mix from revenues largely derived from lower
margin engineering, furnishing and installation sales to higher margin
MultiWave product sales. The year to year increase was also attributable to
fixed overhead costs being allocated over a larger revenue base, an improvement
in manufacturing efficiencies, and reductions in component costs.
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. 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 $2.5 million or 40.3% 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, 1996, and 1995 research and development
expenses were 5.6%, 10.1%, and 29.3% 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 $22.6
million, $5.6 million, and $1.9 million for fiscal 1997, 1996, and 1995,
respectively. The approximate $17.0 million or 301% increase from fiscal 1996
to 1997 and the approximate $3.7 million or 196% 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 1997,1996, and 1995 selling and marketing
expenses were 5.5%, 6.4%, and 8.8% 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 $19.3 million, $6.4 million, and $3.0 million for fiscal 1997, 1996, and
1995, respectively. The approximate $12.9 million or 201% 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. The remaining $5.4 million
increase was primarily the result of increased staffing levels and outside
consulting services. The approximate $3.4 million or 112% 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,
1996 and 1995 , general and administrative expenses were 4.7%, 7.3%, and 14.0%
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 (LOSS). The Company's operating profit for fiscal 1997 and
1996 was $181.5 million or 43.9% of revenue, and $20.2 million or
22.8%,respectively. During fiscal year 1995 the Company incurred a loss from
5
<PAGE> 6
operations of $5.8 million or 26.7% of revenue. The year to year increases in
operating profits was primarily due to the comparable increases in revenues and
gross profits derived from the Company's MuliWave systems. 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 $7.2 million, $0.7 million, and $0.2 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.
PROVISION FOR INCOME TAXES. During fiscal 1995, Alta was required to file
separate Federal, State and Foreign income tax returns resulting in a tax
expense of $0.8 million. Also during fiscal 1995, no tax benefit was recorded
for the losses derived from the Company's other operations as 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 commenced
profitable operations, at which time the Company reversed its previously
established deferred tax valuation allowance. The provision for income taxes
for fiscal 1996 of $3.6 million is net of a tax benefit of approximately $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 38.5% of pre-tax earnings, or $72.7 million for fiscal
1997.
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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.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
----------------------------------------------------------------------------------
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, April 30, Jul. 31, Oct. 31
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- -------- -------- -------- --------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue .................................... $ 8,579 $ 6,765 $ 25,732 $47,387 $ 63,673 $ 97,603 $121,845 $130,094
Cost of goods sold ......................... 6,449 5,138 14,036 21,692 28,253 40,400 47,569 50,250
-------- -------- -------- -------- -------- --------- -------- --------
Gross profit ........................... 2,130 1,627 11,696 25,695 35,420 57,203 74,276 79,844
-------- -------- -------- -------- -------- --------- -------- --------
Operating expenses:
Research and development ............... 2,473 1,746 1,964 2,739 3,050 4,699 7,245 8,314
Selling and marketing .................. 990 1,068 1,609 1,974 3,070 4,946 6,722 7,889
General and administrative ............. 1,175 1,023 1,711 2,513 7,003 2,797 3,241 6,282
-------- -------- -------- -------- -------- --------- -------- --------
Total operating expenses ................... 4,638 3,837 5,284 7,226 13,123 12,442 17,208 22,485
-------- -------- -------- -------- -------- --------- -------- --------
Income (loss) from operations .............. (2,508) (2,210) 6,412 18,469 22,297 44,761 57,068 57,359
Other income (expense), net ................ 124 258 102 169 302 1,846 1,426 3,611
-------- -------- -------- -------- -------- --------- -------- --------
Income (loss) before income taxes .......... (2,384) (1,952) 6,514 18,638 22,599 46,607 58,494 60,970
