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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
JULY 1, 1999
Date of Report (Date of earliest event reported)
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 0-21969 23-2725311
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
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1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code
(410) 865-8500
NOT APPLICABLE
(Former name or former address, if changed since last report)
Exhibit Index on page 46
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ITEM 5. OTHER EVENTS
This current report on Form 8-K provides supplemental financial
information pertaining to the retroactive effect of the July 1, 1999 business
combination of CIENA Corporation and Omnia Communications, Inc., which was
accounted for under the pooling of interests method of accounting.
CIENA's fiscal year ends on October 31. Omnia's fiscal year ends on
December 31. Since the fiscal years of CIENA and Omnia differ, the periods
combined for the supplemental consolidated financial data give effect to the
merger as if it had occurred at the beginning of each period presented:
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CIENA Omnia
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Fiscal year ended October 31, 1997 For the period from June 3, 1997 (date of inception) to
December 31, 1997
Fiscal year ended October 31, 1998 Fiscal year ended December 31, 1998
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The supplemental consolidated financial data for the years ended October 1994,
1995, and 1996 was not impacted by CIENA's merger with Omnia as Omnia did not
commence operations until June 3, 1997.
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the supplemental consolidated financial
statements and the notes thereto included in "Supplemental Consolidated
Financial Statements and Supplementary Data".
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YEAR ENDED OCTOBER 31, (1)
1994 1995 1996 1997 1998
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(in thousands except share and per share data)
STATEMENT OF OPERATIONS DATA:
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Revenue ..................................... $ 20,890 $ 21,691 $ 88,463 $ 413,215 $ 508,087
Cost of goods sold........................... 15,638 16,185 47,315 166,472 256,014
-------------- ------------ ------------ -------------- ------------
Gross profit .............................. 5,252 5,506 41,148 246,743 252,073
-------------- ------------ ------------ -------------- ------------
Operating expenses:
Research and development................... 1,287 6,361 8,922 23,773 73,756
Selling and marketing...................... 1,339 1,907 5,641 22,627 47,343
General and administrative................. 2,352 3,034 6,422 11,965 19,274
Purchased research and development......... - - - - 9,503
Pirelli litigation......................... - - - 7,500 30,579
Costs of proposed merger................... - - - - 2,548
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Total operating expenses..................... 4,978 11,302 20,985 65,865 183,003
-------------- ------------ ------------ -------------- ------------
Income (loss) from operations................ 274 (5,796) 20,163 180,878 69,070
Other income (expense), net.................. (180) 172 653 7,178 12,830
-------------- ------------ ------------ -------------- ------------
Income (loss) before income taxes............ 94 (5,624) 20,816 188,056 81,900
Provision for income taxes................... 942 824 3,553 72,488 36,200
-------------- ------------ ------------ -------------- ------------
Net income (loss)............................ $ (848) $ (6,448) $ 17,263 $ 115,568 $ 45,700
============== ============ ============ ============== ============
Basic net income (loss) per common
share...................................... $ (0.12) $ (0.51) $ 1.25 $ 1.52 $ 0.39
============== ============ ============ ============== ============
Diluted net income (loss) per common
and dilutive potential common share...... $ (0.12) $ (0.51) 0.19 $ 1.10 $ 0.36
============== ============ ============ ============== ============
Weighted average basic common shares
outstanding.............................. 7,317 $ 12,717 13,817 75,964 117,990
============== ============ ============ ============== ============
Weighted average basic common and
dilutive potential common shares
outstanding.............................. 7,317 12,717 92,407 104,843 127,894
============== ============ ============ ============== ============
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OCTOBER 31, (1)
1994 1995 1996 1997 1998
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BALANCE SHEET DATA: (in thousands)
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Cash and cash equivalents............ $ 4,440 $ 8,261 $ 24,040 $ 273,286 $ 250,714
Working capital........................ 5,485 7,221 42,240 338,078 391,305
Total assets.............................. 12,076 17,706 79,676 468,247 602,809
Long-term obligations, excluding
current portion and deferred income taxes.. 1,901 2,074 3,465 1,900 3,029
Mandatorily redeemable preferred stock 3,492 14,454 40,404 - -
Stockholders' equity (deficit)......... (300) (6,662) 10,783 377,278 501,036
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(1) CIENA 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, 1997, and 1998 comprised 52 weeks and
fiscal 1996 comprised 53 weeks.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Supplemental Consolidated Financial Data" and the Company's
supplemental 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, risk factors disclosed in the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1998 and risk factors contained
in the SEC filings thereafter. The information presented in this report is
presented as of October 31, 1998 and has not been updated or changed to reflect
any events subsequent to that date, other than the acquisition of Omnia
Communications, Inc.
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations has been restated to give retroactive effect to the
Company's July 1, 1999 acquisition of Omnia Communications, Inc., ("Omnia"),
Delaware corporation headquartered in Marlborough, Massachusetts, in a
transaction valued at approximately $483 million. Omnia focuses on developing
solutions to allow public telephone network operators to alter services cost
effectively over integrated metropolitan fiberoptic access and transport
networks. Under the terms of the merger agreement with Omnia, the Company
acquired all of the outstanding shares and assumed stock options of Omnia in
exchange for approximately 16 million shares of CIENA common stock and CIENA
stock options. The transaction 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 Omnia as though it had been a part of
CIENA.
CIENA Corporation designs, makes and sells open architecture, dense wave
division multiplex systems for fiberoptic communications networks, including
long-distance and local exchange carriers. CIENA also provides a range of
engineering, furnishing and installation services for telecommunications service
providers.
Fiscal 1998 was a year of dramatic events affecting the Company. Soon
after the close of the first fiscal quarter, MCIWorldCom, the Company's largest
customer of fiscal 1997, surprised the Company with an announcement of a major
change in purchasing practices - a change that meant materially reduced revenue
for the Company. This adverse event was followed in the second quarter by the
Company's successful, large scale commercial introduction of the Company's
industry leading 40-channel MultiWave Sentry 4000. The third quarter included
resolution of the Company's longstanding Pirelli SpA ("Pirelli") litigation,
which was followed on June 3, 1998 with the announcement of a planned merger
with Tellabs, Inc. In the fourth quarter, just prior to consummation of the
merger, AT&T advised the Company that it would no longer consider CIENA's long
distance DWDM products for deployment in AT&T's network. The planned merger with
Tellabs was later terminated on September 14, 1998.
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The Company's final results for fiscal 1998, its second full year in the
DWDM marketplace, show total revenues in excess of $500 million. The Company
believes this represents a considerable achievement, particularly given the
substantial portion of revenues derived from the sale of its now
third-generation DWDM product, the MultiWave Sentry 4000. Nevertheless, the
termination of the Tellabs merger represented a setback for the Company.
The outlook for fiscal 1999 is challenging. The price discounting offered
by competitors striving to catch up to the Company and acquire market share has
placed pressure on gross margins and operating profitability. But market demand
for high-bandwidth solutions still appears robust, and the Company believes that
its product and service quality, manufacturing experience, and proven track
record of delivery will enable it to endure the gross margin pressure while it
concentrates on efforts to reduce product costs and maximize production
efficiencies. The Company intends to continue this strategy in order to preserve
and enhance market leadership and eventually build on its installed base with
new and additional products. Pursuit of this strategy, in conjunction with
increased investments in selling, marketing, and customer service activities,
will likely limit the Company's operating profitability over at least the first
half of fiscal 1999, and may result in near term operating losses.
HIGHLIGHTS OF THE FISCAL YEAR 1998
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 to the
end user.
For the fiscal year ended October 31, 1998, the Company recorded $508.1
million in revenue of which $266.9 million was from sales to Sprint. The Company
increased the total number of customers for DWDM systems from five customers in
fiscal 1997 to fourteen customers in fiscal 1998. Revenue from sales to WorldCom
declined from approximately $184.5 million in fiscal 1997 to an amount less than
10% of the Company's total fiscal 1998 revenue. Substantially all of the revenue
recognized from the sales to WorldCom occurred in the Company's first quarter
ended January 31, 1998. In addition to Sprint and WorldCom, during the fiscal
year ended October 31, 1998 the Company recognized revenue from Cable and
Wireless; Hermes; Enron; Racal; Telia of Sweden; TD of France; DTI; GST; and,
through the Company's distributor, NISSHO Electronics Corporation ("NISSHO"),
sales to Teleway, Japan Telecom and to DDI. The Company also recognized an
immaterial amount of revenue from one undisclosed customer.
During December 1997 the Company acquired Astracom, an early stage
telecommunications company located in Atlanta, Georgia. The employees of
Astracom were immediately deployed to assist with the Company's development
efforts for its MultiWave Metro product. The purchase price was approximately
$13.1 million and consisted 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. The transaction was recorded using the purchase accounting method with
the purchase price representing approximately $11.4 million in goodwill and
other intangibles, and approximately $1.7 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.
In February 1998 the Company acquired Alta, a Canadian corporation
headquartered near Atlanta, 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 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 always been a part of CIENA.
In March 1998 the Company announced an agreement to supply Bell Atlantic
with DWDM optical transmission systems. The supply agreement has no minimum
purchase commitments and includes the Company's MultiWave 1600,
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Sentry and Firefly systems. Deployment and revenue recognition is expected in
the first half of calendar 1999, subject to successful completion of ongoing
testing. The Bell Atlantic DWDM deployment is expected to mark the first time a
RBOC has committed to deployment of DWDM equipment.
During April 1998 the Company acquired Terabit, a developer of optical
components known as photodetectors or optical receivers. The Company believes
the technology currently under development at Terabit may give it a strategic
advantage over its competitors. 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.
From December 1996 until June 1998, the Company was involved in
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, a worldwide, non-exclusive cross-license
to each party's patent portfolios, and a 5-year moratorium on future litigation
between the parties. The Company recorded a charge of approximately $30.6
million for the year ended October 31, 1998, relating to legal fees and the
ultimate settlement to Pirelli. 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 or results of operations.
On June 3, 1998 the Company announced an agreement to merge with Tellabs,
Inc. ("Tellabs"), a Delaware corporation headquartered in Lisle, Illinois.
Tellabs designs, manufactures, markets and services voice and data transport
network access systems. Under the terms of the original agreement, all
outstanding shares of CIENA stock were to have been exchanged at the ratio of
one share of Tellabs common stock for each share of CIENA common stock. On
August 21, 1998 the Company was informed by AT&T that AT&T had decided not to
pursue further evaluation of CIENA's DWDM systems. Following the impact of the
AT&T announcement on the market prices of the common stock of the respective
companies, the Company and Tellabs management renegotiated the terms of the
merger agreement, and on August 28, 1998 announced an amendment to the original
merger agreement which was approved by the respective companies' boards of
directors. Under the terms of the agreement as amended, all outstanding shares
of CIENA stock were to have been exchanged at the ratio of 0.8 share of Tellabs
common stock for each share of CIENA common stock. Subsequent to August 28,
1998, further adverse investor reaction raised serious questions about the
ultimate ability to obtain shareholder approval for the merger. An agreement to
terminate the merger was announced on September 14, 1998.
In June 1998 at the SUPERCOMM trade show in Atlanta, Georgia, the Company
demonstrated its MultiWave Metro(TM) ("Metro") DWDM system for metropolitan and
local access applications. Metro enables carriers to offer multi-protocol
high-bandwidth services economically using their existing network
infrastructure. The Metro product is expected to be commercially available by
the first quarter of calendar 1999. The Company also demonstrated at the
SUPERCOMM trade show a 96 channel DWDM system. The 96 channel DWDM system is
expected to be commercially available during the first half of calendar 1999.
The Company had previously announced that AT&T was evaluating a
customized version of its MultiWave 1600 Sentry system. In July 1998 AT&T
indicated to the Company that capacity requirements of its network had grown to
such extent that the delays in final certification and approval for deployment
of the Company's customized 16 channel system would make actual deployment of
that system inadvisable, and that AT&T would accordingly shift to an accelerated
evaluation of commercially available, higher channel count systems. The Company
believed AT&T would evaluate the Company's MultiWave(R) 4000 system positively
in this context, particularly because the Company believes it is the only
manufacturer in the world with operational 40 channel systems ready for prompt
delivery on an "off-the-shelf" basis in substantial manufacturing volumes.
However, on August 21, 1998 the Company was informed by AT&T that AT&T had
decided not to pursue further evaluation of CIENA's DWDM systems.
During the first quarter of 1998 the Company continued its effort to
expand its manufacturing capabilities by leasing an additional facility of
approximately 35,000 square feet located in the Linthicum, Maryland area. This
facility
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is used for manufacturing and customer service activities. In April 1998 the
Company leased an additional manufacturing facility in the Linthicum area of
approximately 57,000 square feet. With the addition of this new facility the
Company has a total of four facilities with approximately 210,000 square feet
that can be used for manufacturing operations. In April 1998 the Company
completed the transfer of its principal executive, sales, and marketing
functions located in Linthicum in a portion of its 96,000 square foot facility
to an approximately 68,000 square foot facility also located in Linthicum.
During the third quarter of 1998, the Company completed the process of
renovating the vacated portions of the 96,000 square foot facility for the
purpose of accommodating expanding research and development functions.
As of October 31, 1998 the Company and its subsidiaries employed
approximately 1,476 persons, which was an increase of 635 persons over the
approximate 841 employed on October 31, 1997.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 1996, 1997 AND 1998
REVENUE. The Company recognized $508.1 million, $413.2 million and $88.5
million in revenue for the years ended October 31, 1998, 1997 and 1996,
respectively. Sales to Sprint accounted for $266.9 million (52.5%), $179.4
million (43.4%) and $54.8 million (62.0%), of the Company's revenue during
fiscal 1998, 1997 and 1996, respectively. While WorldCom accounted for $184.5
million (44.7%) of the Company's revenue during fiscal 1997, it was not a
significant contributor to fiscal 1998 revenues. There were no other customers
who accounted for 10% or more of the Company's revenues during fiscal 1998, 1997
and 1996. Revenue derived from foreign sales accounted for approximately 23.0%,
2.8%, and 4.0% of the Company's revenues during fiscal 1998, 1997 and 1996,
respectively.
