<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM..................TO.........................
COMMISSION FILE NUMBER: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(410) 865-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT AUGUST 19, 1999
---------------------------- ------------------------------
<S> <C>
Common stock. $.01 par value 137,363,709
</TABLE>
Page 1 of 24 pages
Exhibit Index on page 23
<PAGE> 2
CIENA CORPORATION
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and nine months ended July 31, 1998
and July 31, 1999 3
Consolidated Balance Sheets
October 31, 1998 and July 31, 1999 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 1998 and
July 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
July 31, July 31, July 31, July 31,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 129,116 $ 128,826 $ 416,926 $ 340,733
Cost of goods sold 70,431 79,361 193,326 216,377
--------- --------- --------- ---------
Gross profit 58,685 49,465 223,600 124,356
--------- --------- --------- ---------
Operating expenses:
Research and development 21,965 28,402 51,196 74,714
Selling and marketing 12,937 16,839 34,019 43,539
General and administrative 4,186 5,433 12,927 16,318
Purchased research and development -- -- 9,503 --
Pirelli litigation 20,579 -- 30,579 --
Merger related costs 2,017 10,768 2,017 13,021
--------- --------- --------- ---------
Total operating expenses 61,684 61,442 140,241 147,592
--------- --------- --------- ---------
Income (loss) from operations (2,999) (11,977) 83,359 (23,236)
Interest and other income, net 2,840 3,692 10,058 10,786
Interest expense (71) (200) (242) (410)
--------- --------- --------- ---------
Income (loss) before income taxes (230) (8,485) 93,175 (12,860)
Provision (benefit) for income taxes 20 (2,928) 40,337 (4,437)
--------- --------- --------- ---------
Net income (loss) $ (250) $ (5,557) $ 52,838 $ (8,423)
========= ========= ========= =========
Basic net income (loss) per common share $ (0.00) $ (0.04) $ 0.47 $ (0.06)
========= ========= ========= =========
Diluted net income (loss) per common share
and dilutive potential common share $ (0.00) $ (0.04) $ 0.43 $ (0.06)
========= ========= ========= =========
Weighted average basic common shares outstanding 121,820 133,016 113,602 132,712
========= ========= ========= =========
Weighted average basic common and dilutive
potential common shares outstanding 121,820 133,016 124,130 132,712
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 250,714 $ 142,599
Marketable debt securities 15,993 155,657
Accounts receivable, net 85,472 103,156
Inventories, net 70,908 64,638
Deferred income taxes 16,421 19,324
Prepaid income taxes 11,688 --
Prepaid expenses and other 4,728 11,804
--------- ---------
Total current assets 455,924 497,178
Equipment, furniture and fixtures, net 125,767 128,333
Goodwill and other intangible assets, net 16,270 13,544
Other assets 4,848 5,842
--------- ---------
Total assets $ 602,809 $ 644,897
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,893 $ 30,467
Accrued liabilities 34,437 48,786
Income taxes payable -- 4,661
Deferred revenue 1,084 3,697
Other current obligations 1,205 1,164
--------- ---------
Total current liabilities 64,619 88,775
Deferred income taxes 34,125 36,766
Other long-term obligations 3,029 3,962
--------- ---------
Total liabilities 101,773 129,503
--------- ---------
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;
134,605,491 and 137,263,120 shares issued and outstanding 1,346 1,373
Additional paid-in capital 328,821 351,029
Notes receivable from stockholders (586) (280)
Cumulative translation adjustment (107) 133
Retained earnings 171,562 163,139
--------- ---------
Total stockholders' equity 501,036 515,394
--------- ---------
Total liabilities and stockholders' equity $ 602,809 $ 644,897
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
-------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 52,838 $ (8,423)
Adjustments to reconcile net income to net cash
from operating activities:
Non-cash charges from equity transactions 31 8,364
Amortization of premiums on marketable debt securities 362 100
Effect of translation adjustments (60) 240
Purchased research and development 9,503 --
Depreciation and amortization 23,106 37,192
Provision for doubtful accounts 194 --
Provision for inventory excess and obsolescence 4,116 4,022
Provision for warranty and other contractual obligations 9,583 6,619
Changes in assets and liabilities:
Increase in accounts receivable (36,103) (17,684)
Increase in prepaid expenses and other (7,753) (7,176)
(Increase)/decrease in prepaid income tax (21,015) 11,688
(Increase)/decrease in inventories (39,356) 2,248
Decrease/(increase) in deferred income tax asset 1,511 (2,903)
Increase in other assets (8,520) (994)
Increase in accounts payable and accruals 8,667 10,304
(Decrease)/increase in income taxes payable (1,093) 4,661
Increase in deferred income tax liability 3,179 2,641
(Decrease)/increase in deferred revenue and other
obligations (2,399) 2,613
--------- ---------
Net cash (used) provided by operating activities (3,209) 53,512
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (79,105) (37,032)
Purchases of marketable debt securities (90,008) (235,770)
Maturities of marketable debt securities 61,876 96,106
Net cash paid for business combinations (2,103) --
--------- ---------
Net cash used in investing activities (109,340) (176,696)
--------- ---------
Cash flows from financing activities:
Net proceeds from other obligations 235 892
Net proceeds from the issuance of common stock and warrants 34,035 7,369
Tax benefit related to exercise of stock warrants 25,481 6,405
(Borrowings)/repayment of notes receivable from stockholders (163) 403
--------- ---------
Net cash provided by financing activities 59,588 15,069
--------- ---------
Net decrease in cash and cash equivalents (52,961) (108,115)
Cash and cash equivalents at beginning of period 273,286 250,714
--------- ---------
Cash and cash equivalents at end of period $ 220,325 $ 142,599
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation
("CIENA") have been prepared by CIENA, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, financial statements included in this report reflect all normal
recurring adjustments which CIENA considers necessary for the fair presentation
of the results of operations for the interim periods covered and of the
financial position of CIENA 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,
CIENA 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 CIENA's October 31, 1998 audited
supplemental consolidated financial statements and notes thereto included in
CIENA's Form 8-K filed on July 21, 1999.
Principles of Consolidation
The Company completed a merger with Omnia Communications, Inc.
("Omnia") a Delaware company headquartered in Marlborough, Massachusetts on July
1, 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.
On March 31, 1999 the Company completed a merger with Lightera
Networks, Inc. ("Lightera") a Delaware 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.
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.
Since the fiscal years for CIENA and Omnia differ, the periods combined
for the purposes of the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
CIENA Omnia
----- -----
<S> <C>
Quarter ended July 31, 1998 July 1, 1998 to September 30, 1998
Nine months ended July 31, 1998 January 1, 1998 to September 30, 1998
</TABLE>
The nine months ended July 31, 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.
6
<PAGE> 7
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is probable. For transactions where CIENA 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-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying balance sheets. For distributor sales where risks of
ownership have not transferred, CIENA recognizes revenue when the product is
shipped through to the end user.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1998 1999
-------- --------
<S> <C> <C>
Raw materials $ 43,268 $ 36,184
Work-in-process 8,592 17,913
Finished goods 30,202 21,878
-------- --------
82,062 75,975
Less: reserve for excess and obsolescence (11,154) (11,337)
-------- --------
$ 70,908 $ 64,638
======== ========
</TABLE>
(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, stock options and warrants using the treasury stock method. (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter ended July 31,
-----------------------------
1998 1999
--------- ---------
<S> <C> <C>
Net loss ...................... $ (250) $ (5,557)
========= =========
Weighted average shares-basic . 121,820 133,016
========= =========
Effect of dilutive securities:
Restricted stock ......... -- --
--------- ---------
Employee stock options ... -- --
--------- ---------
Weighted average shares-diluted 121,820 133,016
========= =========
Basic EPS ..................... $ (0.00) $ (0.04)
========= =========
Diluted EPS ................... $ (0.00) $ (0.04)
========= =========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Nine months ended July 31,
------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Net Income (loss) ........................... $ 52,838 $ (8,423)
========= =========
Weighted average shares-basic ............... 113,602 132,712
--------- ---------
Effect of dilutive securities:
Restricted stock ....................... 3,953 --
--------- ---------
Employee stock options ................. 6,575 --
--------- ---------
Weighted average shares-diluted......... 124,130 132,712
========= =========
Basic EPS ................................... $ 0.47 $ (0.06)
========= =========
Diluted EPS ................................. $ 0.43 $ (0.06)
========= =========
</TABLE>
Approximately 10,963,000 and 12,202,000 options and restricted stock
were outstanding during the quarters ended July 31, 1998 and July 31, 1999,
respectively, but were not included in the computation of the diluted EPS as the
effect would be anti-dilutive.
Stock options to purchase 268,000 shares of common stock were not
included in the computation of diluted EPS for the nine months ended July 31,
1998 because the options exercise price was greater than the average market
price of common shares during the period. Approximately 11,734,000 options and
restricted stock were outstanding during nine months ended July 31, 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 CIENA's fiscal year 1999. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components 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. CIENA's accumulated
other comprehensive income is comprised entirely of accumulated foreign currency
translation adjustments and is shown as a separate amount on CIENA's
Consolidated Balance Sheets. During the third quarter of fiscal 1998 and 1999,
total comprehensive income (loss), which includes net income (loss) and changes
in foreign currency translation adjustments, amounted to ($286,000) and
($5,445,000) of comprehensive loss, respectively. During the nine months ended
July 31, 1998 and 1999, total comprehensive income (loss), which includes net
income (loss) and changes in foreign currency translation adjustments, amounted
to $52,778,000 and ($8,183,000) of comprehensive income (loss), respectively.
(5) BUSINESS COMBINATIONS
Omnia
On July 1, 1999, the Company completed a merger with Omnia 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
merger, 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 shares issuable upon exercise of 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.