Provision (benefit) for income taxes ....... 382 249 (4,276) 7,198 8,744 18,127 22,770 23,062
-------- -------- -------- -------- -------- --------- -------- --------
Net income (loss) .......................... $ (2,766) $ (2,201) $ 10,790 $11,440 $ 13,855 $ 28,480 $ 35,724 $ 37,908
======== ======== ======== ======== ======== ========= ======== ========
Basic net income (loss) per common share
(1) (2) .................................. $ (0.21) $ (0.16) $ 0.77 $ 0.81 $ 0.97 $ 0.31 $ 0.36 $ 0.38
======== ======== ======== ======== ======== ========= ======== ========
Diluted net income (loss) per common share
and dilutive potential common share
(1) (2) .................................. $ (0.21) $ (0.16) $ 0.11 $ 0.12 $ 0.14 $ 0.27 $ 0.34 $ 0.35
======== ======== ======== ======== ======== ========= ======== ========
Weighted average basic common share (1) .... 13,115 13,862 14,057 14,178 14,216 92,644 98,021 99,786
======== ======== ======== ======== ======== ========= ======== ========
Weighted average basic and common and
dilutive potential common share (1) ...... 13,115 13,862 95,970 97,755 100,425 105,456 106,296 107,308
======== ======== ======== ======== ======== ========= ======== ========
</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 % 100.0 % 100.0 %
Cost of goods sold .................... 75.2 75.9 54.5 45.8 44.4 41.4 39.0 38.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit ...................... 24.8 24.1 45.5 54.2 55.6 58.6 61.0 61.4
Operating expenses:
Research and development .......... 28.8 25.8 7.6 5.8 4.8 4.8 5.9 6.4
Selling and marketing ............. 11.5 15.8 6.3 4.2 4.8 5.1 5.5 6.1
General and administrative ........ 13.7 15.1 6.6 5.3 11.0 2.9 2.7 4.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses .............. 54.0 56.7 20.5 15.3 20.6 12.8 14.1 17.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations ......... (29.2) (32.6) 25.0 38.9 35.0 45.8 46.9 44.1
Other income (expense), net ........... 1.4 3.8 0.4 0.4 0.5 1.9 1.2 2.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes ..... (27.8) (28.8) 25.4 39.3 35.5 47.7 48.1 46.9
Provision (benefit) for income taxes .. 4.5 3.7 (16.6) 15.2 13.7 18.6 18.7 17.7
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ..................... (32.3) (32.5) 42.0 % 24.1 % 21.8 % 29.1 % 29.4 % 29.2 %
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) The diluted net income (loss) per common share and dilutive potential
common share include the weighted average outstanding basic and
diluitive common shares which includes 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
for all periods stated, except for the quarters ended January 31, 1996
and April 30, 1996, which because a loss was incurred during these
quarters, are presented using only basic shares outstanding. Basic
shares outstanding includes only weighted average Common Stock
outstanding.
(2) The sum of the quarterly earnings per share for fiscal 1996 does not
equal the reported annual earnings per share for fiscal 1996 due to the
effect of using only basic shares outstanding for the quarters ended
January 31, 1996 and April 30, 1996. 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.
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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.
The Company's revenue increased significantly on a quarter-to-quarter basis
since the Company's initial customer acceptance of its' MultiWave systems
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.
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.
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 $268.6 million in cash and cash equivalents.
The Company's operating activities used cash of $5.2 million and $1.2
million in fiscal 1995 and 1996, respectively, and provided cash of $85.0
million for fiscal 1997. The cash used in operations in fiscal 1995 and 1996
was accounted for primarily by the Company's research and development
activities relating to its early development of the MultiWave system. Cash
provided by operations in fiscal 1997 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 $2.1
million, $11.6 million and $66.8 million, respectively. Included in investment
activities were capital equipment expenditures in fiscal 1995, 1996 and 1997 of
$2.0 million, $9.9 million and $51.9 million, respectively. These capital
equipment expenditures were primarily for test, manufacturing and computer
equipment. The Company expects additional capital equipment
8
<PAGE> 9
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 $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. 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.