The Company expects Sprint's purchases in fiscal 1999 to be focused
primarily on filling out installed systems with additional channel cards and
therefore substantially below the purchasing volume in either of the last two
years. The Company also expects the percentage of fiscal 1999 revenue derived
from foreign sales to increase relative to fiscal 1998. Based on overall new bid
activity as well as expected deployment plans of existing customers, the Company
believes revenue growth in fiscal 1999 over fiscal 1998 is possible, but will be
highly dependent on winning new bids for shipments from new and existing
customers during the year. Competition of new bids is intense, and there is no
assurance the Company will be successful in winning enough new bids and new
customers to achieve year over year sequential growth.
The Company began shipping MultiWave 1600 systems for field testing in
May 1996 with customer acceptance by Sprint occurring in July 1996. For fiscal
years 1996 and 1997 all of the Company's DWDM system revenues were derived from
the MultiWave 1600 product. During fiscal 1998 the Company began shipments of
and recognized revenues from sales of MultiWave Sentry 1600, MultiWave Firefly,
and MultiWave Sentry 4000 systems. The amount of revenue recognized from
MultiWave 1600 sales declined in fiscal 1998 as compared to fiscal 1997. This
decline in MultiWave 1600 sales in fiscal 1998 was offset by revenue recognized
from sales of MultiWave Sentry 1600, MultiWave Firefly, and MultiWave Sentry
4000 systems.
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to the Company's
manufacturing and engineering, furnishing and installation operations. Gross
profit was $252.1 million, $246.7 million and $41.1 million for fiscal years
1998, 1997, and 1996, respectively. Gross margin was 49.6%, 59.7%, and 46.5% for
fiscal 1998, 1997, and 1996, respectively. The increase in gross profit from
fiscal 1997 to fiscal 1998 was attributable to increased revenues. The decrease
in gross margin percentage from fiscal 1997 to fiscal 1998 was largely
attributable to lower selling prices. The increase in gross margin percentage
from fiscal 1996 to fiscal 1997 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. This 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 may be affected by a number of factors,
including continued competitive market pricing, lower manufacturing volumes and
efficiencies and fluctuations in component costs. During fiscal 1999, the
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Company expects to face continued pressure on gross margins, primarily as a
result of substantial price discounting by competitors seeking to acquire market
share.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$73.8 million, $23.8 million, and $8.9 million for fiscal 1998, 1997, and 1996,
respectively. The approximate $50.0 million or 210% increase from fiscal 1997 to
1998 and the approximate $14.9 million or 167% increase from fiscal 1996 to
fiscal 1997 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 1998, 1997, and 1996 research and development
expenses were 14.5%, 5.8%, and 10.1% of revenue, respectively. The Company
expects that its research and development expenditures will continue to increase
moderately in absolute dollars and perhaps as a percentage of revenue during
fiscal 1999 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 $47.3
million, $22.6 million, and $5.6 million for fiscal 1998, 1997, and 1996,
respectively. The approximate $24.7 million or 109% increase from fiscal 1997 to
1998 and the approximate $17.0 million or 301% increase from fiscal 1996 to
fiscal 1997 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 1998, 1997, and 1996 selling and marketing
expenses were 9.3%, 5.5%, and 6.4% of revenue, respectively. The Company
anticipates that its selling and marketing expenses may increase in absolute
dollars and perhaps as a percentage of revenue during fiscal 1999 as additional
personnel are hired and additional offices are opened to allow the Company to
pursue new customers and market opportunities. The Company also expects the
portion of selling and marketing expenses attributable to technical assistance
and field support, specifically in Europe and Asia, 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, $12.0 million, and $6.4 million for fiscal 1998, 1997, and
1996, respectively. The approximate $7.3 million or 61.1% increase from fiscal
1997 to 1998 and the approximate $5.6 million or 46.3% increase from fiscal 1996
to fiscal 1997 in general and administrative expenses was primarily the result
of increased staffing levels and outside consulting services. During fiscal
1998, 1997 and 1996, general and administrative expenses were 3.8%, 2.9%, and
7.3% of revenue, respectively. The Company believes that its general and
administrative expenses will moderately increase in absolute dollars and perhaps
as a percentage of revenue during fiscal 1999 as a result of the expansion of
the Company's administrative staff required to support its expanding operations.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the fiscal year 1998. These costs were for the
purchase of technology and related assets associated with the acquisition of
Terabit during the second quarter of fiscal 1998.
PIRELLI LITIGATION. The Pirelli litigation costs of $30.6 million in
fiscal 1998 were attributable to a $30.0 million payment made to Pirelli during
the third quarter of 1998 and to additional other legal and related costs
incurred in connection with the settlement of this litigation. The Pirelli
litigation expense in fiscal 1997 was primarily the result of a $7.5 million
charge for actual and estimated legal and related costs associated with the
litigation.
COSTS OF PROPOSED MERGER. The costs of the proposed merger for fiscal
1998 were costs related to the contemplated merger between the Company and
Tellabs. These costs include approximately $1.2 million in Securities and
Exchange Commission filing fees and approximately $1.3 million in legal,
accounting, and other related expenses.
OPERATING PROFIT. The Company's operating profit for fiscal 1998, 1997
and 1996 was $69.1 million or 13.6% of revenue, $180.9 million or 43.8% and
$20.2 million or 22.8%, respectively. Excluding charges for purchased research
and development, Pirelli litigation and costs from the proposed Tellabs merger
in fiscal 1998 operating profit was $111.7 million or 22.0% of revenue and
excluding Pirelli litigation costs in fiscal 1997 operating profit was $188.4
million or 45.6%. The decrease in operating profit and operating margin from
fiscal 1997 to fiscal 1998 was due to increased competitive pricing pressures
causing a reduction in gross profit margin and increased operating expenses from
investments in operating infrastructure. The year to year increases in operating
profits from fiscal 1996 to fiscal 1997 was primarily due to the comparable
increases in revenues and gross profits derived from the Company's MultiWave
systems. If the Company is unable to convert fiscal 1998 investments in
operating infrastructure into
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significant revenue generating relationships, the Company's business, financial
condition and results of operations could be materially and adversely affected.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on the Company's cash, cash equivalents and marketable
debt securities, net of interest expense associated with the Company's debt
obligations. Other income (expense), net, was $12.8 million, $7.2 million, and
$0.7 million for fiscal 1998, 1997, and 1996, 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 and net
earnings.
PROVISION 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. The Company's provision
for income taxes was 38.5% of pre-tax earnings, or $72.5 million for fiscal 1997
and was 44.2% of pre-tax earnings, or $36.2 million for fiscal 1998. The
increase in the tax rate from fiscal 1997 to fiscal 1998 was primarily the
result of charges for purchased research and development expenses recorded in
fiscal 1998 and an adjustment to the estimated prior year state income tax
liability associated with Alta operations. Purchased research and development
charges are not deductible for tax purposes. Exclusive of the effect of these
charges, the Company's provision for income taxes was 38.6% of income before
income taxes in fiscal 1998.
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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, 1998. 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.
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Jan. 31, April 30, Jul. 31, Oct. 31, Jan. 31, April 30, Jul. 31, Oct. 31,
1997 1997 1997 1997 1998 1998 1998 1998
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Revenue............................. $ 63,673 $ 97,603 $121,845 $130,094 $145,092 $142,718 $129,116 $91,161
Cost of goods sold.................. 28,253 40,400 47,569 50,250 58,980 63,915 70,431 62,688
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Gross profit.................... 35,420 57,203 74,276 79,844 86,112 78,803 58,685 28,473
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Operating expenses:
Research and development........ 3,050 4,699 7,245 8,779 11,245 17,986 21,965 22,560
Selling and marketing........... 3,070 4,946 6,722 7,889 9,975 11,107 12,937 13,324
General and administrative...... 2,003 2,797 3,241 3,924 3,984 4,757 4,186 6,347
Purchased research & development - - - - - 9,503 - -
Pirelli litigation.............. 5,000 - - 2,500 - 10,000 20,579 -
Cost of proposed merger......... - - - - - - 2,017 531
--------- --------- --------- --------- --------- --------- ---------- -----------
Total operating expenses............ 13,123 12,442 17,208 23,092 25,204 53,353 61,684 42,762
--------- --------- --------- --------- --------- --------- ---------- -----------
Income (loss) from operations....... 22,297 44,761 57,068 56,752 60,908 25,450 (2,999) (14,289)
Other income (expense), net......... 302 1,846 1,426 3,604 3,697 3,350 2,769 3,014
--------- --------- --------- --------- --------- --------- ---------- -----------
Income (loss) before income taxes... 22,599 46,607 58,494 60,356 64,605 28,800 (230) (11,275)
Provision (benefit) for income taxes 8,744 18,127 22,770 22,847 25,710 14,607 20 (4,137)
--------- --------- --------- --------- --------- --------- ---------- -----------
Net income (loss)................... $ 13,855 $ 28,480 $ 35,724 $ 37,509 $ 38,895 $ 14,193 $ (250) $ (7,138)
========= ========= ========= ========= ========= ========= ========== ===========
Basic net income (loss) per common
share............................... $ 0.97 $ 0.31 $ 0.36 $ 0.37 $ 0.37 $ 0.13 $ (0.00) $ (0.06)
========= ========= ========= ========= ========= ========= ========== ===========
Diluted net income (loss) per
common share and dilutive potential
common share........................ $ 0.14 $ 0.27 $ 0.34 $ 0.35 $ 0.33 $ 0.12 $ ( 0.00) $ (0.06)
========= ========= ========= ========= ========= ========= ========== ===========
Weighted average basic common
share............................... 14,216 92,644 98,247 100,209 106,405 112,302 121,820 128,384
========= ========= ========= ========= ========= ========= ========== ===========
Weighted average basic common and
dilutive potential common share.. 100,425 105,456 106,522 107,802 116,875 122,483 121,820 128,384
========= ========= ========= ========= ========= ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31 Oct. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ---------- ---------- --------- --------- -------- --------- --------
<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............... 44.4 41.4 39.0 38.6 40.7 44.8 54.5 68.8
----------- ---------- ---------- --------- -------- -------- --------- --------
Gross profit............... 55.6 58.6 61.0 61.4 59.3 55.2 45.5 31.2
Operating expenses:
Research and development... 4.8 4.8 6.0 6.8 7.8 12.6 17.0 24.7
Selling and marketing...... 4.8 5.0 5.5 6.1 6.9 7.8 10.0 14.6
General and administrative. 3.1 2.9 2.7 3.0 2.7 3.3 3.3 7.0
Purchased research &
development................ - - - - - 6.7 - -
Pirelli litigation......... 7.9 - - 1.9 - 7.0 15.9 -
Cost of proposed merger.... - - - - - - 1.6 0.6
----------- ---------- ---------- --------- -------- -------- --------- --------
Total operating expenses......... 20.6 12.7 14.2 17.8 17.4 37.4 47.8 46.9
----------- ---------- ---------- --------- -------- -------- -------- --------
Income (loss) from operations.... 35.0 45.9 46.8 43.6 41.9 17.8 (2.3) (15.7)
Other income (expense), net...... 0.5 1.9 1.2 2.8 2.6 2.3 2.1 3.3
----------- ---------- ---------- --------- -------- -------- --------- --------
Income (loss) before income
taxes.............. 35.5 47.8 48.0 46.4 44.5 20.1 (0.2) (12.4)
Provision (benefit) for income
taxes............ 13.7 18.6 18.7 17.6 17.7 10.2 - (4.6)
----------- ---------- ---------- --------- -------- -------- --------- --------
Net income (loss)................ 21.8% 29.2% 29.3% 28.8% 26.8% 9.9% (0.2)% (7.8)%
=========== ========== ========== ========= ======== ======== ========= ========
</TABLE>
9
<PAGE> 10
The Company's quarterly operating results have varied and are expected to
vary significantly in the future. The Company's detailed discussion of risk
factors addresses the many factors that have caused such variation in the past,
and may cause similar variations in the future. See "Risk Factors". In addition
to those factors, in fiscal 1998, the distraction attendant to the aborted
Tellabs merger had a significant, though difficult to quantify impact on the
Company's operations in the third and fourth quarter. But apart from the
distraction factor, the Company believes the single most significant trend
affecting the Company's financial performance is the material effect of very
aggressive price discounting by competitors seeking to acquire market share in
the increasingly important market for high-capacity solutions. The Company chose
in the face of this pressure to continue to build market share in fiscal 1998 at
the cost of declining margins. The Company intends to continue this strategy in
order to preserve and enhance its market leadership and eventually build on its
installed base with new and additional products. Pursuit of this strategy, in
conjunction with increased investments in selling, marketing, and customer
service activities, will likely limit the Company's operating profitability over
at least the first half of fiscal 1999, and may result in near term operating
losses.
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 $40.7 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 and fiscal 1998 the Company also realized approximately $53.1
million and $22.6 million in tax benefits from the exercise of stock options and
certain stock warrants, respectively. Also during fiscal 1997 and fiscal 1998
the Company received approximately $5.2 million and $12.8 million, respectively,
from issuance of stock associated with the initial capitalization of Omnia.
During fiscal 1998 the Company received approximately $15.5 million from the
issuance of stock associated with the initial capitalization of Lightera. As of
October 31, 1998, the Company had $250.7 million in cash and cash equivalents
and $16.0 million in corporate debt securities with contractual maturities of
six months or less.