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 fiscal year
end is December 31. CIENA's results for the
8
<PAGE> 9
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, Nine Months Ended July 31,
------------------------------------- -------------------------------------
1997 1998 1998 1999
------------------ ----------------- ------------------ -----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
CIENA $ 413,215 $ 508,087 $ 416,960 $ 340,773
Omnia - - - -
Intercompany elimination's - - - -
----------------- ------------------ ------------------ ------------------
Consolidated revenues $ 413,215 $ 508,087 $ 416,926 $ 340,733
================= ================== ================== ==================
Net Income (loss):
CIENA $ 115,967 $ 51,113 $ 56,133 $ (1,020)
Omnia (399) (5,413) (3,295) (7,403)
----------------- ------------------ ------------------ ------------------
Consolidated net income $ 115,568 $ 45,700 $ 52,838 $ (8,423)
================= ================== ================== ==================
</TABLE>
Lightera
On March 31, 1999 the Company completed a merger with Lightera 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 merger 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 Six Months Ended
October 31, April 30, 1999
1998
----------------- ------------------
(in thousands)
<S> <C> <C>
Revenues:
CIENA $ 508,087 $ 211,907
Lightera - -
Intercompany eliminations -
-
----------------- ------------------
Consolidated revenues $ 508,087 $ 211,907
================= ==================
Net Income (loss):
CIENA $ 53,194 $ 8,046
Lightera (2,081) (6,169)
----------------- ------------------
Consolidated net income $ 51,113 $ 1,877
================= ==================
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
risks and uncertainties. CIENA has set forth below under the heading "Risk
Factors" 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.
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. In conjunction with the
agreements to acquire Lightera Networks, Inc. ("Lightera"), a Delaware company
headquartered in Cupertino, California, and Omnia Communications, Inc.
("Omnia"), a Delaware company headquartered in Marlborough, Massachusetts, 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. 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 July 1, 1999 the Company completed a merger with Omnia 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 shares issuable upon exercise of 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.
On March 31, 1999 the Company completed a merger with Lightera 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.
On August 3, 1999, CIENA announced that the Omnia AXR 500 multi-service
transport platform had been integrated into the CIENA LightWorks architecture
and that CIENA had renamed the product the MultiWave EdgeDirector(TM) 500.
CIENA's MultiWave EdgeDirector 500 is a next generation multi-service transport
platform that combines the functions of traditional transport equipment with
advanced data networking. The MultiWave EdgeDirector 500 utilizes packet and
cell technology to enable service providers to cost effectively deliver
traditional voice and new high-speed data services over a single optical
network. Commercial availability of the MultiWave EdgeDirector 500 is expected
in the third quarter of calendar 1999.
During the third quarter of fiscal 1999 both the MultiWave(R)
Metro(TM), CIENA's system designed for use in metropolitan ring applications,
and the MultiWave CoreStream(TM), CIENA's next generation long-distance optical
transport system capable of 96-channel configuration at 2.5 gigabits per second,
became available for commercial shipments. CIENA expects to have 10 gigabit per
second transmission capability for its MultiWave CoreStream system in the second
half of the calendar year.
CIENA intends to continue the development of the MultiWave
CoreDirector(TM) product developed by Lightera. MultiWave CoreDirector is
believed to be the world's first intelligent optical core switch and would
reduce the cost of
10
<PAGE> 11
deploying and operating telecommunication service provider networks. The
MultiWave CoreDirector allows carriers to deliver a full range of transport
services, without costly SONET/SDH multiplexers or inflexible "wavelength only"
devices. We expect that field deployable units of the MultiWave CoreDirector
will be available in the end of the first calendar quarter 2000.
CIENA has increased the number of its optical transport equipment
customers from a total of ten during the nine months ended July 31, 1998 to
twenty for the nine months ended July 31, 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. As a
result of these cost reduction and production efficiency efforts to date CIENA's
gross margin as a percentage of revenue has increased from 36.1% in the second
quarter of fiscal 1999 to 38.4% in the third quarter of fiscal 1999.
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
three months of fiscal 1999. 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 July 31, 1999 CIENA employed 1,821 people, which includes the 145
people added as a result of CIENA's acquisitions of Lightera and Omnia. This was
an increase of 439 people over the 1,382 CIENA employees on October 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1999
REVENUE. CIENA recognized $129.1 million and $128.8 million in revenue
for the third quarters ended July 31, 1998 and 1999, respectively. The
approximate $0.3 million or 0.2% decrease in revenues in the third fiscal
quarter 1999 compared to the third fiscal quarter 1998 was largely the result of
reduced selling prices. CIENA recorded revenues recognized from eighteen optical
transport equipment customers in the quarter ended July 31, 1999, as compared to
ten such customers in the same quarter of the prior year. Additionally, during
the quarter ended July 31, 1999, each of three optical transport equipment
customers accounted for at least 10% or more of CIENA's quarterly revenue and
combined accounted for 58.1% of CIENA's quarterly revenue. This compares to the
quarter ended July 31, 1998 where each of two customers accounted for at least
10% or more of CIENA's quarterly revenue and combined accounted for
approximately 72.2% of CIENA's quarterly revenue. Revenues derived from foreign
sales accounted for approximately 25.3% and 40.3% of CIENA's revenues during the
third quarter ended July 31, 1998 and 1999, respectively. The relative increase
in foreign sales reflects an increase in sales to several new customers.
Revenues in CIENA's third fiscal quarter 1998 and 1999 were both
largely attributed to sales of CIENA's MultiWave Sentry(TM) 4000 systems. Also
contributing to CIENA's third fiscal quarter 1999 revenues were sales of CIENA's
96 channel Multiwave CoreStream systems. The Multiwave CoreStream did not begin
commercial shipments until the third fiscal quarter of 1999. Revenues derived
from engineering, furnishing and installation services as a percentage of total
revenue were approximately 8.5% and 12.4% for the third fiscal quarter 1998 and
1999, respectively.
CIENA expects revenue in the near term to be largely dependent upon
sales to existing customers and to be derived primarily from sales of MultiWave
Sentry 4000, MultiWave CoreStream, products using 10 gigabit per second
transmission capability, and MultiWave Metro. There are material risks
associated with CIENA's dependence on these customers, as well as the successful
ramping up of the manufacturing of these products. See "Risk Factors".
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 CIENA's
manufacturing and engineering, furnishing and installation operations. Gross
profits were $58.7 million and $49.5 million for
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the third quarters ended July 31, 1998 and 1999, respectively. The approximate
$9.2 million or 15.7% decrease in gross profit in the third fiscal quarter 1999
compared to the third fiscal quarter 1998 was the result of decreased selling
prices in the third quarter 1999 compared to third quarter 1998. Gross margin as
a percentage of revenues was 45.5% and 38.4% for the third fiscal quarters 1998
and 1999, respectively. The decrease in gross margin percentage for the third
fiscal quarter 1999 compared to the third quarter 1998 was largely attributable
to aggressive price competition resulting in significantly lower selling prices
for optical transport systems.
CIENA's gross margins may be affected by a number of factors, including
continued competitive market pricing, manufacturing volumes and efficiencies,
and fluctuations in component costs. During the remainder of fiscal 1999, CIENA
expects to face continued pressure on gross margins, primarily as a result of
substantial price discounting by competitors seeking to acquire market share.
CIENA will continue to concentrate on efforts to reduce product costs and
maximize production efficiencies and, if successful in these efforts, may be
able to improve gross margins in the future. See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $22.0 million and $28.4 million for the third quarters ended July 31, 1998
and 1999, respectively. During the third fiscal quarters 1998 and 1999, research
and development expenses were 17.0% and 22.0% of revenue, respectively. The
approximate $6.4 million or 29.3% increase in research and development expenses
in the third fiscal quarter 1999 compared to the third quarter 1998 was the
result of increases in staffing levels, prototype materials, utilization of
outside consultants, facility costs and depreciation expense. CIENA expects that
its research and development expenditures will continue to increase during the
remainder of fiscal year 1999 to support the continued development of optical
transport products, intelligent optical core switching products, the exploration
of new or complementary technologies, and the pursuit of various cost reduction
strategies. CIENA expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$12.9 million and $16.8 million for the third quarters ended July 31, 1998 and
1999, respectively. During the third fiscal quarters 1998 and 1999, selling and
marketing expenses were 10.0% and 13.1% of revenue, respectively. The
approximate $3.9 million or 30.2% increase in selling and marketing expenses in
the third fiscal quarter 1999 compared to the third fiscal quarter 1998 was
primarily the result of increased staffing levels in the areas of sales,
technical assistance and field support. Increases in costs for tradeshows,
advertising and depreciation also contributed the comparable quarter to quarter
selling and marketing expense increase. CIENA anticipates that its selling and
marketing expenses will increase during the remainder of fiscal year 1999 as
additional personnel are hired and offices are opened, particularly in support
of international market development, to allow CIENA to pursue new market
opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $4.2 million and $5.4 million for the third quarters ended July
31, 1998 and 1999, respectively. During the third fiscal quarters 1998 and 1999,
general and administrative expenses were 3.2% and 4.2% of revenue, respectively.
The approximate $1.2 million or 29.8% increase in general and administrative
expenses from the third quarter 1998 compared to the third quarter 1999 was
primarily the result of increased staffing levels, depreciation and facility
costs. CIENA believes that its general and administrative expenses for the
remainder of fiscal 1999 will increase due to the expansion of CIENA's
administrative staff required to support its expanding operations in Cupertino,
California, Marlborough, Massachusetts and London, England.