9
<PAGE> 10
AUDITED FINANCIAL STATEMENTS
The following is an index to the audited consolidated financial statements:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants...................................... 11
Consolidated Balance Sheets............................................ 12
Consolidated Statements of Operations.................................. 13
Consolidated Statements of Changes in Stockholders' Equity (Deficit)... 14
Consolidated Statements of Cash Flows.................................. 15
Notes to Consolidated Financial Statements............................. 16
</TABLE>
10
<PAGE> 11
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, except for Note 1 Principles of Consolidation, as to which
the date is February 19, 1998
11
<PAGE> 12
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................................................................. $ 24,040 $ 268,588
Accounts receivable (net of allowance of $233 and $722)................................... 26,516 72,336
Inventories, net.......................................................................... 13,228 41,109
Deferred income taxes..................................................................... 1,834 9,139
Prepaid expenses and other................................................................ 1,646 3,093
------------ ------------
Total current assets................................................................... 67,264 394,265
Equipment, furniture and fixtures, net...................................................... 11,972 67,618
Other assets................................................................................ 440 1,396
------------ ------------
Total assets.............................................................................. $ 79,676 $ 463,279
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 9,363 $ 24,760
Accrued liabilities....................................................................... 5,242 32,022
Income taxes payable...................................................................... 3,962 261
Deferred revenue.......................................................................... 4,598 2,591
Other current obligations................................................................. 1,859 1,179
------------ ------------
Total current liabilities.............................................................. 25,024 60,813
Deferred income taxes..................................................................... - 28,167
Other long-term obligations............................................................... 3,465 1,885
------------ ------------
Total liabilities...................................................................... 28,489 90,865
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;
14,191,585 and 100,287,653 shares issued and outstanding.................................. 142 1,003
Additional paid-in capital................................................................ 407 245,219
Notes receivable from stockholders........................................................ (60) (64)
Translation adjustment.................................................................... - (5)
Retained earnings......................................................................... 10,294 126,261
------------ ------------
Total stockholders' equity........................................................ 10,783 372,414
------------ ------------
Total liabilities, mandatorily redeemable preferred stock and stockholders'
equity................................................................................. $ 79,676 $ 463,279
============ ============
</TABLE>
12
<PAGE> 13
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................................................ $ 21,691 $ 88,463 $ 413,215
Cost of goods sold..................................... 16,185 47,315 166,472
------------ ---------- ------------
Gross profit....................................... 5,506 41,148 246,743
------------ ---------- ------------
Operating expenses:
Research and development........................... 6,361 8,922 23,308
Selling and marketing.............................. 1,907 5,641 22,627
General and administrative......................... 3,034 6,422 19,323
------------ ---------- ------------
Total operating expenses....................... 11,302 20,985 65,258
------------ ---------- ------------
Income (loss) from operations.......................... (5,796) 20,163 181,485
Interest and other income (expense), net............... 435 1,096 7,593
Interest expense....................................... (263) (443) (408)
------------ ---------- ------------
Income (loss) before income taxes...................... (5,624) 20,816 188,670
Provision for income taxes............................. 824 3,553 72,703
------------ ---------- ------------
Net income (loss)...................................... $ (6,448) $ 17,263 $ 115,967
============ ========== ============
Basic net income (loss) per common share............... $ (0.51) $1.25 $1.53
============ ========== ============
Diluted net income (loss) per common share and
dilutive potential common share.................... $ (0.51) $ 0.19 $ 1.11
============ ========== ============
Weighted average basic common shares outstanding 12,717 13,817 75,802