The Company's operating activities used cash of $1.2 million in fiscal
1996, and provided cash of $84.7 million and $26.2 million for fiscal 1997 and
1998, respectively. The cash used in operations in fiscal 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 and 1998 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, and accrued expenses;
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 1996, 1997 and 1998 was $11.6
million, $67.0 million and $107.0 million, respectively. Included in investment
activities were capital equipment expenditures in fiscal 1996, 1997 and 1998 of
$9.9 million, $52.1 million and $77.8 million, respectively. These capital
equipment expenditures were primarily for test, manufacturing and computer
equipment. The Company expects additional capital equipment expenditures of
approximately $50.0 million to be made during fiscal 1999 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 $28.3
million for the construction of leasehold improvements and the Company expects
to use an additional $3.0 million of capital during fiscal 1999 in the
construction of leasehold improvements for its facilities.
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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (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
10
<PAGE> 11
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.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 will be effective
for the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
YEAR 2000 READINESS
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company's operations
make use of a variety of computer equipment and software. If the computer
equipment and software used in the operation of the Company do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on the Company's operations.
The Company has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by the
Company, the Company currently believes and warrants to its customers that its
products are Year 2000 compliant. However, since all customer situations cannot
be anticipated, particularly those involving interaction of the Company's
products with third party products, the Company may see an increase in warranty
and other claims as a result of the Year 2000 transition. The impact of customer
claims, if broader than anticipated, could have a material adverse impact on the
Company's results of operations or financial condition.
The Company is currently in the process of conducting a comprehensive
inventory and evaluation of both information technology ("IT") or software
systems and non-IT systems used to run its systems. Non-IT systems typically
include embedded technology such as microcontrollers. Examples of the Company's
Non-IT systems include certain equipment used for production, research, testing
and measurement processes and calibration. As of December 1998 the Company had
assessed approximately 80% of the IT and non-IT systems used in its operations
with an insignificant amount of those systems having been identified as Year
2000 non-compliant. The Company has begun the process of upgrading or replacing
those identified non-compliant systems with completion expected during fiscal
1999. For the Year 2000 non-compliance systems identified to date, the cost of
remediation is not considered to be material to the Company's financial
condition or operating results. However, if implementation of replacement
systems is delayed, or if significant new noncompliance issues are identified,
the Company's results of operations or financial condition may be materially
adversely affected.
The Company changed its main financial, manufacturing and information
system to a company-wide Year 2000 compliant enterprise resource planning
("ERP") computer-based system during the fourth quarter of fiscal 1998. The
Company estimates that it has spent approximately $4.0 million on its ERP
implementation and estimates that it will likely spend $50,000 to $100,000 to
address identified Year 2000 issues. The Company expects that it will use cash
from operations for Year 2000 remediation and replacement costs. Approximately
less than 2% of the information technology budget is expected to be used for
remediation. No other information technology projects have been
11
<PAGE> 12
deferred due to the Year 2000 efforts. To date, the Company has not yet employed
an independent verification and validation process to assure the reliability of
its risk and cost estimates.
The Company is also in the process of contacting its critical suppliers
to determine that suppliers' operations and the products and services they
provide are Year 2000 compliant. To date, the Company's optical suppliers have
represented that they are Year 2000 compliant or are in the process of becoming
compliant by December 31, 1999. If these suppliers fail to adequately address
the Year 2000 issue for the products they provide to the Company, this could
have a material adverse impact on the Company's operations and financial
results.
Contingency plans will be developed if it appears the Company or its key
suppliers will not be Year 2000 compliant, and such noncompliance is expected to
have a material adverse impact on the Company's operations.
12
<PAGE> 13
AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following is an index to the audited supplemental consolidated
financial statements and supplementary data :
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Accountants....................................................... 14
Supplemental Consolidated Balance Sheets................................................ 15
Supplemental Consolidated Statements of Operations...................................... 16
Supplemental Consolidated Statements of Changes in Stockholders' Equity ................ 17
Supplemental Consolidated Statements of Cash Flows...................................... 18
Notes to Supplemental Consolidated Financial Statements................................. 19
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CIENA Corporation
In our opinion, the accompanying supplemental consolidated balance sheets and
the related supplemental 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1998, 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.
As described in Note 2, on July 1, 1999 CIENA Corporation merged with Omnia
Communications, Inc., in a transaction accounted for as a pooling of interests.
The accompanying supplemental consolidated financial statements give retroactive
effect to the merger of CIENA Corporation and Omnia Communications, Inc.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
CIENA Corporation and subsidiaries after the financial statements covering the
date of consummation of the business combination are issued.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
McLean, VA
November 25, 1998, except as to
Note 2 "Lightera" and "Omnia", which are as of July 20, 1999
14
<PAGE> 15
<TABLE>
<CAPTION>
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31,
---------------------------------------
1997 1998
-------------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................ $ 273,286 $ 250,714
Marketable debt securities........................................................... - 15,993
Accounts receivable (net of allowance of $722 and $1,528)............................ 72,336 85,472
Inventories, net..................................................................... 41,109 70,908
Deferred income taxes................................................................ 9,139 16,421
Prepaid income taxes................................................................. - 11,688
Prepaid expenses and other........................................................... 3,110 4,728
-------------------- -----------------
Total current
assets............................................................................ 398,980 455,924
Equipment, furniture and fixtures, net.................................................. 67,823 125,767
Goodwill and other intangible assets, net............................................... 5 16,270
Other assets............................................................................ 1,439 4,848
-------------------- -----------------
Total assets......................................................................... $ 468,247 $ 602,809
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 25,057 $ 27,893
Accrued liabilities.................................................................. 32,022 34,437
Income taxes payable................................................................. 46 -
Deferred revenue..................................................................... 2,591 1,084
Other current obligations............................................................ 1,186 1,205
-------------------- -----------------
Total current liabilities......................................................... 60,902 64,619
Deferred income taxes................................................................ 28,167 34,125
Other long-term obligations.......................................................... 1,900 3,029
-------------------- -----------------
Total liabilities................................................................. 90,969 101,773
-------------------- -----------------
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;
109,699,270 and 134,605,491 shares issued and outstanding......................... 1,097 1,346
Additional paid-in capital........................................................... 250,392 328,821
Notes receivable from stockholders................................................... (68) (586)
Cumulative translation adjustment.................................................... (5) (107)
Retained earnings.................................................................... 125,862 171,562
-------------------- -----------------
Total stockholders' equity........................................................ 377,278 501,036
-------------------- -----------------
Total liabilities and stockholders' equity........................................... $ 468,247 $ 602,809
==================== =================
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
15
<PAGE> 16
<TABLE>
<CAPTION>
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended October 31,
1996 1997 1998
------------------ ----------------- ----------------
<S> <C> <C> <C>
Revenue........................................................ $ 88,463 $ 413,215 $ 508,087
Cost of goods sold............................................. 47,315 166,472 256,014
------------------ ----------------- ----------------
Gross profit............................................ 41,148 246,743 252,073
------------------ ----------------- ----------------
Operating expenses:
Research and development................................ 8,922 23,773 73,756
Selling and marketing................................... 5,641 22,627 47,343
General and administrative.............................. 6,422 11,965 19,274
Purchased research and development...................... - - 9,503
Pirelli litigation...................................... - 7,500 30,579
Cost of proposed merger................................. - - 2,548
Total operating expenses......................... 20,985 65,865 183,003
------------------ ----------------- ----------------
Income from operations......................................... 20,163 180,878 69,070
------------------ ----------------- ----------------
Interest and other income (expense), net....................... 1,096 7,586 13,143
Interest expense............................................... (443) (408) (313)
------------------ ----------------- ----------------
Income before income taxes..................................... 20,816 188,056 81,900
Provision for income taxes..................................... 3,553 72,488 36,200
------------------ ----------------- ----------------
Net income .................................................... $ 17,263 $ 115,568 $ 45,700
================== ================= ================
Basic net income per common share.............................. $ 1.25 $ 1.52 $ 0.39
================== ================= ================
Diluted net income per common share and
dilutive potential common share......................... $ 0.19 $ 1.10 $ 0.36
================== ================= ================
Weighted average basic common shares outstanding............... 13,817 75,964 117,990
================== ================= ================
Weighted average basic common and dilutive
potential common shares outstanding..................... 92,407 104,843 127,894
================== ================= ================
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE> 17
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE RETAINED STOCKHOLDERS'
---------------------------- PAID-IN- FROM TRANSLATION EARNINGS EQUITY
SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENT (DEFICIT) (DEFICIT)
--------------- ------------ ------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of warrants......... 666,086 7 - - - - 7
Exercise of stock
options...................... 3,612,182 36 859 (73) - - 822
Compensation cost of stock
options...................... - - 85 - - - 85
Issuance of common stock, net
of issuance costs.......... 16,413,677 164 179,076 (4) - - 179,236
Conversion of Preferred
Stock........................ 74,815,740 748 40,256 - - - 41,004
Tax benefit from the
exercise of stock options.... - - 29,709 - - - 29,709
Repayment of receivables
from stockholders.......... - - - 69 - - 69
Translation adjustment....... - - - - (5) - (5)
Net income................... - - - - - 115,568 115,568
--------------- ------------ ------------- -------------- ------------- ------------ ------------
BALANCE AT OCTOBER 31, 1997.. 109,699,270 1,097 250,392 (68) (5) 125,862 377,278
Exercise of stock options.... 2,647,907 26 6,215 (392) - - 5,849
Compensation cost of stock
options...................... - - 54 - - - 54
Issuance of common stock,
net of issuance costs...... 21,954,170 220 28,474 (225) - - 28,469
Tax benefit from the
exercise of stock options.. - - 22,634 - - - 22,634
Repayment of receivables
from stockholders.......... - - - 99 - - 99
Translation adjustment....... - - - - (102) - (102)
Purchase acquisitions, net
of transaction costs..... 304,144 3 20,817 - - - 20,820
Issuance of warrants for
technology rights........ - - 235 - - - 235
Net income................... - - - - - 45,700 45,700
--------------- ------------ ------------- -------------- ------------- ------------ ------------
BALANCE AT OCTOBER 31, 1998.. 134,605,491 $ 1,346 $ 328,821 $ (586) $ (107) $ 171,562 $ 501,036
=============== ============= ============= ============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
17
<PAGE> 18
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEAR ENDED OCTOBER 31,
---------------------------------------------
1996 1997 1998
------------ ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 17,263 $ 115,568 $ 45,700
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Non-cash charges from equity transactions................................ 158 85 289
Amortization of premiums on marketable debt securities................... - - 464
Effect of translation adjustment......................................... - (5) (102)
Purchased research and development....................................... - - 9,503
Write down of leasehold improvements and equipment....................... 883 923 1,605
Depreciation and amortization............................................ 1,082 10,256 33,623
Provision for doubtful accounts.......................................... 76 489 806
Provision for inventory excess and obsolescence.......................... 1,937 7,585 9,617
Provision for warranty and other contractual obligations................. 1,584 11,866 10,523
Changes in assets and liabilities:
Increase in accounts receivable...................................... (20,601) (46,309) (13,707)
Increase in inventories.............................................. (15,165) (35,466) (39,416)
Increase in deferred income tax assets............................... (1,834) (7,305) (7,282)
Increase in prepaid income taxes..................................... - - (11,688)
Increase in prepaid expenses and other assets........................ (1,009) (2,468) (11,847)
Increase (decrease) in accounts payable and accrued expenses......... 7,259 30,608 (6,288)
Increase (decrease) in income taxes payable.......................... 3,801 (3,916) (46)
Increase in deferred income tax liabilities.......................... - 4,793 5,958
Increase (decrease) in deferred revenue and other obligations........ 3,386 (2,007) (1,507)
------------ ------------- --------------
Net cash (used in) provided by operating activities...................... (1,180) 84,697 26,205
------------- ------------- --------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures........................... (11,558) (67,030) (88,913)
Purchase of marketable debt securities................................... - - (93,869)
Maturities of marketable debt securities................................. - - 77,876
Net cash paid for business combinations.................................. - - (2,070)
------------- ------------- --------------
Net cash used in investing activities................................ (11,558) (67,030) (106,976)
------------- ------------- --------------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations....................... 2,543 (2,238) 1,148
Net proceeds from issuance of or subscription to
mandatorily redeemable preferred stock............................... 25,950 - -
Net proceeds from issuance of common stock............................... 24 180,665 34,318
Tax benefit related to exercise of stock options and warrants............ - 53,083 22,634
Repayment of notes receivable from stockholders.......................... - 69 99
------------- ------------- --------------
Net cash provided by financing activities............................ 28,517 231,579 58,199
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents................. 15,779 249,246 (22,572)
Cash and cash equivalents at beginning of period............................. 8,261 24,040 273,286
------------- ------------- --------------
Cash and cash equivalents at end of period................................... $ 24,040 $ 273,286 $ 250,714
============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 419 $ 405 $ 265
============= ============= ==============
Income taxes......................................................... $ 1,830 $ 27,455 $ 30,203
============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from stockholders........... $ 60 $ 77 $ 638
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
18
<PAGE> 19
CIENA CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CIENA Corporation (the "Company" or "CIENA") designs, manufactures and
sells open architecture, dense wavelength division multiplexing ("DWDM") systems
for fiberoptic communications networks, including long-distance and local
exchange carriers. CIENA also provides a range of engineering, furnishing and
installation services for telecommunications service providers.
Principles of Consolidation
The Company completed a merger with Omnia Communications, Inc. ("Omnia")
a U.S. company headquartered in Marlborough, Massachusetts in July 1999. The
transaction 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 Omnia as though it had been a part of CIENA.
During March 1999 the Company completed a merger with Lightera Networks,
Inc. ("Lightera") a U.S. company headquartered in Cupertino, California. The
transaction 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 Lightera as though it had been a part of CIENA.
During the fiscal year ended October 31, 1998, the Company completed a
merger with ATI Telecom International Ltd., ("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. The Company has ten wholly owned U.S. and
international subsidiaries which have been consolidated in the accompanying
financial statements. The accompanying supplemental 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. See Note 2.