PIRELLI LITIGATION. The Pirelli litigation charge of $20.6 million in
the third fiscal quarter 1998 was attributable to a $30.0 million payment made
to Pirelli during third fiscal quarter 1998 and to additional other legal and
related costs incurred in connection with the settlement of this litigation.
These charges were partially offset by accrued legal and related costs
associated with this litigation.
MERGER RELATED COSTS. The merger costs for the third fiscal quarter
1998 of $2.0 million were costs related to the contemplated merger between CIENA
and Tellabs. The merger costs for the third quarter 1999 of $10.8 million were
costs related to CIENA's acquisition of Omnia. These costs include an $8.1
million non-cash charge for the acceleration of warrants based upon CIENA's
common stock price on June 30, 1999 and $2.7 million for fees, legal and
accounting services and other integration costs. The warrants were issued to one
of Omnia's customers and became exercisable upon the consummation of the merger.
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INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $2.8 million and $3.7 million for the third quarters
ended July 31, 1998 and 1999, respectively. The approximate $0.9 million or
30.0% increase in interest income and other income (expense), net was
attributable to higher invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. Tax expense for the third fiscal
quarter 1998 was primarily attributable to State income taxes. CIENA's benefit
for income taxes of $2.9 million for third fiscal quarter 1999 was the result of
recognizing the benefit of net operating losses. During the third fiscal quarter
1999, the benefit for income taxes was 34.5% of losses before income taxes.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
REVENUE. CIENA recognized $416.9 million and $340.7 million in revenue
for the nine months ended July 31, 1998 and 1999, respectively. The approximate
$76.2 million or 18.3% decrease in revenues in the nine months ended July 31,
1999 compared to the nine months ended July 31, 1998 was largely the result of
decreased selling prices. CIENA recognized revenues from twenty different
optical transport equipment customers in the nine months ended July 31, 1999, as
compared to ten such customers in the same nine months of the prior year.
Additionally, during the nine months ended July 31, 1999, each of three 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 nine months ended July 31, 1998 where one customer accounted for at least
10% or more of CIENA's revenue and in total accounted for approximately 59.6% of
CIENA's revenue. Revenues derived from foreign sales accounted for approximately
18.1% and 36.7% of CIENA's revenues during the nine months ended July 31, 1998
and 1999, respectively. The increase in foreign sales reflects an increase in
sales to new customers.
Revenues during CIENA's nine months ended July 31, 1998 were largely
attributable to both sales of MultiWave Sentry and MultiWave Sentry 4000
systems. Revenues during CIENA's nine months ended July 31, 1999 were largely
attributed to sales of CIENA's MultiWave Sentry 4000 systems. Revenues derived
from engineering, furnishing and installation services as a percentage of total
revenue were approximately 8.8% and 12.3% for the nine months ended July 31,
1998 and 1999, respectively.
GROSS PROFIT. Gross profits were $223.6 million and $124.4 million for
the nine months ended July 31, 1998 and 1999, respectively. The approximate
$99.2 million or 44.4% decrease in gross profit in the first nine months of 1999
compared to the first nine months of 1998 was the result of decreased revenues
for those periods. Gross margin as a percentage of revenues was 53.6% and 36.5%
for the first nine months of fiscal 1998 and 1999, respectively. The decrease in
gross margin percentage for the first nine months of fiscal 1999 compared to the
first nine months of fiscal 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 $51.2 million and $74.7 million for the nine months ended July 31, 1998 and
1999, respectively. During the first nine months of fiscal 1998 and 1999,
research and development expenses were 12.3% and 21.9% of revenue, respectively.
The approximate $23.5 million or 45.9% increase in research and development
expenses in the first nine months of fiscal 1999 compared to the first nine
months of fiscal 1998 was the result of increases in staffing levels,
depreciation, 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
$34.0 million and $43.5 million for the nine months ended July 31, 1998 and
1999, respectively. During the first nine months of 1998 and 1999, selling and
marketing expenses were 8.2% and 12.8% of revenue, respectively. The approximate
$9.5 million or 28.0% increase in selling and marketing expenses in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 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 $12.9 million and $16.3 million for the nine months ended July 31,
1998 and 1999, respectively. During the first nine months of fiscal 1998 and
1999, general and administrative expenses were 3.1% and 4.8% of revenue,
respectively. The approximate $3.4 million or 26.2% increase in general and
administrative expenses in the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998 was primarily due to increases in staffing
levels and outside consulting services.
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PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the nine months ended July 31, 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 costs of $30.6 million for
the nine months ended July 31, 1998 was attributable to a $30.0 million payment
to Pirelli during third fiscal quarter of 1998 and to additional other legal and
related costs incurred in connection with the settlement of this litigation.
MERGER COSTS. The merger costs for the first nine months ended July 31,
1998 of $2.0 million were costs related to the contemplated merger between CIENA
and Tellabs. The merger costs for the first nine months ended July 31, 1999 of
13.0 million were costs related to CIENA's acquisition of Omnia and Lightera.
These costs include an $8.1 million non-cash charge for the acceleration of
warrants based upon CIENA's common stock price on June 30, 1999 and $4.9 million
for fees, legal and accounting services and other integration costs. The
warrants were issued to one of Omnia's customers and became exercisable upon the
consummation of the merger between CIENA and Omnia.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $10.1 million and $10.8 million for the nine months
ended July 31, 1998 and 1999, respectively. The approximate $0.7 million or 7.2%
increase in interest income and other income (expense), net was attributable to
higher invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision for income
taxes was $40.3 million for the nine months ended July 31, 1998. During the
first nine months of fiscal 1998 the provision for income taxes was 39.3% of
income before income taxes, respectively, exclusive of the effect of one-time
charges for purchased research and development expenses. CIENA's benefit for
income taxes of $4.4 million for the first nine months of 1999 was the result of
recognizing the benefit of net operating losses. During the first nine months of
fiscal 1999, the benefit for income taxes was 34.5% of losses before income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, CIENA's principal source of liquidity was its cash
and cash equivalents of $142.6 million and its marketable debt securities of
$155.7 million. CIENA's marketable debt securities have maturities no longer
than six months.
Cash generated from operations was $53.5 million for the nine months
ended July 31, 1999. This amount was principally attributable to the non-cash
charges of certain equity transactions, 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.
Investment activities in the nine months ended July 31, 1999 included
the net purchase of $139.7 million worth of corporate debt securities and $37.0
million invested in capital expenditures. Of the amount invested in capital
expenditures, $32.3 million was used for additions to capital equipment and
furniture and the remaining $4.7 million was invested in leasehold improvements.
CIENA expects to use an additional $35.0 million to $45.0 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 currently anticipated
capital requirements 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.
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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
Omnia. 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 90% complete. Completion is
expected during the fourth 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
Omnia acquisition. CIENA expects to complete the evaluation process concerning
the Omnia systems during the fourth quarter of fiscal 1999. CIENA expects to
evaluate, upgrade and or replace as necessary those systems identified as
non-compliant systems in Omnia 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 $4.5 million on its ERP implementation. During
the nine months ended July 31, 1999, CIENA has spent approximately $400,000 to
address identified Year 2000 issues. CIENA estimates that it will likely spend
an additional $100,000 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 estimates. His findings identify CIENA's
processes as sufficient and our risk of negative impact as low.
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.
Initial contingency plans have been developed in case 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
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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.
RISK FACTORS
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
- the introduction of new products
- satisfaction of contractual customer acceptance criteria
- manufacturing and 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, our Core Switching Division (formerly Lightera) and
Access Switching Division (formerly Omnia) have ongoing development and
operating expenses but are not expected to contribute materially to revenues
until calendar 2000.
DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT OUR NEAR TERM PROSPECTS
If we fail to deploy new and improved products in a timely manner, our
competitive position and financial condition would be materially and adversely
affected. The complexity of the technology involved with several of our new
products such as the Multiwave CoreDirector and the Multiwave CoreStream
products using 10 gigabit per second transmission capability could result in
unanticipated delays in development and manufacturing. Such delays could
adversely affect our competitive and financial condition.
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 component availability could result in delays in deployment of these
products and in recognizing revenues. Such delays could adversely affect our
customer relationships.
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 compete directly with
product offerings of these companies and in some cases displace their legacy
equipment. As such, we represent a specific threat to these companies. The
expansion of our product offerings as a result of our acquisitions of Lightera
and Omnia likely will 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. In addition, other
customers that in the past have purchased DWDM equipment from CIENA, may select
a second vendor for DWDM products. We do not know when or if these customers
will select a second vendor or what impact the selection might have on purchases
from us. These customers could reduce their purchases from us, which could in
turn have a material adverse effect on us.
New competitors may also emerge to compete with our existing products
as well as our future products. In particular, a number of companies, including
several start-ups, have announced products that compete with our MultiWave
CoreStream, MultiWave CoreDirector and EdgeDirector products.
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. Further, we will need to evaluate the collectibility of
receivables from these carriers if their financial condition deteriorates in the
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future. Additionally, purchasing delays or changes in the amount of purchases by
any of these customers, could have a material adverse effect on us.
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 CoreStream which is
capable of 96-channel configurations at 2.5 gigabits per second transmission
speeds, 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. Delayed deliveries of
key components from these sources could have a material adverse effect on
CIENA's near-term results of operations.
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. Our key founders and employees, together with the key founders and
employees of Lightera and Omnia have received a substantial number of CIENA
shares and vested options that can be sold at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before CIENA's future products have matured into commercially deliverable
products. Under the circumstances, we face a difficult and significant task of
retaining and motivating these key personnel. As CIENA has grown and matured,
competitors' efforts to entice our employees to leave
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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. However, we can make no assurances
of that, or that we will be able to retain all of our key contributors or
attract new personnel 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 NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF LIGHTERA AND OMNIA PRODUCTS
Lightera's product, the MultiWave CoreDirector is in the laboratory-
testing phase and has not matured into commercially manufacturable units
suitable for field deployment. We expect that field deployable units of the
Multiwave CoreDirector will be available in the end of the first calendar
quarter 2000. We expect that Omnia's product, the MultiWave EdgeDirector 500,
will be commercially available in the third calendar quarter of 1999. 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 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.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new fiberoptic products and 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.