============ ========== ============
Weighted average basic common and dilutive
potential common shares outstanding................ 12,717 92,407 104,664
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 14
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES FOREIGN TOTAL
COMMON STOCK RECEIVABLE CURRENCY RETAINED STOCKHOLDERS'
--------------------------- ADDITIONAL FROM TRANSLATION EARNINGS EQUITY
SHARES AMOUNT PAID-IN-CAPITAL STOCKHOLDERS ADJUSTMENT (DEFICIT) (DEFICIT)
------------- ---------- --------------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994..... 11,816,665 $ 118 $ 167 $(65) $ - $ (519) $ (299)
Exercise of warrants............ 1,075,000 11 11 - - - 22
Exercise of stock options....... 43,750 - - - - - -
Repayment of receivables from
stockholders.................. - - - 65 - - 65
Dividend payable................ (2) (2)
Net loss........................ - - - - - (6,448) (6,448)
------------- ----------- --------------- ------------ ----------- --------- ------------
BALANCE AT OCTOBER 31, 1995..... 12,935,415 129 178 - - (6,969) (6,662)
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...................... - - - - - 17,263 17,263
------------- ----------- --------------- ------------ ----------- --------- ------------
BALANCE OF OCTOBER 31, 1996..... 14,191,585 142 407 (60) - 10,294 10,783
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
Translation adjustment.......... (5) (5)
Compensation cost of stock
options and other adjustments. - - 41 - - - 41
Net income...................... - - - - - 115,967 115,967
------------- ----------- --------------- ------------ ----------- --------- ------------
BALANCE AT OCTOBER 31, 1997..... 100,287,653 $ 1,003 $245,219 $(64) $ (5) $126,261 $ 372,414
============= =========== =============== ============ =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 15
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 activites:
Net (loss) income ................................................ $ (6,448) $ 17,263 $ 115,967
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activites:
Non-cash charges from equity transactions....................... - 158 36
Write down of leasehold improvements and equipment.............. - 883 923
Depreciation and amortization................................... 414 1,082 10,251
Provision for doubtful accounts................................. 76 76 489
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 liabilites:
Increase in accounts receivable............................. (169) (20,601) (46,309)
Increase in inventories..................................... - (15,165) (35,466)
Increase in deferred income tax assets...................... - (1,834) (7,305)
Increase in prepaid expenses and other assets............... (9) (1,009) (2,403)
Increase in accounts payable and accruals................... 1,171 7,259 30,311
Increase (decrease) in income taxes payable................. 161 3,801 (3,701)
(Decrease) increase in deferred income tax liabilities...... (392) - 4,793
(Decrease) increase in deferred revenue and other
obligations............................................. (23) 3,386 (2,007)
------------ ------------ ------------
Net cash (used in) provided by operating activities............. (5,219) (1,180) 85,030
------------ ------------ ------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures.................. (2,120) (11,558) (66,820)
------------ ------------ ------------
Net cash used in investing activities....................... (2,120) (11,558) (66,820)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations.............. 111 2,543 (2,260)
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................... 11,160 28,517 226,338
------------ ------------ ------------
Net increase in cash and cash equivalents................... 3,821 15,779 244,548
Cash and cash equivalents at beginning of period.................... 4,440 8,261 24,040
------------ ------------ ------------
Cash and cash equivalents at end of period.......................... $ 8,261 $ 24,040 $ 268,588
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................... $ 269 $ 419 $405
============ ============ ============
Income taxes................................................. $ 1,023 $ 1,830 $ 26,999
============ ============ ============
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.
15
<PAGE> 16
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.
On February 19, 1998 the Company completed a merger with ATI Telecom
International Ltd., ("Alta"), a Canadian corporation headquartered in Norcross,
Georgia, in a transaction valued at approximately $52.5 million. Alta provides
a range of engineering, furnishing and installation services for
telecommunications service providers in the areas of transport, switching and
wireless communications. Under the terms of the agreement the Company exchanged
1,000,000 shares of its common stock for all the common stock of Alta. The
merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial
position and cash flows of Alta as though it had been a part of CIENA.
Prior to the merger, Alta's year ended on December 31. In recording the
business combination, Alta's prior period financial statements have been
restated to a year ended October 31, to conform to CIENA's fiscal year end.