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 (October 31, 1998; November 1,
1997; and November 2, 1996). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 1998 and
1997 comprised 52 weeks and fiscal 1996 comprised 53 weeks. Omnia's fiscal year
ends on December 31.
19
<PAGE> 20
Since the fiscal years for CIENA and Omnia differ, the periods combined
for the purposes of the supplemental consolidated financial statements and the
additional supplemental data are as follows:
<TABLE>
<CAPTION>
CIENA Omnia
<S> <C>
Fiscal year ended October 31, 1997 June 3, 1997 (date of inception) to December 31, 1997
Fiscal year ended October 31, 1998 January 1, 1998 to December 31, 1998
Quarter ended April 30, 1997 June 3, 1997 (date of inception) to June 30, 1997
Quarter ended July 31, 1997 July 1, 1997 to September 30, 1997
Quarter ended October 31, 1997 October 1, 1997 to December 31, 1997
Quarter ended January 31, 1998 January 1, 1998 to March 31, 1998
Quarter ended April 30, 1998 April 1, 1998 to June 30, 1998
Quarter ended July 31, 1998 July 1, 1998 to September 30, 1998
Quarter ended October 31, 1998 October 1, 1998 to December 31, 1998
Six months ended April 30, 1998 January 1, 1998 to June 30,1998
</TABLE>
The quarter ended January 31, 1999 and the six months ended April 30, 1999
contain two months of Omnia's financial results, which are also recorded in the
quarter and fiscal year ending October 31, 1998. The net loss for these two
months, November and December 1998 was $1,621,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates,
judgements 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. 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.
Marketable Debt Securities
The Company has classified its investments in marketable debt securities
as held-to-maturity securities as defined by Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Such investments are recorded at their amortized cost in the
accompanying consolidated balance sheets. All of the marketable debt securities
are corporate debt securities with contractual maturities of six months or less
and have $60,000 and $9,000 of unrealized gain and unrealized loss,
respectively, as of October 31, 1998.
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.
20
<PAGE> 21
Goodwill
The Company has recorded goodwill from two purchase transactions. See
Note 2. It is the Company's policy to continually assess the carrying amount of
its goodwill to determine if there has been an impairment to its carrying value.
The Company would record any such impairment when identified.
Concentrations
Substantially all of the Company's cash and cash equivalents are
custodied at four major U.S. financial institutions. The majority of the
Company's cash equivalents include U.S. Government Federal Agency Securities,
short term marketable 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. While there were no
revenues derived from WorldCom in fiscal 1996, Sprint accounted for 62% of the
Company's fiscal 1996 revenues and both Sprint and WorldCom combined accounted
for greater than 88% of the Company's 1997 fiscal revenues. WorldCom accounted
for less than 10% and Sprint accounted for approximately 53% of the Company's
fiscal 1998 revenues. 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 one of these customers or any substantial reduction in orders by
any one of these customers could materially adversely affect the Company's
financial condition or 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
an allowance for potential losses when identified and has not incurred any
significant losses to date. As of October 31, 1997, Sprint and WorldCom
accounted for 84% of the trade accounts receivable. Sprint and three other
customers comprise 10%, 11%, 25% and 26% of the trade accounts receivable
respectively as of October 31, 1998.
Revenue Recognition
The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain customer
acceptance, revenue is deferred until the terms of acceptance are satisfied.
Revenue for installation services is recognized as the services are performed
unless the terms of the supply contract combine product acceptance with
installation, in which case revenues for installation services are recognized
when the terms of acceptance are satisfied and installation is completed.
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.
21
<PAGE> 22
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 8.
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. For those
subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet
date. Resulting translation adjustments are recorded directly to a separate
component of shareholders' equity. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in other income. The net gain
(loss) on foreign currency remeasurement and exchange rate changes for fiscal
1996, 1997, and 1998 was immaterial for separate financial statement
presentation .
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. See
Note 6.
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires
the capitalization of certain software development costs incurred subsequent to
the date technological feasibility is established and prior to the date the
product is generally available for sale. The capitalized cost is then amortized
over the estimated product life. The Company defines technological feasibility
as being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation", which is effective for the Company's consolidated
financial statements for fiscal years 1996, 1997, and 1998. SFAS No. 123 allows
companies to either account for stock-based compensation under the new
provisions 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 the pro
forma disclosures required by SFAS No. 123. See Note 7.
22
<PAGE> 23
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (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 Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS 133 will be effective for
the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year consolidated financial statement presentation.
(2) BUSINESS COMBINATIONS
Omnia
On July 1, 1999 the Company completed a merger with Omnia, a U.S. company
headquartered in Marlborough, Massachusetts, in a transaction valued at
approximately $483 million. Omnia is a telecommunications equipment supplier
which focuses on developing solutions to allow public telephone network
operators to offer services cost effectively over integrated metropolitan
fiberoptic access and transport networks. Under the terms of the agreement, the
Company acquired all of the outstanding shares and assumed the stock options of
Omnia in exchange for approximately 15.2 million shares of CIENA common stock
and 0.8 million CIENA stock options. The transaction 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 Omnia as
though it had been a part of CIENA.
23
<PAGE> 24
The following table shows the separate historical results of CIENA and
Omnia for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal year ended
1996 as Omnia did not commence operations until June 1997. Omnia's year end is
December 31. CIENA's results for the years ended October 31, 1997 and 1998
include Omnia's financial results from June 3, 1997 (date of inception) to
December 31, 1997 and January 1, 1998 to December 31, 1998, respectively.
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1997 1998
------------------- -----------------------
(in thousands)
<S> <C> <C>
Revenues:
CIENA $ 413,215 $ 508,087
Omnia - -
Intercompany eliminations - -
------------------- -----------------------
Consolidated revenues $ 413,215 $ 508,087
=================== =======================
Net Income (loss):
CIENA $ 115,967 $ 51,113
Omnia (399) (5,413)
------------------- -----------------------
Consolidated net income $ 115,568 $ 45,700
=================== =======================
</TABLE>
Lightera
On March 31, 1999 the Company completed a merger with Lightera, a U.S.
company headquartered in Cupertino, California, in a transaction valued at
approximately $459 million. Lightera is a developer of carrier class optical
core switches for fiberoptic communications networks. Under the terms of the
agreement, the Company acquired all of the outstanding shares and assumed
outstanding stock options and warrants of Lightera in exchange for approximately
17.5 million shares of CIENA common stock and 2.9 million CIENA shares issuable
upon exercise of stock options and warrants. The transaction 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 Lightera as
though it had been a part of CIENA.
The following table shows the separate historical results of CIENA and
Lightera for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal years ended
1997 and 1996 as Lightera did not commence operations until April 1998.
<TABLE>
<CAPTION>
Year Ended
October 31, 1998
----------------------
(in thousands)
<S> <C>
Revenues:
CIENA $ 508,087
Lightera -
Intercompany eliminations -
----------------------
Consolidated revenues $ 508,087
======================
Net Income (loss):
CIENA $ 53,194
Lightera (2,081)
----------------------
Consolidated net income $ 51,113
======================
</TABLE>
24
<PAGE> 25
Astracom
During December 1997 the Company completed an Agreement and Plan of
Merger with Astracom, Inc. ("Astracom"), an early stage telecommunications
company located in Atlanta, Georgia. The purchase price was approximately $13.1
million and consisted 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. The transaction was recorded using the purchase accounting method with
the purchase price representing approximately $11.4 million in goodwill and
other intangibles, and approximately $1.7 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
Astracom are not material to the consolidated financial statements of the
Company and, accordingly, separate pro forma financial information has not been
presented.
Alta
On February 19, 1998 the Company completed a merger with ATI Telecom
International Ltd., ("Alta"), a Canadian corporation headquartered near Atlanta,
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 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>
Year Ended October 31,
-------------------------------------------
1996 1997
------------------- ---------------------
(in thousands)
<S> <C> <C>
Revenues:
CIENA $ 54,838 $ 373,827
Alta 33,625 39,531
Intercompany eliminations - (143)
--------------------- ---------------------
Consolidated revenues $ 88,463 $ 413,215
===================== =====================
Net Income (loss):
CIENA $ 14,718 $ 112,945
Alta 2,545 3,022
--------------------- ---------------------
Consolidated net income $ 17,263 $ 115,967
===================== =====================
</TABLE>
25
<PAGE> 26
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 photodetectors 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.
In connection with the Terabit acquisition, the Company recorded a $9.5
million charge in the year ended October 31, 1998 for purchased research and
development. This generally represents the estimated value of purchased
in-process technology related to Terabit's avalanche photodiodes (APD) that have
not yet reached technological feasibility and have no alternative future use.
The amount of purchase price allocated to in-process research and
development was determined using the discounted cash flow method. This method
consisted of estimating future net cash flows attributable in-process APD
technology for a discrete projection period and discounting the net cash flows
back to their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the purchased
in-process technology. The estimated revenue associated with the APD technology
future net cash flows assumed a five year compound annual growth rate of between
5% to 43%. The revenue growth rates were developed considering, among other
things, the current and expected industry trends and acceptance of the
technologies in historical growth rates for similar industry products.
Management's estimates or projections were based upon an estimated period of ten
years with revenues reaching a peak in 2002 and declining through 2008. The
estimated net cash flows were discounted to present value at a rate of return
which considers the relative risk of achieving the net cash flows and the time
value of money. A 30% rate was used to effect the risk associated with Terabits
APD technology. This rate is higher than the Company's normal discount rate due
to inherent uncertainties surrounding the successful development of purchase
in-process technology, the useful life of the technology, and the profitability
levels of such technology.
The resulting net cash flows from the APD project was based on
management's estimates of revenues, cost of sales, research and development
costs, selling general and administrative costs, and income taxes associated
with the project.
(3) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
---------------------------------------
1997 1998
------------------- ----------------
<S> <C> <C>
Raw materials.......................................... $ 27,716 $ 43,268
Work-in-process........................................ 5,679 8,592
Finished goods......................................... 15,180 30,202
------------------- ----------------
48,575 82,062
Reserve for excess and obsolescence.................... (7,466) (11,154)
------------------- ---------------
$ 41,109 $ 70,908
=================== ================
</TABLE>
26
<PAGE> 27
The following is a table depicting the activity in the Company's reserve for
excess and obsolescence (in thousands):
<TABLE>
<CAPTION>
October 31,
----------------------------------------
1997 1998
------------------ -----------------
<S> <C> <C>
Beginning balance....................................... $ 1,937 $ 7,466
Provision charged to operations......................... 7,585 9,617
Amounts written off to reserve.......................... (2,056) (5,929)
------------------ -----------------
Ending balance.......................................... $ 7,466 $ 11,154
================== =================
</TABLE>
(4) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
------------------------------------------
1997 1998
------------------ -------------------
<S> <C> <C>
Equipment, furniture and fixtures...................... $ 65,654 $ 141,845
Leasehold improvements................................. 13,953 24,076
------------------ -------------------
79,607 165,921
Accumulated depreciation and amortization.............. (12,284) (41,506)
Construction-in-progress............................... 500 1,352
------------------ -------------------
$ 67,823 $ 125,767
================== ===================
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
--------------------------------------
1997 1998
---------------- -----------------
<S> <C> <C>
Warranty and other contractual obligations................. $ 12,205 $ 17,256
Accrued compensation....................................... 8,284 9,229
Legal and related costs.................................... 4,577 542
Consulting and outside services............................ 3,219 2,837
Unbilled construction-in-process and leasehold
improvements.......................................... 1,427 -
Other...................................................... 2,310 4,573
---------------- -----------------
$ 32,022 $ 34,437
================= =================
</TABLE>
27
<PAGE> 28
(6) EARNINGS PER SHARE CALCULATION
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).
<TABLE>
<CAPTION>
October 31,
---------------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Income................................... $ 17,263 $ 115,568 $ 45,700
================ ================ ================
Weighted average shares-basic............ 13,817 75,964 117,990
---------------- ---------------- ----------------
Effect of dilutive securities:
Employee stock options and warrants. 8,533 8,791 9,904
Conversion of preferred stock.......... 70,057 20,088 -
---------------- ---------------- ----------------
Weighted average shares-diluted.......... 92,407 104,843 127,894
================ ================ ================
Basic EPS...................................... $ 1.25 $ 1.52 $ 0.39
================ ================ ================
Diluted EPS................................... $ 0.19 $ 1.10 $ 0.36
================ ================ ================
</TABLE>
(7) STOCKHOLDERS' EQUITY
Stockholder Rights Plan
In December 1997, the Company's Board of Directors adopted a Stockholder
Rights Plan. This plan is designed to deter any potential coercive or unfair
takeover tactics in the event of an unsolicited takeover attempt. It is not
intended to prevent a takeover of the Company on terms that are favorable and
fair to all shareholders and will not interfere with a merger approved by the
Board of Directors. Each right entitles shareholders to buy a "unit" equal to
one one-thousandth of a share of Preferred Stock of the Company. The rights will
be exercisable only if a person or a group acquires or announces a tender or
exchange offer to acquire 15% or more of the Company's common stock or if the
Company enters into certain other business combination transactions not approved
by the Board of Directors.
In the event the rights become exercisable, the rights plan allows for
CIENA shareholders to acquire stock of the surviving corporation, whether or not
CIENA is the surviving corporation, having a value twice that of the exercise
price of the Rights. The Rights were distributed to shareholders of record in
January 1998. The Rights will expire December 2007 and are redeemable for $.001
per right at the approval of the Company's Board of Directors.
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.
28
<PAGE> 29
Other Offerings
Omnia sold 173,813 shares of stock in October 1997, 19,349 shares of
stock in March of 1998 and 3,791,956 shares of stock in September 1998 in
exchange for net proceeds of approximately $5,062,000, $586,000 and $12,115,000
respectively.
In March 1998, Lightera issued a total of 5,000,768 shares of stock to
the founders of Lightera in exchange for certain technology rights and notes
receivables totaling $211,000. Lightera sold 7,104,086 shares of stock in March
1998 and 3,489,079 shares of stock in July 1998 in exchange for net proceeds of
approximately $9,356,000 and $6,074,000 respectively.