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 Multiwave
CoreDirector product is targeted to high capacity applications and our Multiwave
EdgeDirector product is targeted to providers of integrated fiberoptic access
and transport networks. 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.
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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 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:
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- 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 MultiWave CoreStream,
Multiwave Edge Director and MultiWave Metro, there is substantial risk of widely
varying quarterly results.
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. These lawsuits, which were
consolidated into one complaint, were dismissed by the United States District
Court on July 19, 1999 with leave to amend until August 20, 1999. We believe the
allegations in the complaint are without merit and intend to defend vigorously
against them should an amended complaint be filed. However, a consolidated
amended complaint has not yet been filed, and it is not possible to predict the
outcome at this time. If an amended complaint is filed and it is decided
adversely to CIENA, 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
- 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.
20
<PAGE> 21
WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE
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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term
investment portfolio consisting mainly of corporate debt securities and U.S.
government agency discount notes with an average maturity of less than six
months. These held-to-maturity securities are subject to interest rate risk and
will fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10 percent from levels at July 31,
1999, the fair value of the portfolio would decline by an immaterial amount. The
Company has the ability to hold its fixed income investments until maturity, and
therefore the Company would not expect its operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union has not had a material impact on CIENA's foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of July 31, 1999 the assets and
liabilities of the Company related to nondollar -denominated currencies was not
material.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. The complaint alleged
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
21
<PAGE> 22
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 sought 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 have been
determined at trial together with attorneys' fees. On February 16, 1999, an
amended complaint was filed. On July 19, 1999 the United States District Court
dismissed the suit before any discovery had been taken. Plaintiffs were given
leave to amend until August 20, 1999. CIENA believes the suit is without merit
and if the plaintiffs file a second amended complaint, CIENA intends to continue
to defend the case vigorously.
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<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS on Form 8-K
(a) Exhibit Description
------- -----------
10.20 Omnia Communications, Inc. 1997 Stock Plan and Form
of Agreements
27.10 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K : Form 8-K filed July 21, 1999
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
CIENA CORPORATION
<S> <C>
Date: August 19, 1999 By: /s/ Patrick H. Nettles
-------------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: August 19, 1999 By: /s/ Joseph R. Chinnici
--------------- ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
24
<PAGE> 1
Exhibit 10.20
Omnia Communications, Inc.
1997 Stock Plan and Form of Agreements
OMNIA COMMUNICATIONS, INC.
1997 STOCK PLAN
1. PURPOSE. The purpose of the Omnia Communications, Inc. 1997 Stock
Plan (the "Plan") is to provide an incentive for employees of Omnia
Communications, Inc., a Delaware corporation (the "Company") and of any present
or future parent or subsidiary of the Company (collectively, "Related
Corporations") and other individuals who render services to the Company or a
Related Corporation, by offering opportunities to participate in the ownership
of the Company and its future growth through (a) the grant of options which
qualify as "incentive stock options" ("ISOs") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"); (b) the grant of options which do
not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in the
Company ("Awards"); and (d) opportunities to make direct purchases of stock in
the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to
hereafter individually as an "Option" and collectively as "Options." Options,
Awards and authorizations to make Purchases are referred to hereafter
collectively as "Stock Rights." As used herein, (i) the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code, and (ii)
the term "grantee" refers to the recipient of a Stock Right.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or by a committee of two
or more non-employee directors appointed by the Board (the "Committee").
Hereinafter, all references in the Plan to the "Committee" shall mean the Board
if no Committee has been appointed. Subject to the terms of the Plan, the
Committee shall have the authority to (i) determine to whom (from among the
class of employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities eligible
under paragraph 3 to receive Non-Qualified Options and Awards and to make
Purchases) Non-Qualified Options, Awards and authorizations to make Purchases
may be granted; (ii) determine the time or times at which Options or Awards
shall be granted or Purchases made; (iii) determine the purchase price of shares
subject to each Option or Purchase, which prices shall not be less than the
minimum price specified in paragraph 6; (iv) determine whether each option
granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to
paragraph 7) the time or times when each Option shall become exercisable and the
duration of the exercise period; (vi) extend the period during which outstanding
Options may be exercised; (vii) determine whether restrictions such as
repurchase options (in addition to the forfeiture provisions specified in
paragraph 20) are to be imposed on shares subject to Options, Awards and
Purchases and the nature of such restrictions, if any, (viii) determine whether
performance targets or goals are to be imposed on Options, Awards and Purchases
and set and interpret such targets or goals, and (ix) interpret the Plan and
prescribe and rescind rules and regulations relating to it. The interpretation
and construction by the Committee of any provisions of the Plan or any Stock
Right granted under it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. Consistent with the terms of the
Plan, the Committee may waive, modify or suspend any restriction or performance
target or goal imposed by the Committee. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Stock Right granted under it.
B. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Subject to the
restrictions on ISOs imposed by the Code, Stock Rights may be granted to members
of the Board, including members of the Committee. All grants of Stock Rights to
members of the Board shall in all other respects be made in accordance with the
provisions of this Plan applicable to other eligible persons. Members of the
Board who either (i) are eligible to receive grants of Stock Rights pursuant to
the Plan or (ii) have been granted Stock Rights may vote or act by written
consent on any matters affecting the administration of the Plan.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISO's may be granted only to
employees of the Company or any Related Corporation. Non-Qualified Options,
Awards and authorizations to make Purchases may be granted to any employee,
officer or director (whether or not also an employee) or consultant of the
Company or any Related Corporation.
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<PAGE> 2
The Committee may take into consideration a recipient's individual circumstances
in determining whether to grant a Stock Right. The granting of any Stock Right
to any individual or entity shall neither entitle that individual or entity to,
nor disqualify such individual or entity from, participation in any other grant
of Stock Rights, or any other incentive plan or arrangement of the Company.
4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $0.001 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares of Common Stock which may be issued
pursuant to the Plan is 5,777,925 subject to adjustment as provided in paragraph
13. If any Option granted under the Plan shall expire or terminate for any
reason without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part or shall be repurchased by the Company, the
unpurchased shares of Common Stock subject to such Option shall again be
available for grants of Stock Rights under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time on or after the date of adoption hereof and prior to October 31,
2007. The date of grant of a Stock Right under the Plan will be the date
specified by the Committee at the time it grants the Stock Right.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. The
exercise price per share specified in the agreement relating to each
Non-Qualified Option granted, and the purchase price per share of stock granted
in any Award or authorized as a Purchase, under the Plan shall in no event be
less than the minimum legal consideration required therefor under the laws of
any jurisdiction in which the Company or its successors in interest may be
organized.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less than the
fair market value per share of Common Stock on the date of such grant. In the
case of an ISO to be granted to an employee owning stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date of grant.
For purposes of determining stock ownership under this paragraph, the rules of
Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
may be granted Options treated as ISOs only to the extent that, in the aggregate
under this Plan and all incentive stock option plans of the Company and any
Related Corporation, ISOs do not become exercisable from the first time by such
employee during any calendar year with respect to stock having a fair market
value (determined at the time the ISOs were granted) in excess of $100,000. The
Company intends to designate any Options granted in excess of such limitation as
Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices or
quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date of
grant and shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities exchange on which the
Common Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the last reported sale price (on that date) of the
Common Stock on the NASDAQ National Market, if the Common Stock is not then
traded on a national securities exchange; or (iii) the closing bid (or average
of bid prices) last quoted (on that date) by an established quotation service
for over-the-counter securities, if the Common Stock is not reported on the
NASDAQ National Market. If the Common Stock is not publicly traded at the time
an Option is granted under the Plan, "fair market value" shall mean the fair
value of the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided herein
or in the agreement relating to such Option, each Option shall expire on the
date specified by the Committee, but not more than (i) ten years from the date
of grant in the case of Options generally and (ii) five years from the date of
grant in the case of ISOs granted to an employee owning stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Related Corporation, as determined under paragraph
6(B). Subject to earlier termination as
26
<PAGE> 3
provided herein, the term of each ISO shall be the term set forth in the
original instrument granting such ISO, except with respect to any part of such
ISO that is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 12 and 20, each Option granted under the Plan shall be exercisable as
follows:
A. VESTING. The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such installments (which need
not be equal) as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total number
of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee may in its discretion, at
any time, accelerate the date that any installment of any Option becomes
exercisable, including prior to or in connection with any Acquisition (as
defined in paragraph 13(B)); provided that the Committee shall not, without the
consent of an optionee, accelerate the permitted exercise date of any
installment of any Option granted to any employee as an ISO (and not previously
converted into a Non-Qualified Option pursuant to paragraph 16) if such
acceleration would violate the annual vesting limitation contained in Section
422(d) of the Code, as described in paragraph 6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
agreement relating to such ISO, if an ISO optionee ceases to be employed by the
Company and all Related Corporations other than by reason of death or disability
as defined in paragraph 10, no further installments of his or her ISOs shall
become exercisable, and his or her ISOs shall terminate on the earlier of (a)
three months after the date of termination of his or her employment, or (b)
their specified expiration dates, except to the extent that such ISOs (or
unexercised installments thereof) have been converted into Non-Qualified Options
pursuant to paragraph 16. For purposes of this paragraph 9, employment shall be
considered as continuing uninterrupted during any bona fide leave of absence
(such as those attributable to illness, maternity leave, military obligations or
governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute. A bona fide leave of absence with the
written approval of the Committee shall not be considered an interruption of
employment under this paragraph 9, provided that such written approval
contractually obligates the Company or any Related Corporation to continue the
employment of the optionee after the approved period of absence. ISOs granted
under the Plan shall not be affected by any change of employment within or among
the Company and Related Corporations, so long as the optionee continues to be an
employee of the Company or any Related Corporation. Nothing in the Plan shall be
deemed to give any grantee of any Stock Right the right to be retained in
employment or other service by the Company or any Related Corporation for any
period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her death, any ISO held by such
optionee upon death may be exercised, to the extent otherwise exercisable on the
date of death, by the estate, personal representative or beneficiary who has
acquired the ISO by will or by the laws of descent and distribution, until the
earlier of (i) the specified expiration date of the ISO or (ii) one year from
the date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her disability, such
optionee shall have the right to exercise any ISO held by him or her on the date
of termination of employment, for the number of shares for which he or she could
have exercised it on that date, until the earlier of (i) the specified
expiration date of the ISO or (ii) one year from the date of termination of the
optionee's employment. For the purposes of the Plan, the term "disability" shall
mean "permanent and total disability" as defined in Section 22(e)(3) of the Code
or any successor statute.