All intercompany transactions between CIENA and Alta have been eliminated in
consolidation. Certain reclassifications were made to Alta financial
statements to conform to CIENA's presentation. No material adjustments were
made to conform to CIENA's accounting policies.
The following table shows the separate historical results of CIENA and Alta
for the periods prior to the consummation of the merger of the two entities:
<TABLE>
<CAPTION>
(in thousands) Quarter
Ended
Year Ended October 31, January 31,
---------------------------------------------------------
1995 1996 1997 1998
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
CIENA $ - $ 54,838 $ 373,827 $ 134,267
Alta 21,691 33,625 39,531 11,349
Intercompany eliminations - - (143) (524)
---------- ----------- ------------- -----------
Consolidated total, as restated $ 21,691 $ 88,463 $ 413,215 $ 145,092
========== =========== ============= ===========
Net Income (loss):
CIENA $ (7,629) $ 14,718 $ 112,945 $ 39,768
Alta 1,181 2,545 3,022 (70)
---------- ----------- ------------- -----------
Consolidated total, as restated $ (6,448) $ 17,263 $ 115,967 $ 39,698
========== =========== ============= ===========
</TABLE>
16
<PAGE> 17
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.
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 88% 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 84% 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
17
<PAGE> 18
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage of costs incurred to date compared to estimated
total costs for each contract. 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.
Foreign Currency Translation
The majority of 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 Basic Net Income per Common Share and Diluted Net Income per
Common and Dilutive Potential Common Share
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 has implemented SFAS No. 128 in
fiscal 1998, as required. Accordingly, all prior period EPS data has been
restated.
The following is a reconciliation of the numerators and denominators of
the basic net income per common share ("basic EPS") and diluted net income per
common and dilutive potential common share ("diluted EPS"). Basic EPS is
computed using the weighted average number of common shares outstanding.
Diluted EPS is computed using the weighted average number of common shares
outstanding, stock options and warrants using the treasury stock method and
shares issued upon conversion of all outstanding shares of Mandatorily
Redeemable Preferred Stock. (in thousands except per share amounts)
18
<PAGE> 19
<TABLE>
<CAPTION>
For the Year Ended October 31, 1995
----------------------------------------------------
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -------------
<S> <C> <C> <C>
BASIC EPS
(Loss) available to
common stockholders $ (6,448) 12,717 $ (0.51)
=============
EFFECT OF DILUTIVE SECURITIES
No effect due to anti-dilution - -
-------------- --------------
DILUTED EPS
(Loss) available to common
stockholders $ (6,448) 12,717 $ (0.51)
============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended October 31, 1996
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -------------
<S> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 17,263 13,817 $ 1.25
=============
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants - 8,533
Conversion of Preferred Stock - 70,057
-------------- --------------
DILUTED EPS
Income available to common
stockholders + assumed conversions $ 17,263 92,407 $ 0.19
============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended October 31, 1997
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- -------------
<S> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 115,967 75,802 $ 1.53
=============
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants - 8,774
Conversion of Preferred Stock - 20,088
-------------- --------------
DILUTED EPS
Income available to common
stockholders + assumed conversions $ 115,967 104,664 $ 1.11
============== ============== =============
</TABLE>
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
19
<PAGE> 20
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 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.
20
<PAGE> 21
(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>
(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............... $ 12,396 $ 65,444
Leasehold improvements................... 1,141 13,953
------------ ------------
13,537 79,397
Accumulated depreciation and amortization....... (2,028) (12,279)
Construction-in-progress........................ 463 500
------------ ------------
$ 11,972 $ 67,618
============ ============
</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 8,284
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 $ 32,022
========= ===========
</TABLE>
21
<PAGE> 22
(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-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.