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. Certain of
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-qualified
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-qualified stock options.
As a result of the Company's merger with Omnia, the Company assumed the
Omnia 1997 Stock Plan Option Plan ("the 1997 Plan"). The 1997 Plan provided for
the granting of stock options to employees and consultants of Omnia. Options
granted under the 1997 Plan were either incentive stock options or nonstatutory
stock options. Incentive stock options, ("ISO"), could be granted only to Omnia
employees (including officers and directors who were also employees).
Nonstatutory stock options ("NSO") could be granted to Omnia employees and
consultants. The Company has reserved 759,889 shares of Common Stock for
outstanding options under the plan. Options exercised are immediately subject
to a repurchase right held by the Company which lapse over a maximum period of
four years at such times and under such conditions as determined by the Board of
Directors. To date, options granted generally vest over four years.
As a result of the Company's merger with Lightera, the Company assumed
the Lightera 1998 Stock Option Plan ("the 1998 Plan"). The 1998 Plan provided
for the granting of stock options to employees and consultants of Lightera.
Options granted under the 1998 Plan were either incentive stock options or
nonstatutory stock options. Incentive stock options, ("ISO"), could be granted
only to Lightera employees (including officers and directors who were also
employees). Nonstatutory stock options ("NSO") could be granted to Lightera
employees and consultants. The Company has reserved 2,529,161 shares of Common
Stock for outstanding options under the plan. Options exercised are immediately
subject to a repurchase right held by the Company which lapse over a maximum
period of five years at such times and under such conditions as determined by
the Board of Directors. To date, options granted generally vest over four years.
29
<PAGE> 30
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, 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
Granted............................................. 6,414 18.99
Exercised........................................... (2,648) 2.40
Canceled............................................ (3,340) 40.12
----------------
Balance at October 31, 1998......................... 9,536 4.82
================
</TABLE>
During September 1998, the Company cancelled and re-issued outstanding
employee stock options with exercise prices in excess of the fair market value,
except those options held by outside directors and officers of the Company. A
total of 2,905,116 options with an average exercise price of $42.87 were
cancelled and reissued at $12.38 per share. At October 31, 1998 approximately
292,000 shares of Common Stock subject to repurchase by the Company had been
issued upon the exercise of options and approximately 2.2 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, 1998:
<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 1998 (Years) Price 1998 Price
- -------------------------- --------------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.03 1,048,678 6.23 $ 0.03 878,524 $ 0.03
$ 0.06 - $ 1.66 2,802,154 8.82 $ 0.41 375,006 $ 0.78
$ 2.25 - $ 4.34 2,648,482 7.66 $ 2.48 450,455 $ 2.54
$ 4.40 - $ 11.56 189,216 8.56 $ 6.55 47,818 $ 6.15
$ 12.38 - $ 12.38 2,761,977 8.93 $ 12.38 419,150 $ 12.38
$ 12.56 - $ 43.25 85,675 9.57 $ 32.40 - $ -
--------- ---------
$ 0.02 - $ 43.25 9,536,182 8.24 $ 5.83 2,170,953 $ 3.19
========= =========
</TABLE>
30
<PAGE> 31
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. 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, 1997, and 1998 consistent with the provisions of
SFAS No. 123, the Company's net income and net income per share for fiscal
years 1996, 1997, and 1998 would have been decreased to the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
October 31,
--------------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable to common stockholders -
as reported.................................... $ 17,263 $ 115,568 $ 45,700
================= ================= ==================
Net income applicable to common stockholders -
pro forma...................................... $ 16,770 $ 110,005 $ 20,816
================= ================= ==================
Basic net income per share - as reported............ $ 1.25 $ 1.52 $ 0.39
================= ================= ==================
Basic net income per share - pro forma.............. $ 1.21 $ 1.45 $ 0.18
================= ================= ==================
Diluted net income per share - as reported.......... $ 0.19 $ 1.10 $ 0.36
================= ================= ==================
Diluted net income per share - pro forma............ $ 0.18 $ 1.05 $ 0.16
================= ================= ==================
</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, 1997 and 1998 were approximately $6.7 million,
$33.6 million, $73.2 million and $1.14, $19.33, and $15.17 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, 1997, and 1998:
<TABLE>
<CAPTION>
October 31,
--------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------
<S> <C> <C> <C>
Expected volatility 60% 60% 109%
Risk-free interest rate 6.1% 5.8% 4.4%
Expected life 3 yrs. 3 yrs. 3 yrs.
Expected dividend yield 0% 0% 0%
</TABLE>
(8) INCOME TAXES
Income before income taxes and the provision for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
October 31,
------------------------------------------------------------------
1996 1997 1998
------------------- ---------------------- -------------------
<S> <C> <C> <C>
Income before income taxes....................... $ 20,816 $ 188,056 $ 81,900
=================== ====================== ===================
Provision for income taxes:
Current:
Federal................................................. $ 4,483 $ 67,529 36,865
State................................................... 694 7,373 4,444
Foreign................................................. 210 98 40
------------------- ---------------------- -------------------
Total current.................................... 5,387 75,000 41,349
------------------- ---------------------- -------------------
Deferred:
Federal................................................. (1,690) (2,015) (4,496)
State................................................... (144) (497) (653)
Foreign................................................. - - -
------------------- ---------------------- -------------------
Total deferred................................... (1,834) (2,512) (5,149)
------------------- ---------------------- -------------------
Provision for income taxes.............................. $ 3,553 $ 72,488 $ 36,200
=================== ====================== ===================
</TABLE>
31
<PAGE> 32
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 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Provision at statutory rate................................ 35.0% 35.0% 35.0%
Reversal of valuation allowance............................ (20.0) - -
Non-deductible purchased research and development - - 4.3
State taxes, net of federal benefit........................ 2.7 2.6 4.3
Research and development credit............................ - - (4.0)
Other...................................................... (0.6) 0.9 4.6
---------------- --------------- ----------------
17.1% 38.5% 44.2%
================ =============== ================
</TABLE>
The significant components of deferred tax assets and liabilities were
as follows (in thousands):
<TABLE>
<CAPTION>
October 31,
------------------------------------------
1997 1998
--------------------- ----------------
<S> <C> <C>
Deferred tax assets:
Reserves and accrued liabilities........................ $ 9,281 $ 14,611
Other................................................... - 690
Net operating loss and credit carry forward............. 1,555 2,682
--------------------- ----------------
Gross deferred tax assets.............................. 10,836 17,983
Valuation allowance.................................... (1,697) (1,562)
--------------------- ----------------
Net current deferred tax asset....................... $ 9,139 $ 16,421
===================== ================
Deferred tax liabilities:
Equipment leases........................................ $ 3,985 $ 7,978
Services................................................ 19,389 21,594
Depreciation and other.................................. 4,793 4,553
--------------------- ----------------
Deferred long term tax liabilities................... $ 28,167 $ 34,125
===================== ================
</TABLE>
As of October 31, 1998 the Company assumed net operating loss carry
forwards of approximately $16.5 million through its acquisitions of Omnia,
Lightera and Alta. The net operating loss carry forwards 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 in fiscal 1997, and $22.6 million and $3.6 million in fiscal 1998, from
exercises of stock options and certain stock warrants were credited directly to
additional paid-in-capital and to long-term deferred income taxes,
respectively.
(9) EMPLOYEE BENEFIT PLANS
Employee 401(k) Plan
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 and 1998 the Company made
matching contributions of approximately $0.3 million and $1.1 million,
respectively.
32
<PAGE> 33
Employee Stock Purchase Plan
In March 1998, the shareholders approved the Corporation's 1998 Stock
Purchase Plan ("the Purchase Plan") under which 2.5 million shares of common
stock have been reserved for issuance. Eligible employees may purchase a
limited number of shares of the Company's stock at 85% of the market value at
certain plan-defined dates, the first of which occurs in March 1999. As of
October 31, 1998 no shares had been issued from the Purchase Plan.
(10) 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, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending October 31,
<S> <C>
1999...................................................... $ 6,323
2000...................................................... 6,023
2001...................................................... 5,578
2002...................................................... 4,411
2003...................................................... 3,050
Thereafter................................................ 10,358
----------
$ 35,743
==========
</TABLE>
Rental expense for fiscal 1996, 1997 and 1998 was approximately
$717,000, $2,699,000 and $6,104,000, respectively.
Litigation
Class Action Litigation. A class action complaint was filed on August
26, 1998 in U.S. District Court for the District of Maryland entitled Witkin
et.al v. CIENA Corporation et. al (Case No. Y-98-2946). Several other
complaints, substantially similar in content, have been filed. These cases were
consolidated by court order on November 30, 1998. The complaint alleges that
CIENA and certain officers and directors violated certain provisions of the
federal securities laws, including Section 10(b) and Rule 10b-5 under the
Securities Exchange Act of 1934, by making false statements, failing to
disclose material information and taking other actions intending to
artificially inflate and maintain the market price of CIENA's common stock
during the Class Period of May 21, 1998 to September 14, 1998, inclusive. The
plaintiffs seek designation of the suit as a class action on behalf of all
persons who purchased shares of CIENA's common stock during the Class Period
and the awarding of compensatory damages in an amount to be determined at trial
and attorneys' fees. The proceedings are at an early stage. No discovery has
been taken, and no prediction can be made as to its outcome. The Company
believes the suit is without merit and intends to defend itself vigorously.
Kimberlin Litigation. On September 9, 1998 the U.S. District Court for
the Southern District of New York granted summary judgment with respect to
federal securities law claims brought against the Company and certain of its
individual directors by investor Kevin Kimberlin and related parties, finding
"no violations" of federal securities laws in the Company's or directors'
conduct. The Court also dismissed all related state law claims without
prejudice, declining to exercise jurisdiction over these claims. The remaining
state law claims, as well as the Company's counterclaim against the
Kimberlin-related parties, were fully and finally resolved in October 1998 by
agreement of the parties.
Pirelli Litigation. On June 1, 1998 the Company resolved the
long-standing litigation with Pirelli S.p.A. The terms of the settlement
involve dismissal of Pirelli's three lawsuits against CIENA previously pending
in Delaware, dismissal of CIENA's legal proceedings against Pirelli in the
United States International Trade Commission, a worldwide, non-exclusive
cross-license to each party's patent portfolios, a five-year moratorium on
future litigation between the parties. As a result of the settlement, CIENA
recorded a charge for the fiscal year ended October 31, 1998 of $30.6 million
relating to the Pirelli settlement and associated legal fees.
33
<PAGE> 34
(11) FOREIGN SALES
The Company has sales and marketing operations outside the United States
in Canada, The United Kingdom, Belgium, France, Japan, China and the
Philippines. 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 representatives
in Mexico and Brazil. Included in revenues are export sales of approximately
$3.5 million, $11.7 million, and $117.1 million in fiscal years 1996, 1997 and
1998, respectively.
(12) 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 Omnia. In the opinion of management, financial statements included in this
report reflect all normal recurring adjustments which the Company considers
necessary for the fair presentations 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 management's discussion and
analysis of financial condition and results of operations, unaudited
supplemental consolidated balance sheet, supplemental consolidated statement of
operations, and supplemental consolidated statement of cash flows show the
historical results of the combined CIENA and Omnia for the three months ended
January 31, 1998 and 1999, April 30, 1998 and 1999, and the six months ended
April 30, 1998 and 1999, which were prior to the consummation of the merger of
the two entities:
34
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
risks and uncertainties. CIENA has set forth below under the heading "Risk
Factors" included as exhibit 99.1 to this current Report on 8K which includes a
further discussion of certain of those risks as they relate to the period
covered by this report, CIENA's near term outlook with respect thereto, and the
forward-looking statements set forth herein. The information presented in this
report is as of April 30, 1999 and has not been updated or changed to reflect
any events subsequent to that date, other than the acquisition of Omnia
Communications, Inc.
OVERVIEW
CIENA Corporation is a market leader of open architecture, optical
networking systems leveraging the bandwidth enhancing abilities of dense
wavelength division multiplexing ("DWDM") technology. As a leader in the
implementation of new technology in a rapidly evolving and often unpredictable
industry, CIENA's quarterly operating results have varied and are expected to
vary in the future. See "Risk Factors" for a detailed discussion of the many
factors that have caused such variation in the past, and may cause similar
variations in the future.
On March 15, 1999, CIENA announced agreements to acquire Lightera
Networks, Inc. ("Lightera") and Omnia Communications, Inc. ("Omnia"), both
privately held entities, in two separate transactions. Lightera is a developer
of carrier-class optical core switches for fiberoptic communications networks.
Omnia is a developer of carrier-class optical access solutions for fiberoptic
communications networks.
CIENA completed the merger with Lightera in a transaction valued at
approximately $459 million. Under the terms of the agreement, CIENA acquired
all of the outstanding shares of Lightera in exchange for approximately 17.5
million shares of CIENA common stock. In connection with the transaction, CIENA
also assumed outstanding stock options and warrants which represents rights to
acquire an additional 2.9 million of CIENA stock. The transaction constituted a
tax-free reorganization and has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16.
The acquisition of Omnia is a transaction valued at approximately $483
million and is expected to be completed in June or July 1999. Under the terms
of the merger agreement with Omnia, CIENA will acquire all of the outstanding
shares of Omnia in exchange for approximately 16 million shares of CIENA common
stock. The acquisition is subject to shareholder approval by Omnia stockholders
and other customary conditions. The transaction is intended to constitute a
tax-free reorganization and will be accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. The acquisition closed in
July 1999.
In conjunction with the agreements to acquire Lightera and Omnia, CIENA
announced its LightWorks(TM) Initiative, CIENA's vision of how to change the
fundamental economics of optical telecommunication service provider networks.