11. ASSIGNABILITY. Unless otherwise determined by the Committee or
specified in the agreement relating to a Stock Right, no Stock Right shall be
assignable or transferable by the grantee except by will or by the laws of
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<PAGE> 4
descent and distribution. Except as set forth in the previous sentence, during
the lifetime of a grantee each Stock Right shall be exercisable only by such
grantee.
12. TERMS AND CONDITIONS OF STOCK RIGHTS. Stock Rights shall be
evidenced by agreements or other instruments (which need to be identical) in
such forms as the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in paragraphs 6 through 11
hereof, to the extent applicable, and may contain such other provisions as the
Committee deems advisable which are not inconsistent with the Plan, including
restrictions applicable to shares of Common Stock issuable upon exercise of
Stock Rights. The Committee may specify that any Stock Right shall be subject to
the restrictions set forth herein with respect to ISOs, or to such other
termination and cancellation provisions as the Committee may determine. The
Committee may from time to time confer authority and responsibility on one or
more of its own members and/or one or more officers of the Company to execute
and deliver such instruments. The officers of the Company are authorized and
empowered to take any and all action necessary or advisable from time to time to
carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events,
the shares of Common Stock subject to outstanding Stock Rights granted hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the grantee and the Company relating
to such Stock Right:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of the Company
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock subject to
outstanding Stock Rights shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger or other reorganization in which
the holders of the outstanding voting stock of the Company immediately preceding
the consummation of such event, shall, immediately following such event, hold,
as a group, less than a majority of the voting securities of the surviving or
successor entity, or in the event of a sale of all or substantially all of the
Company's assets or otherwise (each, an "Acquisition"), the Committee or the
board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Stock Rights, either
(i) make appropriate provision for the continuation of such Stock Rights by
substituting on an equitable basis for the shares then subject to such Stock
Rights either (a) the consideration payable with respect to the outstanding
shares of Common Stock in connection with the Acquisition, (b) shares of stock
of the surviving or successor corporation or (c) such other securities as the
Successor Board deems appropriate, the fair market value of which shall not
materially exceed the fair market value of the shares of Common Stock subject to
such Stock Rights immediately preceding the Acquisition; or (ii) upon written
notice to the grantees, provide that all Stock Rights must be exercised, to the
extent then exercisable or to be exercisable as a result of the Acquisition,
within a specified number of days of the date of such notice, at the end of
which period the Stock Rights shall terminate; or (iii) terminate all Stock
Rights in exchange for a cash payment equal to the excess of the fair market
value of the shares subject to such Stock Rights (to the extent then exercisable
or to be exercisable as a result of the Acquisition) over the exercise price
thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares of
Common Stock, a grantee upon exercising a Stock Right shall be entitled to
receive for the purchase price paid upon such exercise the securities he or she
would have received if he or she had exercised such Stock Right prior to such
recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall
be made only after the Committee, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Committee
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs or would cause adverse tax consequences to the
holders, it may in its discretion refrain from making such adjustments.
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<PAGE> 5
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each outstanding Stock Right will
terminate immediately prior to the consummation of such proposed action or at
such other time and subject to such other conditions as shall be determined by
the Committee.
F. OTHER ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to outstanding Stock Rights. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan, and the grantee of a Stock Right shall receive from the Company cash in
lieu of any such fractional share.
H. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which previously
have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board shall determine the specific adjustments to
be made under this paragraph 13 and, subject to paragraph 2, its determination
shall be conclusive.
14. EXERCISE OF OPTIONS. An Option (or any part or installments
thereof) shall be exercised by giving written notice to the Company at its
principal office address. Such notice shall identify the Option being exercised
and specify the number of shares as to which such Option is being exercised. The
optionee shall make full payment of the exercise price of the Option shares
being purchased either (a) in United States dollars in cash or by check, (b) at
the discretion of the Committee, through delivery or withholding of shares of
Common Stock having a fair market value equal as of the date of the exercise to
the cash exercise price of the Option, (c) at the discretion of the Committee
and consistent with applicable law, through the delivery to the Company of a
portion of the proceeds from the sale of the Common Stock acquired upon the
exercise of the Option equal to the cash exercise price of the Option, along
with an authorization to the broker or selling agent to pay that amount to the
Company, which sale shall be at the participant's discretion at the time of
exercise, or (d) at the discretion of the Committee, by an combination of (a),
(b) and (c) above. The holder of an Option shall not have the rights of a
shareholder with respect to the shares covered by such Option until the date of
issuance of a stock certificate to such holder for such shares. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued. Unless the Company then has a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company may require, as a condition of the exercise of
any Option and the issuance of stock certificates, that the optionee execute and
deliver to the Company a counterpart copy of any Stockholders Agreement, Stock
Restriction Agreement or other similar agreement restricting the transfer of
shares of Common Stock as may then be in effect.
15. TERM AND AMENDMENT OF PLAN. The Plan was adopted by the Board as of
_______________, 1997 and approved by the stockholders of the Company as of
___________, 1997. The Plan shall expire at the close of business on October 31,
2007 (except as to Stock Rights outstanding on that date). The Board may
terminate or amend the Plan in any respect at any time, except that no amendment
of the Plan by the Board shall be effective, without the approval of the
stockholders obtained within 12 months before or after the Board's action, (i)
if such amendment would cause ISOs already granted under the Plan to fail to
qualify as "incentive stock options" under the Code, or (ii) if such stockholder
approved is then required by applicable law, by Rule 16b-3 (or any successor
rule) under the Exchange Act, or by applicable regulations of any stock exchange
or NASDAQ. In no event may action of the Board or stockholders alter or impair
the rights of a grantee, without such grantee's consent, under any Stock Right
previously granted to such grantee, except as provided herein.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at
the written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the
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<PAGE> 6
resulting Non-Qualified Options as the Committee in its discretion may
determine, provided that such conditions shall not be inconsistent with this
Plan. Nothing in this Plan shall be deemed to give any optionee the right to
have such optionee's ISOs converted into Non-Qualified Options, and no such
conversion shall occur until and unless the Committee takes appropriate action.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITIONS. By accepting an
ISO granted under the Plan, each optionee agrees to notify the Company in
writing immediately after such optionee makes a "Disqualifying Disposition" (as
described in Sections 421, 422 and 424 of the Code and the regulations
thereunder) of any stock acquired pursuant to the exercise of the ISOs granted
under the Plan. A Disqualifying Disposition is generally any disposition
occurring on or before the latter of (a) the date of two years following the
date the ISO was granted or (b) the date one year following the date the ISO was
exercised.
19. WITHHOLDING OF INCOME TAXES. Upon the exercise of a Non-Qualified
Option, the grant of an Award, the making of a Purchase of Common Stock for less
than its fair market value, the making of a Disqualifying Disposition (as
defined in paragraph 18), the vesting or transfer of restricted stock or
securities acquired on the exercise of an Option hereunder, or the making of a
distribution or other payment with respect to such stock or securities, the
Company may withhold taxes in respect of amounts that constitute compensation
includible in gross income. The Committee in its discretion may condition (i)
the exercise of an Option, (ii) the grant of an Award, (iii) the making of a
Purchase of Common Stock for less than its fair market value, or (iv) the
vesting or transferability of restricted stock or securities acquired by
exercising an Option, on the grantee's making satisfactory arrangement for such
withholding. Such arrangement may include payment by the grantee in cash or by
check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding, from the shares of Common Stock otherwise deliverable upon
exercise of a Stock Right, of that number of shares having an aggregate fair
market value equal to the amount of such withholding taxes.
20. FORFEITURE.
A. RESTRICTED ACTIVITIES. In order to effectuate the purposes of the
Plan set forth in Paragraph 1, and in consideration of the Company's grant of
Stock Rights hereunder to employees of the Company or a Related Corporation:
(a) The grantee shall not, during the period of any employment with the
Company or a Related Corporation, and for a period of one (1) year thereafter,
directly or indirectly, employ or contract for the services of or attempt to
employ or contract for the services of, or assist any other person or entity (a
"Third Party") in employing or contracting for the services of, any person who
is an employee or contractor of the Company or a Related Corporation during the
one-year period prior to termination of such grantee's employment with the
Company or a Related Corporation.