22
<PAGE> 23
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>
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>
<CAPTION>
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>
23
<PAGE> 24
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 ....................................... $ 17,263 $ 115,967
========== ===========
Net income applicable to common stockholders -
pro forma .......................................... $ 16,770 $ 110,404
========== ===========
Basic net income per share - as reported ............ $ 1.25 $ 1.53
========== ===========
Basic net income per share - pro forma .............. $ 1.21 $ 1.46
========== ===========
Diluted net income per share - as reported .......... $ 0.19 $ 1.11
========== ===========
Diluted net income per share - pro forma ............ $ 0.18 $ 1.05
========== ===========
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
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>
24
<PAGE> 25
(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........... $20,816 $188,670
======= ========
Provision for income taxes:
Current:
Federal............................ $ 4,483 $67,744
State.............................. 694 7,373
Foreign............................ 210 98
------- --------
Total current............... 5,387 75,215
------- --------
Deferred:
Federal............................ (1,690) (2,015)
State............................. (144) (497)
Foreign....................... - -
------- --------
Total deferred.............. (1,834) (2,512)
------- --------
Provision for income taxes........... $ 3,553 $72,703
======= ========
</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...... (20.0) -
State taxes, net of federal benefit.. 2.7 2.6
Other................................ (0.6) 0.9
-------- --------
17.1 % 38.5 %
======== ========
</TABLE>
25
<PAGE> 26
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 $ 9,281
Depreciation and other .......................... 382 -
Net operating loss and credit carry forward ....... 1,609 1,555
Capital loss carry forward ........................ 940 -
------- --------
Gross deferred tax assets ......................... $ 4,383 $ 10,836
Valuation allowance ............................... (2,549) (1,697)
------- --------
Net deferred tax asset ............................ $ 1,834 $ 9,139
======= ========
Deferred tax liabilities:
Equipment leases ................................ $ - $ 3,985
Services ........................................ - 19,389
Depreciation and other .......................... - 4,793
------- --------
Deferred tax liabilites ....................... $ - $ 28,167
======= ========
</TABLE>
As of October 31, 1997 the Company assumed net operating loss carryforwards
of approximately $4.5 million through its acquisition of Alta which begin
expiring in fiscal 2002.
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.
26
<PAGE> 27
(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 ............................... $ 4,536
1999 ............................... 4,946
2000 ............................... 4,817
2001 ............................... 4,639
2002 ............................... 4,008
Thereafter ......................... 13,015
-------
$35,961
=======
</TABLE>
Rental expense for fiscal 1995, 1996 and 1997 was approximately $207,000,
$717,000 and $2,652,000, respectively.
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.
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.
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.
27
<PAGE> 28
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.
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, Canada, Philippines, 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 $6.0 million, $3.5
million, and $11.7 million in fiscal years 1995, 1996 and 1997, respectively.
(11) SUBSEQUENT EVENTS (UNAUDITED)
Acquisitions
Astracom
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.
Terabit
During April 1998 the Company completed an Agreement and Plan of
Reorganization with Terabit Technology, Inc. ("Terabit"), a developer of
optical components known as photodetector or optical receivers. Terabit is
located in Santa Barbara, California. The purchase price was approximately
$11.5 million and consisted of the issuance of 134,390 shares of CIENA common
stock, the payment of $1.1 million in cash, and the assumption of certain stock
options. The transaction was recorded using the purchase accounting method
with the purchase price representing approximately $9.5 million in purchased
research and development, 1.8 million in goodwill and other intangibles, and
approximately $0.2 million in net assets assumed. The amortization period for
the intangibles, based on management's estimate of the useful life of the
acquired technology, is five years. The operations of Terabit are not material
to the consolidated financial statements of the Company, and accordingly,
separate pro forma financial information has not been presented.