The eventual addition of Lightera's and Omnia's products to CIENA's product
suite will make it possible for CIENA to offer telecommunications service
providers a comprehensive next-generation optical network architecture that
dramatically reduces the total number of network elements, thereby lowering
network costs. By sweeping the functionality and performance of what are now
several network elements into dramatically fewer network elements, without
sacrificing network reliability or performance, CIENA LightWorks architecture
should lower both a carrier's equipment cost and its operational costs. In
addition, LightWorks network architecture may enhance the revenue generating
potential of carrier networks by shortening their service delivery intervals
and enabling them to offer their customers a wide variety of services from a
single network platform.
CIENA has increased the number of its optical transport equipment
customers from a total of seven during the six months ended April 30, 1998 to
seventeen for the six months ended April 30, 1999. This reflects CIENA's
ongoing strategy in the face of aggressive price competition to continue to
build market share at the cost of reduced margins. CIENA intends to preserve
and enhance its market leadership and eventually build on its installed base
with new and additional products. While this gross margin pressure continues,
CIENA believes that its product and service quality, manufacturing experience,
and proven track record of delivery will enable it to be successful while it
concentrates on efforts to reduce product costs and maximize production
efficiencies.
35
<PAGE> 36
CIENA believes that the need for customer financing assistance is
increasingly a factor among the new carriers seeking rapid buildout of their
networks. To date CIENA has not recognized revenue from customers with extended
payment terms beyond 90 days from customer acceptance. Revenue recognition from
future customers who require financing assistance may be deferred until
collection is probable.
CIENA is committed to achieving general commercial availability of
MultiWave(R) Metro(TM), CIENA's system designed for use in metropolitan ring
applications within the next several months, as well as 10 gigabit per second
transmission capability for its MultiWave Sentry(TM) line of products in the
second half of the year. The general commercial availability of CIENA's next
generation long-distance optical transport system, a MultiWave platform capable
of 96-channel configuration, is also expected in the second half of the year.
CIENA intends to continue the development of the CoreDirector(TM)
product developed by Lightera. CoreDirector is believed to be the world's first
intelligent optical core switch and reduces the cost of deploying and operating
telecommunication service provider networks with industry-leading capacity and
advanced networking software. Because it supports capacities from optical
wavelengths down to STS-1s with what CIENA believes is industry-leading scale
and density, the CoreDirector allows carriers to deliver a full range of
transport services, without costly SONET/SDH multiplexers or inflexible
"wavelength only" devices. The general commercial availability of the
CoreDirector is expected by the end of the first quarter calendar 2000.
Pursuit of these strategies, in conjunction with increased investments
in research and development, selling, marketing, and customer service
activities, will likely limit CIENA's operating profitability over the
remaining six months of fiscal 1999, and may result in operating losses during
the period. CIENA intends to continue to pursue new or complementary
technologies either through ongoing internal development or by acquisition in
order to further broaden CIENA's product line.
As of April 30, 1999 CIENA employed 1,557 people, which includes 69
persons as a result of CIENA's acquisition of Lightera. This was an increase of
175 persons over the 1,382 employed on October 31, 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1999
REVENUE. CIENA recognized $287.8 million and $211.9 million in revenue
for the six months ended April 30, 1998 and 1999, respectively. The approximate
$75.9 million or 26.4% decrease in revenues in the six months ended April 30,
1999 compared to the six months ended April 30, 1998 was largely the result of
decreased selling prices. CIENA recognized revenues from seventeen different
optical transport equipment customers in the six months ended April 30, 1999,
as compared to seven such customers in the same six months of the prior year.
Additionally, during the six months ended April 30, 1999, each of two optical
transport equipment customers accounted for at least 10% or more of CIENA's
revenue and combined accounted for 53.2% of CIENA's revenue. This compares to
the six months ended April 30, 1998 where two customers accounted for at least
10% or more of CIENA's revenue and combined accounted for approximately 71.5%
of CIENA's revenue. Revenues derived from foreign sales accounted for
approximately 14.9% and 34.5% of CIENA's revenues during the six months ended
April 30, 1998 and 1999, respectively. The increase in foreign sales reflects
an increase in sales to new customers.
Revenues during CIENA's six months ended April 30, 1998 were largely
attributable to both sales of 16 channel MultiWave Sentry and 40 channel
MultiWave Sentry 4000 systems. Revenues during CIENA's six months ended April
30, 1999 were largely attributed to sales of CIENA's MultiWave Sentry 4000
systems. Revenues derived from engineering, furnishing and installation
services increased by less than 10% from the six months ended April 30, 1998
compared to the six months ended April 30, 1999. Sales from this activity
increased as a percentage of total revenue from approximately 8.3% to 12.2% of
CIENA's revenue from the first six months of 1998 to the first six months of
1999, respectively.
GROSS PROFIT. Gross profits were $164.9 million and $74.9 million for
the six months ended April 30, 1998 and 1999, respectively. The approximate
$90.0 million or 54.6% decrease in gross profit in the first six months of 1999
compared to the first six months of 1998 was the result of decreased revenues
for those periods. Gross margin as a percentage of revenues was 57.3% and 35.3%
for the first six months of 1998 and 1999, respectively. The decrease in
36
<PAGE> 37
gross margin percentage for the first six months of 1999 compared to the first
six months of 1998 was largely attributable to aggressive price competition
resulting in lower selling prices for MultiWave optical transport systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $29.2 million and $46.3 million for the six months ended April 30, 1998
and 1999, respectively. During the first six months of 1998 and 1999, research
and development expenses were 10.2% and 21.9% of revenue, respectively. The
approximate $17.1 million or 58.4% increase in research and development
expenses in the first six months of 1999 compared to the first six months of
1998 was the result of increases in staffing levels, consumption of prototype
materials, utilization of outside consultants for certain development efforts
and higher costs of test equipment used to develop and test new products and
features. CIENA expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$21.1 million and $26.7 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, selling and
marketing expenses were 7.3% and 12.6% of revenue, respectively. The
approximate $5.6 million or 26.6% increase in selling and marketing expenses in
the first six months of 1999 compared to the first six months of 1998 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, promotional costs, travel expenditures and rent
expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $8.7 million and $10.9 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, general and
administrative expenses were 3.0% and 5.1% of revenue, respectively. The
approximate $2.2 million or 24.5% increase in general and administrative
expenses in the first six months of 1999 compared to the first six months of
1998 was primarily due to increases in staffing levels and outside consulting
services.
MERGER COSTS. The merger costs for the six months ended April 30, 1999
of $2.3 million were costs related to the merger between CIENA and Lightera.
These costs include fees for legal, accounting, investment banking services and
other related expenses.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the six months ended April 30, 1998. These costs
were for the purchase of technology associated with the acquisition of Terabit
during the second quarter 1998.
PIRELLI LITIGATION. The Pirelli litigation expense for the six months
ended 1998 was primarily the result of a $10.0 million charge for actual and
estimated legal and related costs associated with the litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $7.0 million and $6.9 million for the six months
ended April 30, 1998 and 1999, respectively. The approximate $0.2 million or
2.3% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION FOR INCOME TAXES. CIENA's provision for income taxes was $40.3
million for the six months ended April 30, 1998. CIENA recorded a benefit for
income taxes of 1.5 million for the six months ended April 30, 1999. During the
first six months of 1998 the provision for income taxes was 35.7% of income
before income taxes, exclusive of the effect of one-time charges for purchased
research and development expenses and Pirelli litigation. The benefit for income
taxes recorded in the first six months of 1999 was due to the Company's
generation of operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, CIENA's principal source of liquidity was its cash
and cash equivalents of $200.7 million and its marketable debt securities of
$100.0 million. CIENA's marketable debt securities have maturities no longer
than six months.
Cash generated from operations was $47.8 million for the six months
ended April 30, 1999. This amount was principally attributable to the non-cash
charges of depreciation, amortization, provisions for inventory obsolescence
and warranty, and reductions in inventories, increases in accounts payable,
accrued expenses and income tax payable. This amount was offset by increases in
accounts receivable and prepaid expenses due to increased revenue and to the
general increase in business activity.
37
<PAGE> 38
Investment activities in the six months ended April 30, 1999 included
the net purchase of $84.0 million worth of corporate debt securities and $24.7
million invested in capital expenditures. Of the amount invested in capital
expenditures, $22.3 million was used for additions to capital equipment and
furniture and the remaining $2.4 million was invested in leasehold
improvements.
CIENA expects to use an additional $50.0 million to $60.0 million of
capital during the remainder of fiscal 1999 to complete the construction of
leasehold improvements for its facilities and additional investments in capital
equipment.
CIENA believes that its existing cash balance and cash flows from future
operations will be sufficient to meet CIENA's capital requirement for at least
the next 18 to 24 months.
YEAR 2000 READINESS DISCLOSURE
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. CIENA's operations make
use of a variety of computer equipment and software. If the computer equipment
and software used in the operation of CIENA and its products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on CIENA's operations.
CIENA has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by CIENA,
CIENA currently believes and warrants to its customers that its products are
Year 2000 compliant. However, since all customer situations cannot be
anticipated, particularly those involving interaction of CIENA's products with
third party products, CIENA may experience warranty and other claims as a
result of the Year 2000 transition. The impact of customer claims, if broader
than anticipated, could have a material adverse impact on CIENA's results of
operations or financial condition.
CIENA has concluded a comprehensive inventory and evaluation of both
information technology ("IT") or software systems and non-IT systems used to
run its systems with the exception of the systems it acquired in its merger
with Lightera. Non-IT systems typically include embedded technology such as
microcontrollers. Examples of CIENA's Non-IT systems include certain equipment
used for production, research, testing and measurement processes and
calibration. CIENA has begun the process of upgrading or replacing those
identified non-compliant systems and the process is 60% complete. Completion is
expected during the third quarter of fiscal 1999. For the Year 2000
non-compliance systems identified to date, the cost of remediation is not
considered to be material to CIENA's financial condition or operating results.
However, if implementation of replacement systems is delayed, or if significant
new noncompliance issues are identified, CIENA's results of operations or
financial condition may be materially adversely affected.
CIENA has begun the process of evaluating the systems acquired in the
Lightera merger and has not to date evaluated in detail the systems in use by
Omnia. CIENA expects to complete the evaluation process concerning the Lightera
systems during the third quarter of fiscal 1999. CIENA plans to begin the
process of upgrading or replacing those identified non-compliant systems by the
end of the third fiscal quarter of 1999 with completion expected by the end of
the fourth quarter of fiscal 1999. Depending on the timing of the closing of
its merger with Omnia, CIENA expects to evaluate, upgrade and or replace as
necessary those systems identified as non-compliant systems by December 1,
1999.
CIENA changed its main financial, manufacturing and information system
to a company-wide Year 2000 compliant enterprise resource planning ("ERP")
computer-based system during the fourth quarter of fiscal 1998. CIENA estimates
that it has spent approximately $4.0 million on its ERP implementation and
during the six months ended April 30, 1999 CIENA has spent approximately
$300,000 to address identified Year 2000 issues. CIENA estimates that it will
likely spend an additional $100,000 to $200,000 to address remaining identified
Year 2000 issues. CIENA expects that it will use cash from operations for Year
2000 remediation and replacement costs. Approximately less than 2% of the
information technology budget is expected to be used for remediation. No other
information technology projects have been deferred due to the Year 2000
efforts. CIENA has employed an independent verification consultant to validate
CIENA's processes in order to assure the reliability of CIENA's risk and cost
estimates.
38
<PAGE> 39
CIENA has contacted its critical suppliers to determine that suppliers'
operations and the products and services they provide are Year 2000 compliant.
To date, CIENA's optical suppliers have represented that their products are
year 2000 compliant and have represented that they are in the process of
becoming fully compliant by December 31, 1999. If these suppliers fail to
adequately address the Year 2000 issue for the products they provide to CIENA,
this could have a material adverse impact on CIENA's operations and financial
results. Contingency plans will be developed if it appears CIENA or its key
suppliers will not be Year 2000 compliant, and such noncompliance is expected
to have a material adverse impact on CIENA's operations.
The risks to CIENA resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness are generally similar
to those faced by other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that could
result in the event of one or more major failures of CIENA's information
systems, factories or facilities to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to CIENA: (1) information
systems - could include interruptions or disruptions of business and
transaction processing such as customer billing, payroll, accounts payable and
other operating and information processes, until systems can be remedied or
replaced; (2) factories and facilities - could include interruptions or
disruptions of manufacturing processes and facilities with delays in delivery
of products, until non-compliant conditions or components can be remedied or
replaced; and (3) major suppliers to CIENA - could include interruptions or
disruptions of the supply of raw materials, supplies and Year 2000 ready
components which could cause interruptions or disruptions of manufacturing and
delays in delivery of products, until the third party supplier remedied the
problem or contingency measures were implemented. Risks of major failures of
CIENA's principal products could include adverse functional impacts experienced
by customers, the costs and resources for CIENA to remedy problems or replace
products where CIENA is obligated or undertakes to take such action, and delays
in delivery of new products.