(b) The grantee shall not, during the period of any employment with the
Company or a Related Corporation, and for a period of one (1) year thereafter,
engage, directly or indirectly, in any activity in competition with the business
of the Company, or otherwise inimicable, contrary or harmful to the interests of
the Company, including but not limited to: (i) conduct relating to employment
with the Company for which either criminal or civil penalties may be sought,
(ii) violation of Company policies, including, without limitation, any insider
trading policy of the Company, (iii) acquiring an ownership interest (other than
ownership of up to two percent (2%) of a publicly-traded entity), or accepting
employment with, or serving as a consultant, advisor or in any other capacity to
or for, any Third Party engaged in competition with the Company, including
without limitation by offering the same or similar products or services as the
Company offers to the Company's customers and prospects (and whether or not the
relationship with such customers or prospects was established in whole or in
part through the grantee's efforts), (iv) disclosing or misusing any
confidential information or material concerning the Company, or (v)
participating in a hostile takeover attempt targeting the Company.
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<PAGE> 7
B. FORFEITURE PROVISIONS.
(a) In the event of a breach by a grantee of any of the provisions of
paragraph 20(A), then:
(i) all outstanding Stock Rights granted to such grantee under this
Plan shall terminate, without further action, effective on the date on which the
grantee breaches;
(ii) any Option Gain, as hereinafter defined, realized by the grantee
from exercising all or any portion of any Option, shall be paid by the grantee
to the Company; and
(iii) any shares of Common Stock purchased by the grantee pursuant to
the exercise of Stock Rights under the Plan and still held by the grantee may be
repurchased by the Company at their original exercise price.
(b) The Company may set off and deduct from any amounts that the
Company owes the grantee from time to time (including amounts owed to the
grantee as wages or other compensation, fringe benefits, or vacation pay, as
well as any other amounts owed to the grantee by the Company), to the extent of
the amounts owned to the Company under the provisions of this paragraph 20(B).
Whether or not the Company elects to set off all or any portion of the amounts
due it, if the Company does not recover by means of setoff the full amount owed
to it, calculated as set forth above, the grantee agrees to pay immediately upon
demand the unpaid balance to the Company.
C. OPTION GAIN. As used herein, "Option Gain" means the amounts
realized by the grantee from the sale or other disposition of any shares
purchased by the grantee upon exercise of any Option provided for herein, net of
the exercise price paid by the grantee for such shares.
D. WAIVERS. The Committee may waive or release any of the provisions of
this paragraph 20, including specifically the provisions of subparagraph B, if
and only if the Committee determines in its sole discretion that such action is
in the best interests of the Company.
21. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver shares of Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
Government regulations may impose reporting or other obligations on
the Company with respect to the Plan. For example, the Company may be required
to send tax information statements to employees and former employees that
exercise ISOs under the Plan, and the Company may be required to file tax
information returns reporting the income received by grantees of Options in
connection with the Plan.
22. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of the state
of Delaware or the laws of any jurisdiction in which the Company or its
successors in interest maybe organized.
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<PAGE> 8
OMNIA COMMUNICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
(OPTION HOLDER:________________________)
AGREEMENT made as of the ___ day of ____________, 1999 between Omnia
Communications, Inc., a Delaware corporation (the "Company"), and
_____________________ of ________________________ (the "Option Holder").
WHEREAS, the Company desires to provide the Option Holder with an
incentive to promote the business of the Company and to encourage the Option
Holder to continue his employment; and
WHEREAS, to effectuate that desire the Company has determined to grant
to the Option Holder an incentive stock option to purchase shares of the
Company's common stock under and pursuant to the terms and provisions of the
Company's 1997 Stock Option Plan (the "Plan").
NOW, THEREFORE, the Company and the Option Holder agree as follows:
1. Grant of Option.
The Company hereby grants to Option Holder the option to purchase
_____________________ (_______) shares (the "Option Shares") of the Company's
Common Stock, $0.001 par value, at a price per share equal to $_______, in the
manner and subject to the conditions hereinafter provided. This option is
granted pursuant to and subject to all of the terms and conditions of the Plan
and, unless the context otherwise requires, terms used herein shall have the
same meaning as in the Plan. Determinations made in connection with this option
shall be governed by the Plan as it exists on this date and, in the event of any
inconsistency or conflict between this Agreement and the Plan, the terms of the
Plan shall govern.
2. Time of Exercise.
Option Holder may exercise this option from __________________ to and
including _____________________, the end of [ten] years from the date this
Option is granted, provided that no portion of this Stock Option may be
exercised until such portion shall have vested. Except as set forth below, this
Stock Option shall be vested and exercisable as follows: 1/36 of the total
number of Option Shares shall vest and become exercisable in equal monthly
increments commencing one year after the date hereof, such that the Option
Holder may exercise this option as to all of the Option Shares forty-eight (48)
months from the date hereof.
Notwithstanding the foregoing, the Option Holder may exercise this
option as to 50% of all then unvested Option Shares upon a Change of Control
Transaction, as defined below, and all remaining unvested Option Shares shall
vest and become exercisable in equal increments over the following twelve (12)
months provided, however, that if the Change of Control Transaction is intended
to be accounted for as a "pooling of interests" for financial accounting
purposes, and if, in the opinion of the Company's Board of Directors after
consultation with the Company's independent accountants, the acceleration of
vesting to be effected by this sentence would preclude accounting for the Change
of Control Transaction as a "pooling of interests" for financial accounting
purposes, then no such acceleration of vesting shall occur upon the Change of
Control Transaction. For purposes of this Agreement, the term "Change of Control
Transaction" means any single or related series of transactions after which more
than fifty (50%) percent of the voting stock of the Company outstanding
immediately after the effective date of such Change of Control Transaction is
owned of record or beneficially by persons other than the holders of such
capital stock immediately prior to such Change of Control Transaction.
3. Method of Exercise.
Each exercise of this option shall be effected by giving written notice
of intent to exercise this option, specifying the number of shares of stock as
to which the option is being exercised, and accompanied by full payment of the
option price for the number of shares then being acquired. Payment shall be made
in cash, by certified or bank check payable to the order of
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<PAGE> 9
the Company, or, with the consent of the Company's Board of Directors given at
the time of exercise of this option (which may be granted or withheld by said
Board in its sole and absolute discretion), (i) in shares by the Company's
Common Stock having an aggregate fair market value, at the time of payment,
equal to the option price for the number of shares of stock for which Option
Holder is then making payment, or (ii) partly in cash or by certified or bank
check payable to the order of the Company and the balance in shares of the
Company's Common Stock having an aggregate fair market value, at the time of
such payment, equal to the difference between the option price for the number of
shares of stock for which payment is then being made and the amount of the
payment in cash or by certified or bank check; provided, however, that no part
of the purchase price for any shares being purchased pursuant to an exercise of
this option shall be paid in shares of the Company's Common Stock which were
previously acquired by Option Holder (x) pursuant to an earlier exercise of this
option, or (y) pursuant to the exercise of another incentive stock option
granted by the Company if the previously acquired shares have been held by
Option Holder for less than two years since the date of the granting of such
other option to Option Holder or for less than one year since the transfer to
Option Holder of such previously acquired shares. The determination of fair
market value shall be made by the Board of Directors of the Company, whose
determination in this regard shall be final and binding on the Company and on
Option Holder.
Receipt by the Company of such notice and payment shall constitute
exercise of this option or a part hereof. Promptly thereafter, the Company shall
deliver or cause to be delivered to Option Holder a certificate or certificates
for the number of shares of the Company's Common Stock being acquired pursuant
to such exercise. Such shares shall be fully paid and nonassessable.
Notwithstanding the foregoing, the Company shall not be required to issue such
shares unless a registration statement under the Securities Act of 1933, as
amended (the "Securities Act") is in effect with respect to such shares or the
Company has received evidence satisfactory to the Company that Option Holder may
acquire such shares pursuant to an exemption from registration under the
Securities Act. In addition, as to any jurisdiction (other than the United
States) that expressly imposes the requirement that this option shall not be
exercisable unless and until the shares of Stock covered by this option are
registered or are subject to an available exemption from registration, the
exercise of this option shall, notwithstanding anything to the contrary
contained herein, be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption. Any determination in that
regard by the Company shall be final and conclusive. The Company shall not be
obligated to take any affirmative action in order to cause the exercise of this
option or the issuance of shares of Stock pursuant hereto to comply with any law
or regulation of any governmental authority.
4. Termination of Employment.
This option shall, to the extent not previously exercised, expire
immediately upon the termination (voluntary or involuntary) of Option Holder's
employment with the Company or with a parent or subsidiary of the Company;
except that:
(a) If Option Holder is on military, sick leave or other bona fide
leave of absence (such as temporary employment by the federal government),
Option Holder's employment relationship will be treated as continuing intact if
the period of such leave does not exceed 90 days, or, if longer, so long as
Option Holder's right to reemployment is guaranteed either by statute or by
contract; otherwise, Option Holder's employment will be deemed to have
terminated on the 91st day of such leave.
(b) If Option Holder's employment is terminated by reason of Option
Holder's retirement, this option, to the extent exercisable at retirement, may
be exercised by Option Holder within three months after retirement, unless
terminated earlier by its terms.
(c) If Option Holder's employment is terminated by reason of Option
Holder's death, this option, to the extent exercisable at Option Holder's date
of death, may be exercised at any time within one year after that date (unless
terminated earlier by its terms) by the person(s) to whom Option Holder's option
rights pass by will or by the applicable laws of descent and distribution.
(d) If Option Holder's employment is terminated by reason of Option
Holder's becoming permanently and totally disabled, this option, to the extent
exercisable upon the occurrence of permanent and total disability, may be
exercised by Option Holder within one year after such occurrence unless
terminated earlier by its terms. For purposes hereof, Option Holder shall be
deemed to be "permanently and totally disabled" if Option Holder is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months. Any determination of permanent and total disability
shall be made in good faith by the Company on the basis of a report signed by a
qualified
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<PAGE> 10
physician.