Resolution of Litigation with Pirelli
On June 1, 1998 the Company announced the resolution of all pending
litigation with Pirelli. The terms of the settlement involved the dismissal of
Pirelli's three lawsuits against the Company that were pending in Delaware,
dismissal of the Company's legal proceedings against Pirelli in the United
States International Trade Commission, payment to Pirelli of $30.0 million and
certain running royalties due to Pirelli, a worldwide, non-exclusive
cross-license to each party's patent portfolios, and a five-year moratorium on
future litigation between the parties. As a result of the settlement, the
Company plans to record a one time charge in its fiscal quarter ended July 31,
1998, of approximately $20.0 million. The payment of future royalties due to
Pirelli is based upon future revenues derived from the licensed technology. The
Company does not expect the future royalty payments to have a material impact
on the Company's business, financial condition and or results of operations.
28
<PAGE> 29
ADDITIONAL SUPPLEMENTAL DATA (UNAUDITED)
The historical consolidated financial results of CIENA for prior periods have
been restated to include the financial position and results of operations of
Alta. In the opinion of management, financial statements included in this
report reflect all normal recurring adjustments which the Company considers
necessary for the fair presentation of the results of operations for the
interim period covered and of the financial position of the Company at the date
of the interim balance sheet. The following unaudited consolidated balance
sheet and consolidated statement of operations shows the historical results of
the combined CIENA and Alta for the period ending January 31, 1998 which was
prior to the consummation of the merger of the two entities:
CIENA CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
January 31,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 257,425
Marketable debt securities 31,089
Accounts receivable, net 89,305
Inventories, net 61,388
Deferred income taxes 9,706
Prepaid expenses and other 5,102
-----------
Total current assets 454,015
Equipment, furniture and fixtures, net 83,538
Goodwill and other intangible assets 10,978
Other assets 2,574
-----------
Total assets $ 551,105
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,472
Accrued liabilities 34,754
Income taxes payable 17,417
Deferred revenue 3,026
Other current obligations 988
-----------
Total current liabilities 89,657
Deferred income taxes 29,146
Other long-term obligations 1,942
-----------
Total liabilities 120,745
Commitments and contingencies -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized;
zero shares issued and outstanding -
Common stock - par value $.01; 360,000,000 shares authorized;
101,093,109 shares issued and outstanding 1,011
Additional paid-in capital 263,543
Notes receivable from stockholders (116)
Translation adjustment (37)
Retained earnings 165,959
-----------
Total stockholders' equity 430,360
-----------
Total liabilities and stockholders' equity $ 551,105
===========
</TABLE>
29
<PAGE> 30
CIENA CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
January 31,
--------------
1998
--------------
<S> <C>
Revenue $145,092
Cost of goods sold 58,980
--------------
Gross profit 86,112
--------------
Operating expenses
Research and development 10,203
Selling and marketing 9,968
General and administrative 3,792
--------------
Total operating Expenses 23,963
--------------
Income (loss) from operations 62,149
Interest and other income (expense ), net 3,775
Interest expense (84)
--------------
Income (loss) before income taxes 65,840
Provision (benefit) for income taxes 26,142
--------------
Net income (loss) $39,698
==============
Basic net income per common share $0.39
==============
Diluted net income per common share and dilutive
potential common share $0.37
==============
Weighted average basic common shares outstanding 100,641
==============
Weighted average basic common and dilutive potential
common shares outstanding 107,552
==============
</TABLE>
30
<PAGE> 31
Item 7. Financial Statement and Exhibits.
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
23.2 Consent of Independent Accountants
27.1 Restated Financial Data Schedule (filed only electronically with
the SEC)
27.2 Restated Financial Data Schedule (Filed only electronically with
the SEC)
</TABLE>
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, .
CIENA CORPORATION
Date: June 23, 1998
By: /s/ Joseph R. Chinnici
----------------------
Joseph R. Chinnici
Sr. Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
31
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-1 (Nos. 333-17729 and
333-28325) and in the Registration Statement on Form S-8 (Nos. 333-27131 and
333-52467) of CIENA Corporation of our report dated November 26, 1997, except
for Note 1-Principles of Consolidation, as to which the date is February 19,
1998 appearing in Item 5 of this Current Report on Form 8-K.