39
<PAGE> 40
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended January 31, Quarter Ended April 30, Six Months Ended April 30,
1998 1999 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Revenue $145,092 $100,417 $142,718 $111,490 $287,810 $211,907
Cost of goods sold 58,980 65,778 63,915 71,238 122,895 137,016
-------- -------- -------- -------- -------- --------
Gross profit 86,112 34,639 78,803 40,252 164,915 74,891
-------- -------- -------- -------- -------- --------
Operating expenses:
Research and development 11,245 22,218 17,986 24,094 29,231 46,312
Selling and marketing 9,975 13,608 11,107 13,092 21,082 26,700
General and administrative 3,984 5,036 4,757 5,849 8,741 10,885
Purchased research and development - - 9,503 - 9,503 -
Pirelli litigation - - 10,000 - 10,000
Merger costs - - - 2,253 - 2,253
-------- -------- -------- -------- -------- --------
Total operating expenses 25,204 40,862 53,353 45,288 78,557 86,150
-------- -------- -------- -------- -------- --------
Income (loss) from operations 60,908 (6,223) 25,450 (5,036) 86,358 (11,259)
Interest and other income (expense), net 3,771 3,396 3,448 3,698 7,219 7,094
Interest expense (74) (95) (98) (115) (172) (210)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 64,605 (2,922) 28,800 (1,453) 93,405 (4,375)
Provision (benefit) for income taxes 25,710 (1,041) 14,607 (468) 40,317 (1,509)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 38,895 $ (1,881) $ 14,193 $ (985) $ 53,088 $ (2,866)
======== ======== ======== ======== ======== ========
Basic net income (loss) per common share $ 0.37 $ (0.01) $ 0.13 $ (0.01) $ 0.49 $ (0.02)
======== ======== ======== ======== ======== ========
Diluted net income (loss) per common share
and dilutive potential common share $ 0.33 $ (0.01) $ 0.12 $ (0.01) $ 0.45 $ (0.02)
======== ======== ======== ======== ======== ========
Weighted average basic common shares
outstanding 106,405 131,202 112,302 132,530 108,757 132,041
======== ======== ======== ======== ======== ========
Weighted average basic common and
dilutive potential common shares
outstanding 116,875 131,202 122,483 132,530 119,124 132,041
======== ======== ======== ======== ======== ========
</TABLE>
40
<PAGE> 41
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
January 31, April 30,
1999 1999
---------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 215,631 $ 200,653
Marketable debt securities................................................... 89,702 100,021
Accounts receivable, net..................................................... 80,257 96,448
Inventories, net............................................................. 58,571 54,185
Deferred income taxes........................................................ 12,645 13,514
Prepaid income taxes......................................................... 1,343 -
Prepaid expenses and other................................................... 10,027 9,998
---------------- -----------------
Total current assets....................................................... 468,176 474,819
Equipment, furniture and fixtures, net......................................... 127,478 128,678
Goodwill and other intangible assets, net...................................... 15,361 14,446
Other assets................................................................... 4,785 4,737
---------------- -----------------
Total assets................................................................. $ 615,800 $ 622,680
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 33,161 $ 26,543
Accrued liabilities.......................................................... 37,583 40,773
Income taxes payable......................................................... - 4,457
Deferred revenue............................................................. 785 719
Other current obligations.................................................... 1,668 1,622
---------------- -----------------
Total current liabilities.................................................. 73,197 74,114
Deferred income taxes........................................................ 34,314 36,580
Other long-term obligations.................................................. 4,291 4,350
---------------- -----------------
Total liabilities.......................................................... 111,802 115,044
---------------- -----------------
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;
135,862,591 and 136,302,950 shares issued and outstanding..... 1,359 1,363
Additional paid-in capital................................................... 333,774 338,185
Notes receivable from stockholders........................................... (708) (629)
Cumulative translation adjustment............................................ (108) 21
Retained earnings............................................................ 169,681 168,696
---------------- -----------------
Total stockholders' equity................................................. 503,998 507,636
---------------- -----------------
Total liabilities and stockholders' equity................................... $ 615,800 $ 622,680
================ =================
</TABLE>
41
<PAGE> 42
CIENA CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, April 30,
------------------------ --------------------------
Cash flows from operating activities: 1998 1999 1998 1999
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss)............................................ $ 38,895 $ (1,881) $ 53,088 $ (2,866)
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash charges from equity transactions................ 10 10 20 262
Amortization of premiums on marketable debt securities... 77 42 164 87
Purchased research and development....................... - - 9,503 -
Effect of translation adjustment......................... (32) (1) (24) 128
Depreciation and amortization............................ 5,655 11,557 13,991 23,580
Provision for doubtful accounts.......................... - - 194 -
Provision for inventory excess and obsolescence.......... 557 1,533 1,683 2,533
Provision for warranty and other contractual obligations. 1,721 2,218 6,400 4,617
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable.......... (16,969) 5,215 (59,848) (10,976)
Increase in prepaid expenses and other.............. (1,720) (5,240) (4,565) (5,356)
(Increase)/decrease in inventories.................. (20,836) 10,804 (29,529) 14,190
(Increase)/decrease in deferred income tax asset.... (567) 3,776 (1,247) 2,907
Decrease in prepaid income taxes.................... - 10,345 - 11,688
(Increase)/decrease in other assets................. (1,209) 63 (3,729) 111
Increase in accounts payable and accruals........... 9,475 6,196 17,281 369
Increase in income taxes payable.................... 16,724 - 940 4,457
Increase in deferred income tax liability........... 979 189 1,957 2,455
Increase/(decrease) in deferred revenue and other
obligations..................................... 720 (299) 1,131 (365)
-------- -------- --------- ---------
Net cash provided by operating activities................ 33,480 44,527 7,410 47,821
-------- -------- --------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures............... (21,290) (12,360) (58,729) (24,668)
Purchases of marketable debt securities...................... (31,166) (73,809) (88,305) (118,277)
Maturities of marketable debt securities..................... - - 36,376 34,249
Net cash paid for business combinations...................... (1,005) - (2,103) -
-------- -------- --------- ---------
Net cash used in investing activities.................... (53,461) (86,169) (112,761) (108,696)
-------- -------- --------- ---------
Cash flows from financing activities:
Net (repayment of) proceeds from other obligations........... (409) 1,725 (102) 1,738
Net proceeds for issuance of common stock.................... 1,619 1,904 11,554 5,188
Tax benefit related to exercise of stock options............. 6,827 2,928 6,885 3,796
Repayment of notes from receivable stockholders.............. - 2 - 92
-------- -------- --------- ---------
Net cash provided by financing activities.......... 8,037 6,559 18,337 10,814
-------- -------- --------- ---------
Net decrease in cash and cash equivalents.......... (11,944) (35,083) (87,014) (50,061)
Cash and cash equivalents at beginning of period................ 273,286 250,714 273,286 250,714
-------- -------- --------- ---------
Cash and cash equivalents at end of period...................... $261,342 $215,631 $ 186,272 $ 200,653
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
42
<PAGE> 43
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Supplemental Financial Statements
The interim supplemental financial statements included herein for CIENA
Corporation (the "Company") have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the supplemental 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 periods covered and of the financial position of
the Company at the date of the interim balance sheet. Certain information and
footnote disclosures normally included in the annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the
information presented. The operating results for interim periods are not
necessarily indicative of the operating results for the entire year. These
financial statements should be read in conjunction with the Company's October
31, 1998 audited supplemental consolidated financial statements and notes
thereto included herein.
Revenue Recognition
The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain customer
acceptance, revenue is deferred until the terms of acceptance are satisfied.
Revenue for installation services is recognized as the services are performed
unless the terms of the supply contract combine product acceptance with
installation, in which case revenues for installation services are recognized
when the terms of acceptance are satisfied and installation is completed.
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.
Fiscal Year
CIENA's fiscal year ends on October 31. Omnia's fiscal year ends on
December 31. The quarter ended January 31, 1999 and the six months ended April
30, 1999 contain two months of Omnia's financial results, which are also
recorded in the quarter and fiscal year ending October 31, 1998. The net loss
for these two months, November and December 1998 was $1,621,000.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
January 31, April 30
1999 1999
---------------- ----------------
<S> <C> <C>
Raw materials $ 36,373 $ 30,409
Work-in-process 9,066 13,086
Finished goods 26,514 21,670
---------------- ----------------
71,953 65,165
Less reserve for excess and obsolescence (13,382) (10,980)
---------------- ----------------
$ 58,571 $ 54,185
================ ================
</TABLE>
43
<PAGE> 44
(3) EARNINGS PER SHARE CALCULATION
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, and stock options using the treasury stock method (in thousands
except per share amounts).
<TABLE>
<CAPTION>
Quarter ended January 31, Quarter ended April 30,
-----------------------------------------------------------------------------
1998 1999 1998 1999
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net Income.................................... $ 38,895 $ (1,881) $ 14,193 $ (985)
================ =============== ================ ===============
Weighted average shares-basic................. 106,405 131,202 112,302 132,530
---------------- --------------- ---------------- ---------------
Effect of dilutive securities:
Restricted stock ........................ 3,560 - 3,971 -
Employee stock options................... 6,910 - 6,210 -
---------------- --------------- ---------------- ---------------
Weighted average shares-diluted............... 116,875 131,202 122,483 132,530
================ =============== ================ ===============
Basic EPS..................................... $ 0.37 $ (0.01) $ 0.13 $ (0.01)
================ =============== ================ ===============
Diluted EPS................................... $ 0.33 $ (0.01) $ 0.12 $ (0.01)
================ =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ending April 30,
1998 1999
---------------- ---------------
<S> <C> <C>
Net Income.................................... $ 53,088 $ (2,866)
================ ===============
Weighted average shares-basic................. 108,757 132,041
---------------- ---------------
Effect of dilutive securities:
Restricted stock ........................ 3,765 -
Employee stock options................... 6,602 -
---------------- ---------------
Weighted average shares-diluted.............. 119,124 132,041
================ ===============
Basic EPS..................................... $ 0.49 $ (0.02)
================ ===============
Diluted EPS................................... $ 0.45 $ (0.02)
================ ===============
</TABLE>
Approximately 189,000 and 11,760,000 options or restricted stock were
outstanding during the quarter ended January 31, 1998 and January 31, 1999, but
were not included in the computation of the diluted EPS as the effect would be
anti-dilutive. Stock options to purchase 1,070,000 shares of common stock were
not included in the computation of diluted EPS for the quarter ended April 30,
1998 because the options exercise price was greater than the average market
price of common shares. Approximately 11,651,000 options or restricted stock
were outstanding during the quarter ended April 30, 1999, but were not included
in the computation of the diluted EPS as the effect would be anti-dilutive.
Stock options to purchase 710,000 shares of common stock were not
included in the computation of diluted EPS for the six months ended April 30,
1998 because the options exercise price was greater than the average market
price of common shares. Approximately 11,185,000 options or restricted stock
were outstanding during six months ended April 30, 1999, but were not included
in the computation of the diluted EPS as the effect would be anti-dilutive.
(4) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS No.130), "Comprehensive
Income". SFAS No.130 became effective for the Company's fiscal year 1999. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components: however, the adoption of this statement had no
impact on the Company's net income or shareholders' equity. SFAS No. 130
requires that changes in the amounts of certain items, including foreign
currency translation adjustments and gains
44
<PAGE> 45
and loses on certain securities be shown in the financial statements. The
Company's accumulated other comprehensive income is comprised entirely of
accumulated foreign currency translation adjustments and is shown as a separate
amount on the Company's Consolidated Balance Sheets. During the first quarter
of fiscal 1998 and 1999, total comprehensive income, which includes net income
and changes in foreign currency translation adjustments, amounted to
$39,666,000 and $282,000, respectively. During the second quarter of fiscal
1998 and 1999, total comprehensive income, which includes net income and
changes in foreign currency translation adjustments, amounted to $14,201,000
and $856,000 of comprehensive income, respectively. During the six months ended
April 30, 1998 and 1999, total comprehensive income/(loss), which includes net
income and changes in foreign currency translation adjustments, amounted to
$53,064,000 and $(2,738,000) of comprehensive income/(loss), respectively.
45
<PAGE> 46
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
Exhibit Description
- ------- --------------------------------------------------------------
23.1 Consent of Independent Accountants
27.1 Restated Financial Data Schedule (only filed electronically
with the SEC)
99.1 Cautionary Statements for Purposes of the "Safe Harbor" Provisions
of The Private Securities Reform Act of 1995
46
<PAGE> 47
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, hereunto duly authorized,
<TABLE>
<S> <C>
CIENA CORPORATION
Date: July 21, 1999
By: /s/Joseph R. Chinnici
---------------------
Joseph R. Chinnici
Sr. Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
47
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-27131, No. 333-52467 and No. 333-76915) and on
form S-3 (No. 333-81133) of CIENA Corporation of our report dated November 25,
1998, except as to Note 2 "Lightera" and "Omnia" which are as of July 20, 1999,
which appears in this Current Report on Form 8-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
McLean, VA
July 20, 1999
<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 SUPPLEMENTAL
CONSOLIDATED BALANCE SHEET, SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
AND SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S
FORM 8-K REPORT DATED JULY 21, 1999 FOR THE PERIOD ENDED OCTOBER 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998 OCT-31-1998 OCT-31-1998
<PERIOD-START> NOV-01-1997 NOV-01-1997 FEB-01-1998 MAY-01-1998
<PERIOD-END> OCT-31-1998 JAN-31-1998 APR-30-1998 JUL-31-1998
<CASH> 250,714 261,342 186,272 220,324
<SECURITIES> 15,993 31,089 51,765 28,132
<RECEIVABLES> 87,000 89,833 133,518 110,008
<ALLOWANCES> 1,528 528 1,528 1,528
<INVENTORY> 70,908 61,388 68,955 76,351
<CURRENT-ASSETS> 455,924 458,028 457,151 473,477
<PP&E> 167,273 101,779 140,004 160,153
<DEPRECIATION> 41,506 17,827 24,864 33,565
<TOTAL-ASSETS> 602,809 555,532 588,145 621,425
<CURRENT-LIABILITIES> 64,619 89,411 86,291 77,544
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 1,346 1,117 1,249 1,338
<OTHER-SE> 499,690 433,898 467,126 508,888
<TOTAL-LIABILITY-AND-EQUITY> 602,809 555,532 588,145 621,425
<SALES> 508,087 145,092 142,718 129,116
<TOTAL-REVENUES> 508,087 145,092 142,718 129,116
<CGS> 256,014 58,980 63,915 70,431
<TOTAL-COSTS> 256,014 58,980 63,915 70,431
<OTHER-EXPENSES> 183,003 25,204 53,353 61,684
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 313 74 98 71
<INCOME-PRETAX> 81,900 64,605 28,800 (230)
<INCOME-TAX> 36,200 25,710 14,607 20
<INCOME-CONTINUING> 45,700 38,895 14,193 (250)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 45,700 38,895 14,193 (250)
<EPS-BASIC> 0.39 0.37 0.13 0.00
<EPS-DILUTED> 0.36 0.33 0.12 0.00
</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 SUPPLEMENTAL
CONSOLIDATED BALANCE SHEET, SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
AND SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S
FORM 8-K REPORT DATED JULY 21, 1999 FOR THE PERIOD ENDED OCTOBER 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1999 OCT-31-1999
<PERIOD-START> AUG-01-1997 NOV-01-1998 FEB-01-1999
<PERIOD-END> OCT-31-1998 JAN-31-1999 APR-30-1999
<CASH> 250,714 215,631 200,653
<SECURITIES> 15,993 89,702 100,021
<RECEIVABLES> 87,000 81,785 97,648
<ALLOWANCES> 1,528 1,528 1,200
<INVENTORY> 70,908 58,571 54,185
<CURRENT-ASSETS> 455,924 468,176 474,819
<PP&E> 167,273 178,790 191,940
<DEPRECIATION> 41,506 51,312 63,262
<TOTAL-ASSETS> 602,809 615,800 622,680
<CURRENT-LIABILITIES> 64,619 73,197 74,114
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 1,346 1,359 1,363
<OTHER-SE> 499,690 502,639 506,273
<TOTAL-LIABILITY-AND-EQUITY> 602,809 615,800 622,680
<SALES> 91,161 100,417 111,490
<TOTAL-REVENUES> 91,161 100,417 111,490
<CGS> 62,688 65,778 71,238
<TOTAL-COSTS> 62,688 65,778 71,238
<OTHER-EXPENSES> 42,762 40,862 45,288
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 70 95 115
<INCOME-PRETAX> (11,275) (2,922) (1,453)
<INCOME-TAX> (4,137) (1,041) (468)
<INCOME-CONTINUING> (7,138) (1,881) (985)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (7,138) (1,881) (985)
<EPS-BASIC> (0.06) (0.01) (0.01)
<EPS-DILUTED> (0.06) (0.01) (0.01)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES REFORM ACT OF 1995
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, CIENA Corporation ("CIENA" or the "Company") is
hereby filing cautionary statements identifying important factors that could
cause CIENA's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of CIENA. These statements amend
and supersede prior cautionary statements filed by CIENA to the extent
inconsistent therewith.