5. Non-Transferability.
This option shall not be transferable by Option Holder other than by
will or the laws of descent and distribution, and shall be exercisable, during
Option Holder's lifetime, only by Option Holder. From and after Option Holder's
death, this option, to the extent exercisable at Option Holder's death, may be
exercised prior to its termination by the person(s) to whom Option Holder's
option rights pass by will or by the applicable laws of descent and
distribution. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of this option in contravention of the terms hereof, and the levy of
any execution, attachment or similar process upon this option, shall be null and
void.
6. Adjustment for Capital Changes.
In the event of any stock dividend payable in shares of the Company's
Common Stock or any split-up or contraction in the number of shares of the
Company's Common Stock occurring after the date of this Agreement and prior to
the exercise in full of this option, the number of shares subject hereto and the
option price to be paid for each such share shall each be proportionately
adjusted. In case of any reclassification or change of outstanding shares of the
Company's Common Stock, occurring after the date of this Agreement and prior to
the exercise in full of this option, the number and kind of shares of stock
subject to this Agreement and the price to be paid for each share subject to
this option shall each be proportionately adjusted. In the event of any
consolidation or merger of the Company with or into another company with the
Company not surviving, or upon dissolution or liquidation of the Company, this
option shall terminate. No fraction of a share shall be purchasable or
deliverable upon any exercise of this option, but, in the event any adjustment
hereunder of the number of shares covered by this option shall cause such number
to include a fraction of a share, such fraction shall be adjusted to the nearest
smaller whole number or shares.
7. Prohibited Transfers and Right of First Refusal.
(a) The Option Holder shall not sell, assign, transfer, pledge,
hypothecate, mortgage, encumber or dispose of all or any of his Option Shares
except to the Company or as expressly provided in this Agreement.
Notwithstanding the foregoing, the Option Holder may transfer any or all of his
Option Shares (i) by way of gift to any member of his family (i.e., spouse,
sibling, child (natural or adopted), or any other lineal ancestor or descendant)
or to any trust, partnership or limited liability company for the benefit of, or
the ownership interests of which are wholly owned by, any such family member of
the Option Holder (each, a "Permitted Transferee"), or (ii) by will or the laws
of descent and distribution to or for the benefit of a Permitted Transferee,
provided that any such Permitted Transferee, as a condition to such transfer,
shall execute an Instrument of Adherence in the form of Exhibit A hereto,
agreeing to be bound by the terms of this Agreement to the same extent as if
such Permitted Transferee were the Option Holder.
(b) If requested the Company and the managing underwriter, the Option
Holder agrees to enter into a lock-up agreement pursuant to which the Option
Holder will not, from the date of such agreement and through a period of no more
than one hundred eighty (180) days following the effective date of the first
registration statement for a public offering of the Company's securities, and
for a period of no more than ninety (90) days following the effective day of any
subsequent registration statement, sell, assign, transfer, pledge, hypothecate,
mortgage or dispose of, by gift or otherwise, or in any way encumber, any of his
Option Shares, except transfers permitted by Section 7(a) above.
(c) If, at any time the Option Holder desires to sell all or any part
of the Option Shares and he has received in writing an irrevocable and
unconditional bona fide offer (the "Bona Fide Offer") for the purchase of such
Option Shares from a party (the "Offeror"), the Option Holder shall give written
notice (the "Option Notice") to the Company setting forth his desire to sell
such Option Shares, which Option Notice shall be accompanied by a photocopy of
the original executed Bona Fide Offer and shall set forth at least the name and
address of the Offeror and the price. The Company shall have an assignable
option to purchase any or all of the Option Shares specified in the Option
Notice, exercisable by giving, within thirty (30) days after the receipt of the
Option Notice (the "Exercise Period"), a counter-notice in writing to the Option
Holder. If the Company or its assignee elects to purchase any or all of such
Option Shares, the Company or its assignee shall be obligated to purchase, and
the Option Holder shall be obligated to sell to the Company or its assignee,
such Option Shares at the price and terms indicated in the Bona Fide Offer,
within sixty (60) days from the date of the Company's receipt of the Option
Notice. The Option Holder may sell any or all of such Option Shares which the
Company or its assignee has not so elected to purchase during the thirty (30)
days following the expiration of the Exercise Period, provided that: (i) such
sale shall only be made
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<PAGE> 11
pursuant to the terms of the Bona Fide Offer; (ii) the Option Holder shall not
sell such Option Shares if the Offeror is a competitor of the Company and the
Company gives written notice forbidding such sale to the Option Holder within
the Exercise Period; and (iii) prior to the sale of such Option Shares to the
Offeror, the Offeror shall execute an agreement with the Company pursuant to
which the Offeror agrees to be subject to the restrictions on transfer and
rights of first refusal set forth in this Section 7. If any and all such Option
Shares are not sold pursuant to a Bona Fide Offer within such time period, the
unsold Option Shares shall remain subject to the terms of this Agreement.
(d) The rights of first refusal provided in this Section 7 shall not
apply (i) with respect to sales, transfers or exchanges of Option Shares to the
Company or in conjunction with the sale of the Company to an unaffiliated third
party whether by merger, consolidation or sale of stock in a transaction in
which the Option Holder's Option Shares are also sold or transferred or eligible
to be sold or transferred (herein, a "Sale of the Company") or (ii) on the first
to occur of (x) the tenth (10th) anniversary of the date hereof or (y)
immediately prior to the consummation of a firmly underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the account of
the Company from which the aggregate net proceeds to the Company are at least
$15,000,000 and the price per share of such Common Stock is not less than $5.00
(as equitably adjusted whenever there is a stock split, combination, stock
dividend, reclassification or similar event affecting the Common Stock).
(e) Each certificate evidencing any of the Option Shares shall bear a
legend substantially as follows:
"The shares represented by this certificate are subject to restrictions on
transfer and may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of, whether voluntarily or by operation of law, except in
accordance with and subject to all the terms and conditions of a certain
Incentive Stock Option Agreement dated as of ______________, 1999, as amended or
amended and restated from time to time, a copy of which the Company will furnish
to the holder of this certificate upon request and without charge."
8. Investment Representations.
(a) Restrictions. Regardless of whether the offering and sale of shares
of the Option Stock under the Plan have been registered under the Securities Act
or have been registered or qualified under the securities laws of any state, the
Company may impose restrictions upon the sale, pledge or other transfer of
Option Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Company and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Securities Act, the securities laws of any state or any other
laws.
(b) Investment Intent at Grant. Option Holder represents and agrees
that the shares of Option Stock to be acquired upon exercising this option will
be acquired for investment, and not with a view to the sale or distribution
thereof.
(c) Investment and Intent at Exercise. In the event that the sale of
shares of Option Stock under the Plan is not registered under the Securities
Act, but an exemption from registration is available which requires an
investment representation or other representation, Option Holder shall represent
and agree at the time of exercise that the shares of Option Stock being acquired
upon exercising this option are being acquired for investment, and not with a
view to the sale or distribution thereof, and shall make such other reasonable
investment representations as are deemed necessary or appropriate by the Company
and its counsel.
(d) Legend. All certificates evidencing shares of Option Stock acquired
under this Agreement in an unregistered transaction shall bear the following
legend (and such other restrictive legends as are required or deemed advisable
under the provisions of any applicable law):
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED."
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<PAGE> 12
9. Rights as a Stockholder.
Option Holder shall not be deemed for any purpose to be a stockholder
of the Company with respect to any shares subject to this option except to the
extent that this option shall have been exercised with respect thereto and, in
addition, a certificate shall have been issued therefor and delivered to Option
Holder. No adjustment shall be made for dividends (ordinary or extraordinary,
and whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 6.
10. Employment Rights.
This option shall not confer upon Option Holder any right with respect
to the continuance of Option Holder's employment by the Company or by a parent
or subsidiary of the Company, nor shall it interfere in any way with the right
of any of such corporations to terminate such employment at any time.
11. Disqualifying Dispositions.
Option Holder understands that, in order to enjoy the benefits accruing
to the holder of an incentive stock option under the Internal Revenue Code,
Option Holder may not dispose of any shares transferred to Option Holder
pursuant to Option Holder's exercise of this option either (i) within two years
from the date of the granting of this option to Option Holder, or (ii) within
one year after the transfer of such shares to Option Holder. The preceding
sentence is not a prohibition on the disposal of any shares by Option Holder.
Option Holder may dispose of any shares within the foregoing time periods
subject to all applicable tax consequences.
12. Notices.
Any notice required or permitted to be given hereunder shall be in
writing and shall be deemed to be properly given when sent by registered or
certified mail, return receipt requested, by Federal Express, DHL, or other
guaranteed overnight delivery service or by facsimile transmission, addressed as
follows:
If to the Company: Omnia Communications, Inc.
100 Nickerson Road
Marlborough, MA 01752
Telecopy: (508) 229-7766
with a copy to: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: PeterB. Tarr, Esq.
Telecopy: (617) 526-5000
If to the Option Holder: ___________________________
___________________________
___________________________
All notices, requests, consents and other communications hereunder
shall be deemed to have been received (a) if by hand, at the time of the
delivery thereof to the receiving party at the address of such party set forth
above or as so designated, (b) if made by telecopy or facsimile transmission, at
the time that receipt thereof has been acknowledged by electronic confirmation
or otherwise, (c) if sent by overnight courier, on the next business day
following the day such notice is delivered to the courier service, or (d) if
sent by registered or certified mail, on the fifth (5th) business day following
the day such mailing is made.