Price Waterhouse LLP
Falls Church, Virginia
June 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated Summary Financial Information as a result of a
pooling of interest and is extracted from the Balance Sheet, Statement of
Operation and Statement of Cash Flows included in the Company's Form 8-K report
dated February 19, 1998, for the period ending October 31, 1996 and October 31,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1997
<PERIOD-START> NOV-01-1995 NOV-01-1996
<PERIOD-END> OCT-31-1996 OCT-31-1997
<CASH> 24,040 268,588
<SECURITIES> 0 0
<RECEIVABLES> 26,749 73,058
<ALLOWANCES> 233 722
<INVENTORY> 13,228 41,109
<CURRENT-ASSETS> 67,264 394,265
<PP&E> 14,000 79,897
<DEPRECIATION> 2,028 12,279
<TOTAL-ASSETS> 79,676 463,279
<CURRENT-LIABILITIES> 25,024 60,813
<BONDS> 0 0
40,404 0
0 0
<COMMON> 142 1,003
<OTHER-SE> 10,641 371,411
<TOTAL-LIABILITY-AND-EQUITY> 79,676 463,279
<SALES> 88,463 413,215
<TOTAL-REVENUES> 88,463 413,215
<CGS> 47,315 166,472
<TOTAL-COSTS> 47,315 166,472
<OTHER-EXPENSES> 20,985 65,258
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 443 408
<INCOME-PRETAX> 20,816 188,670
<INCOME-TAX> 3,553 72,703
<INCOME-CONTINUING> 17,263 115,967
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,263 115,967
<EPS-PRIMARY> 1.25 1.53
<EPS-DILUTED> 0.19 1.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated Summary Financial Information as a result of a
pooling of interest and is extracted from the Balance Sheet, Statement of
Operation and Statement of Cash Flows included in the Company's Form 8-K report
dated February 19, 1998, for the period ending October 31, 1996 and October 31,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997 OCT-31-1997 OCT-31-1998
<PERIOD-START> NOV-01-1996 FEB-01-1997 MAY-01-1997 NOV-01-1997
<PERIOD-END> JAN-31-1997 APR-30-1997 JUL-31-1997 JAN-31-1998
<CASH> 33,021 183,804 247,281 257,425
<SECURITIES> 0 0 0 31,089
<RECEIVABLES> 36,971 41,903 67,413 89,833
<ALLOWANCES> 233 692 722 528
<INVENTORY> 16,145 22,859 29,103 61,388
<CURRENT-ASSETS> 92,373 254,379 350,869 454,015
<PP&E> 22,602 40,996 61,375 101,339
<DEPRECIATION> 3,140 4,806 7,970 17,801
<TOTAL-ASSETS> 112,586 291,172 404,855 551,105
<CURRENT-LIABILITIES> 44,458 55,284 81,016 89,657
<BONDS> 0 0 0 0
40,404 0 0 0
0 0 0 0
<COMMON> 145 972 993 1,011
<OTHER-SE> 24,519 215,075 301,248 429,349
<TOTAL-LIABILITY-AND-EQUITY> 112,586 291,172 463,279 551,105
<SALES> 63,673 97,603 121,845 145,092
<TOTAL-REVENUES> 63,673 97,603 121,845 145,092
<CGS> 28,253 40,400 47,569 58,980
<TOTAL-COSTS> 28,253 40,400 47,569 58,980
<OTHER-EXPENSES> 13,123 12,442 17,208 23,963
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 129 105 87 84
<INCOME-PRETAX> 22,599 46,607 58,494 65,840
<INCOME-TAX> 8,744 18,127 22,770 26,142
<INCOME-CONTINUING> 13,855 28,480 35,724 39,698
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 13,855 28,480 35,724 39,698
<EPS-PRIMARY> 0.97 0.31 0.36 0.39
<EPS-DILUTED> 0.14 0.27 0.34 0.37
</TABLE>