OUR RESULTS CAN BE UNPREDICTABLE
Our near term results may be break-even or may involve losses. In
general, sequential revenue and operating results over the next 12 months are
likely to fluctuate and may continue to fluctuate in the future due to factors
including:
- timing and size of orders
- satisfaction of contractual customer acceptance criteria
- shipment delays and deferrals
We budget expense levels partially on our expectations of long term
future revenue. These levels reflect our substantial investment in financial,
engineering, manufacturing and logistics support resources we think we may need
for large potential customers, even though we do not know the volume, duration
or timing of any purchases from them. As a result, we may continue to experience
increased inventory levels, operating expenses and general overhead.
Additionally, Lightera Networks, Inc. and Omnia Communications, Inc.,
companies we have acquired, have ongoing development and operating expenses but
are not expected to contribute materially to revenues until calendar 2000.
WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
A small number of very large companies have historically dominated our
industry including Lucent, Alcatel, Nortel, NEC, Pirelli, Siemens, Ericsson,
Fujitsu, and Hitachi. These companies have substantial financial, marketing and
intellectual property resources. We sell systems which displace their legacy
equipment, which represents a specific threat to these companies. Our
acquisitions of Lightera and Omnia may increase this perceived threat. We expect
continued aggressive tactics from many of these competitors such as:
- Substantial price discounting
- Early announcements of competing products
- "One-stop shopping" appeals
- Customer financing assistance
- Intellectual property disputes
These tactics can be particularly effective in a highly concentrated
customer base such as ours.
Sprint, a significant customer of ours, has long indicated that it
intends to establish a second vendor for DWDM products. We do not know when
Sprint will select a second vendor or what impact the selection might have on
Sprint's purchases from us. Sprint could reduce its purchases from us, which
could in turn have a material adverse effect on us.
1
<PAGE> 2
New competitors may also emerge to compete with our existing products as
well as our future products.
DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT OUR NEAR TERM PROSPECTS
If we fail to deploy new and improved products, our competitive position
and financial condition would be materially and adversely affected.
The certification process for new telecommunications equipment used in
RBOC networks, which is a process traditionally conducted by Telcordia
Technologies, has in the past resulted in and may continue to result in
unanticipated delays which may affect the deployment of our products for the
RBOC market.
In order to meet our delivery commitments for our newest products, we
will need to finalize component sourcing, which we have not yet completed. Any
delays in deployment could result in delays in recognizing revenues and,
ultimately, could adversely affect our customer relationships.
SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN OUR RESULTS
We have recently shifted our sales focus to smaller emerging carriers.
Timing and volume of purchasing from these smaller carriers can also be more
unpredictable due to factors such as their need to build a customer base,
acquire rights of way and interconnections necessary to sell network service,
and build out new capacity, all while working within capital budget constraints.
This increases the unpredictability of our financial results because even
smaller carriers purchase our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. Most of our anticipated revenue over the next
several quarters is comprised of orders of less than $25 million each from
several customers, some of which involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
these carriers will be impacted by their financial condition at the time of
product acceptance. Purchasing delays or changes in the amount of purchases by
any of these customers, could have a material adverse effect on us.
OUR PROSPECTS DEPEND ON DEMAND FOR BANDWIDTH WHICH WE CANNOT PREDICT OR CONTROL
We may not anticipate changes in direction or magnitude of demand for
bandwidth. Unanticipated reductions in bandwidth demand would adversely affect
us.
Our products enable high capacity transmission over long distance, and
certain short-haul portions, of optical communications networks. Our Core
Director switching products are targeted to high capacity applications.
Customers, however, determine:
- the quantity of bandwidth needed
- the timing of its deployment, and
- the equipment configurations and network architectures they want.
Customer determinations are subject to abrupt change in response to their
own competitive pressures, pressures to raise capital and financial performance
expectations.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. As CIENA has grown and matured, competitors' efforts to entice our
employees to leave have intensified, particularly among competitive startups and
other early stage companies seeking to replicate CIENA's experience. CIENA and
its employees are parties to agreements that limit the employee's ability to
work for a competitor following termination of employment. We expect our
competitors will respect these agreements and not interfere with them. But we
can make no assurances of that, or that we will be able to retain all of our key
contributors or attract new personnel
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to add to or replace them. The loss of key personnel would likely have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY EXPERIENCE DELAYS FROM OUR SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE
SUBSTITUTE SUPPLIERS
We depend on a small number of suppliers for key components of our
products, as well as equipment used to manufacture our products. Our highest
capacity product currently being shipped, the MultiWave Sentry which is capable
of 96-channel configurations, includes several higher performance components for
which reliable, high volume suppliers are particularly limited. On occasion, we
have experienced delays in receipt of key components. Any future difficulty in
obtaining sufficient and timely delivery of them could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations. Uniphase
Corporation and JDS FITEL, Inc., both of which are significant suppliers to
CIENA, recently announced a planned merger. If the merger with Omnia and related
integration activities result in delayed deliveries of key components from
either of these sources, those delays could have a material adverse effect on
CIENA's near-term results of operations.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new fiberoptic systems with high technology content
involves occasional problems as the technology and manufacturing methods mature.
We are aware of instances domestically and internationally of delayed
installation and activation of some of our products due to faulty components. If
significant reliability, quality or network monitoring problems develop, a
number of material adverse effects could result, including:
- manufacturing rework costs
- high service and warranty expense
- high levels of product returns
- delays in collecting accounts receivable
- reduced orders from existing customers, and
- declining interest from potential customers
Although we maintain accruals for product warranties, actual costs could
exceed these amounts.
From time to time, there will be interruptions or delays in the
activation of our products and the addition of channels, particularly because we
do not control all aspects of the installation and activation activities. If we
experience significant interruptions or delays that we can not promptly resolve,
confidence in our products could be undermined, which could have a material
adverse effect on us.
INVESTMENT IN NEW COMPANIES AND CHANGES IN TECHNOLOGY COULD RESULT IN MORE
COMPETITION
We may not be able to successfully anticipate changes in technology,
industry standards, customer requirements and product offerings, yet our ability
to develop and introduce new and enhanced products will impact our position as a
leader in the deployment of high-capacity solutions. The accelerating pace of
deregulation in the telecommunications industry will likely intensify the
competition for improved technology. Many of our competitors have substantially
greater financial, technical and marketing resources and manufacturing capacity
with which to develop or acquire new technologies. There has been an increase in
the funding of new companies intending to develop new products for the rapidly
evolving telecom industry. These companies have time-to-market advantages due to
the narrow and exclusive focus of their efforts. New companies may provide
additional competition for our existing product lines as well as potential
future products. The introduction of new products embodying new technologies or
the emergence of new industry standards could render our existing products
uncompetitive from a pricing standpoint, obsolete or
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unmarketable. Any of these outcomes would have a material adverse effect on our
business, financial condition and results of operations.
OUR STOCK PRICE MAY EXHIBIT VOLATILITY
Our common stock price has experienced substantial volatility in the
past, and is likely to remain volatile in the future. Volatility can arise as a
result of the activities of short sellers and risk arbitrageurs, and may have
little relationship to our financial results or prospects. Volatility can also
result from any divergence between our actual or anticipated financial results
and published expectations of analysts, and announcements we may make. This
occurred in 1998. We attempt to address this possible divergence through our
public announcements and reports; however, the degree of specificity we can
offer in such announcements, and the likelihood that any forward-looking
statements we make will prove correct in actual results, can and will vary. This
is due primarily to:
- the uncertainties associated with our dependence on a small number of
existing and potential customers
- the impact of changes in the customer mix
- the actions of competitors
- long and unpredictable sales cycles and customer purchasing programs
- the absence of unconditional minimum purchase commitments from any
customer
- a lack of visibility into our customers' deployment plans over the course
of the capital equipment procurement year, and
- the lack of reliable data on which to anticipate core demand for high
bandwidth transmission capacity
Divergence will likely occur from time to time in the future, with
resulting stock price volatility, irrespective of our overall year-to-year
performance or long-term prospects. As long as we continue to depend on
relatively few customers, and particularly when a substantial majority of their
purchases consist of newly-introduced products such as the 96-channel MultiWave
Sentry and MultiWave Metro, there is substantial risk of widely varying
quarterly results, including the so-called "missed quarter" relative to investor
expectations.
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
In August 1998, shareholder class action lawsuits were filed against us
and certain of our officers and directors. We believe the lawsuits, now
consolidated into one, are without merit and are defending vigorously against
them. However, because the consolidated lawsuit is at an early stage, it is not
possible to predict the outcome at this time. If decided adversely to CIENA,
however, it could have a material adverse effect on our financial condition and
results of operations.
SOME OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Some of our component suppliers are both primary sources for components
and major competitors in the market for system equipment. For example, we buy
certain key components from:
- Lucent
- Alcatel
- Nortel
- NEC, and
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- Siemens
Each of these companies offers optical communications systems and
equipment which are competitive with our products. Also, Lucent is the sole
source of two components and is one of two suppliers of two others. Alcatel and
Nortel are suppliers of lasers used in our products and NEC is a supplier of an
important piece of testing equipment. A decline in reliability or other adverse
change in these supply relationships could materially and adversely affect our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF LIGHTERA AND OMNIA PRODUCTS
Both Lightera and Omnia's products are in the laboratory testing phase
but the products have not matured into commercially manufacturable units
suitable for field deployment. We expect that field deployable units of Omnia's
products will be available in the second half of calendar 1999, and Lightera's
products by the end of the first quarter of calendar 2000. The maturing process
from laboratory prototype to commercial acceptance involves a number of steps,
including:
- successful completion of product development
- the qualification and multiple sourcing of critical components, including
application-specific integrated circuits ("ASIC's") which are not yet
finalized
- validation of manufacturing methods
- extensive quality assurance and reliability testing, and staffing of
testing infrastructure
- software validation
- establishment of systems integration and burn in requirements, and
- identification and qualification of component suppliers
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's, in particular, are key to the timely introduction of
Lightera's and Omnia's products, and schedule delays are common in the final
testing and manufacture of such components. In addition, unexpected intellectual
property disputes, failure of critical design elements, and a host of other
execution risks may delay or even prevent the introduction of these products.
Commercial acceptance of the products is also not established and there is no
assurance that the substantial sales and marketing efforts necessary to achieve
commercial acceptance in traditionally long sales cycles will be successful.
WE MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES OF LIGHTERA AND OMNIA
Because of the high valuation we placed on Lightera and Omnia, their key
founders and employees have received or will receive a substantial number of
CIENA shares and can sell these shares at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before the products of either company have fully matured into commercially
deliverable products commanding reasonable market share. Additionally, startup
and other companies will seek out these individuals due to the financial result
they have achieved for their investors. Under the circumstances, we face a
difficult and significant task of retaining and motivating the key personnel of
both companies to stay committed to us. We do not have employment contracts with
these personnel. We may not be successful in retaining them.
WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE
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Both Lightera and Omnia are still completing their respective development
stages, and we do not expect either of them to generate any revenue or earnings
for at least several months. As a result, we expect to report approximately
breakeven results of operations, and may report operating losses, for the
balance of the fiscal year. Under these circumstances, we can expect significant
volatility over the next several quarters as investors make judgments as to our
relative progress in:
- bringing the Lightera and Omnia products to market
- integrating the two companies
- managing retention issues, and
- generally executing on the strategic vision
Additionally, the shares held by former Lightera and Omnia shareholders,
together account for approximately 25% of the outstanding shares of CIENA. If a
large portion of these shares are sold within short periods of time, the stock
price may experience further volatility and may decline.
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