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<PAGE> 13
13. Waiver, Amendment and Termination.
The provisions of the Agreement may not waived, amended, modified or
terminated except with written consent of the parties hereto.
14. Entire Agreement and Amendments.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. To the extent any term or other provision
of any other agreement or instrument by which any party hereto is bound
conflicts with this Agreement, this Agreement shall have precedence over such
conflicting term or provision.
15. Governing Law; Successors and Assigns.
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts (without regard to choice of law provisions) and shall be binding
upon the heirs, personal representatives, executors, administrators, successors
and permitted assigns of the parties.
16. Waivers.
No waiver of any breach or default hereunder shall be considered valid
unless in writing, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature.
17. Severability.
If any provision of this Agreement shall be held to be illegal, invalid
or unenforceable, such illegality, invalidity or unenforceability shall attach
only to such provision and shall not in any manner affect or render illegal,
invalid or unenforceable any other provision of this Agreement, and this
Agreement shall be carried out as if any such illegal, invalid or unenforceable
provision were not contained herein.
18. Captions.
Captions are for convenience only and are not deemed to be part of this
Agreement.
19. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
OMNIA COMMUNICATIONS, INC.
By:_________________________________
OPTION HOLDER:
------------------------------------
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<PAGE> 14
OMNIA COMMUNICATIONS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
(OPTION HOLDER:________________________)
AGREEMENT made as of the ___ day of ____________, 1998 between Omnia
Communications, Inc., a Delaware corporation (the "Company"), and
_____________________ of ________________________ (the "Option Holder").
WHEREAS, the Company desires to provide the Option Holder with an
incentive to promote the business of the Company and to encourage the Option
Holder to continue his employment; and
WHEREAS, to effectuate that desire the Company has determined to grant
to the Option Holder a non-qualified stock option to purchase shares of the
Company's common stock under and pursuant to the terms and provisions of the
Company's 1997 Stock Option Plan (the "Plan").
NOW, THEREFORE, the Company and the Option Holder agree as follows:
1. Grant of Option.
The Company hereby grants to Option Holder the option to purchase
_____________________ (_______) shares (the "Option Shares") of the Company's
Common Stock, $0.001 par value, at a price per share equal to $_______, in the
manner and subject to the conditions hereinafter provided. This option is
granted pursuant to and subject to all of the terms and conditions of the Plan
and, unless the context otherwise requires, terms used herein shall have the
same meaning as in the Plan. Determinations made in connection with this option
shall be governed by the Plan as it exists on this date and, in the event of any
inconsistency or conflict between this Agreement and the Plan, the terms of the
Plan shall govern.
2. Time of Exercise.
Option Holder may exercise this option from __________________ to and
including _____________________, the end of [ten] years from the date this
Option is granted, provided that no portion of this Stock Option may be
exercised until such portion shall have vested. Except as set forth below, this
Stock Option shall be vested and exercisable as follows: 1/36 of the total
number of Option Shares shall vest and become exercisable in equal monthly
increments commencing one year after the date hereof, such that the Option
Holder may exercise this option as to all of the Option Shares forty-eight (48)
months from the date hereof.
Notwithstanding the foregoing, the Option Holder may exercise this
option as to 50% of all then unvested Option Shares upon a Change of Control
Transaction, as defined below, and all remaining unvested Option Shares shall
vest and become exercisable in equal increments over the following twelve (12)
months. For purposes of this Agreement, the term "Change of Control Transaction"
means any single or related series of transactions after which more than fifty
(50%) percent of the voting stock of the Company outstanding immediately after
the effective date of such Change of Control Transaction is owned of record or
beneficially by persons other than the holders of such capital stock immediately
prior to such Change of Control Transaction.
3. Method of Exercise.
Each exercise of this option shall be effected by giving written notice
of intent to exercise this option, specifying the number of shares of stock as
to which the option is being exercised, and accompanied by full payment of the
option price for the number of shares then being acquired. Payment shall be made
in cash, by certified or bank check payable to the order of the Company, or,
with the consent of the Company's Board of Directors given at the time of
exercise of this option (which may be granted or withheld by said Board in its
sole and absolute discretion), (i) in shares by the Company's Common Stock
having an aggregate fair market value, at the time of payment, equal to the
option price for the number of shares of stock for which Option Holder is then
making payment, or (ii) partly in cash or by certified or bank check payable to
the order of the Company and the balance in shares of the Company's Common Stock
having an aggregate fair market value, at the time of
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<PAGE> 15
such payment, equal to the difference between the option price for the number of
shares of stock for which payment is then being made and the amount of the
payment in cash or by certified or bank check; provided, however, that no part
of the purchase price for any shares being purchased pursuant to an exercise of
this option shall be paid in shares of the Company's Common Stock which were
previously acquired by Option Holder (x) pursuant to an earlier exercise of this
option, or (y) pursuant to the exercise of another incentive stock option
granted by the Company if the previously acquired shares have been held by
Option Holder for less than two years since the date of the granting of such
other option to Option Holder or for less than one year since the transfer to
Option Holder of such previously acquired shares. The determination of fair
market value shall be made by the Board of Directors of the Company, whose
determination in this regard shall be final and binding on the Company and on
Option Holder.
Receipt by the Company of such notice and payment shall constitute
exercise of this option or a part hereof. Promptly thereafter, the Company shall
deliver or cause to be delivered to Option Holder a certificate or certificates
for the number of shares of the Company's Common Stock being acquired pursuant
to such exercise. Such shares shall be fully paid and nonassessable.
Notwithstanding the foregoing, the Company shall not be required to issue such
shares unless a registration statement under the Securities Act of 1933, as
amended (the "Securities Act") is in effect with respect to such shares or the
Company has received evidence satisfactory to the Company that Option Holder may
acquire such shares pursuant to an exemption from registration under the
Securities Act. In addition, as to any jurisdiction (other than the United
States) that expressly imposes the requirement that this option shall not be
exercisable unless and until the shares of Stock covered by this option are
registered or are subject to an available exemption from registration, the
exercise of this option shall, notwithstanding anything to the contrary
contained herein, be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption. Any determination in that
regard by the Company shall be final and conclusive. The Company shall not be
obligated to take any affirmative action in order to cause the exercise of this
option or the issuance of shares of Stock pursuant hereto to comply with any law
or regulation of any governmental authority.
4. Termination of Employment.
This option shall, to the extent not previously exercised, expire
immediately upon the termination (voluntary or involuntary) of Option Holder's
employment with the Company or with a parent or subsidiary of the Company.
5. Non-Transferability.
This option shall not be transferable by Option Holder other than by
will or the laws of descent and distribution, and shall be exercisable, during
Option Holder's lifetime, only by Option Holder. From and after Option Holder's
death, this option, to the extent exercisable at Option Holder's death, may be
exercised prior to its termination by the person(s) to whom Option Holder's
option rights pass by will or by the applicable laws of descent and
distribution. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of this option in contravention of the terms hereof, and the levy of
any execution, attachment or similar process upon this option, shall be null and
void.
6. Adjustment for Capital Changes.
In the event of any stock dividend payable in shares of the Company's
Common Stock or any split-up or contraction in the number of shares of the
Company's Common Stock occurring after the date of this Agreement and prior to
the exercise in full of this option, the number of shares subject hereto and the
option price to be paid for each such share shall each be proportionately
adjusted. In case of any reclassification or change of outstanding shares of the
Company's Common Stock, occurring after the date of this Agreement and prior to
the exercise in full of this option, the number and kind of shares of stock
subject to this Agreement and the price to be paid for each share subject to
this option shall each be proportionately adjusted. In the event of any
consolidation or merger of the Company with or into another company with the
Company not surviving, or upon dissolution or liquidation of the Company, this
option shall terminate. No fraction of a share shall be purchasable or
deliverable upon any exercise of this option, but, in the event any adjustment
hereunder of the number of shares covered by this option shall cause such number
to include a fraction of a share, such fraction shall be adjusted to the nearest
smaller whole number or shares.
7. Prohibited Transfers and Right of First Refusal.
(a) The Option Holder shall not sell, assign, transfer, pledge,
hypothecate, mortgage, encumber or dispose of all or any of his Option Shares
except to the Company or as expressly provided in this Agreement.
Notwithstanding the foregoing,
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<PAGE> 16
the Option Holder may transfer any or all of his Option Shares (i) by way of
gift to any member of his family (i.e., spouse, sibling, child (natural or
adopted), or any other lineal ancestor or descendant) or to any trust,
partnership or limited liability company for the benefit of, or the ownership
interests of which are wholly owned by, any such family member of the Option
Holder (each, a "Permitted Transferee"), or (ii) by will or the laws of descent
and distribution to or for the benefit of a Permitted Transferee, provided that
any such Permitted Transferee, as a condition to such transfer, shall execute an
Instrument of Adherence in the form of Exhibit A hereto, agreeing to be bound by
the terms of this Agreement to the same extent as if such Permitted Transferee
were the Option Holder.
(b) If requested the Company and the managing underwriter, the Option
Holder agrees to enter into a lock-up agreement pursuant to which the Option
Holder will not, from the date of such agreement and through a period of no more
than one hundred eighty (180) days following the effective date of the first
registration statement for a public offering of the Company's securities, and
for a period of no more than ninety (90) days following the effective day of any
subsequent registration statement, sell, assign, transfer, pledge, hypothecate,
mortgage or dispose of, by gift or otherwise, or in any way encumber, any of his
Option Shares, except transfers permitted by Section 7(a) above.
(c) If, at any time the Option Holder desires to sell all or any part
of the Option Shares and he has received in writing an irrevocable and
unconditional bona fide offer (the "Bona Fide Offer") for the purchase of such
Option Shares from a party (the "Offeror"), the Option Holder shall give written
notice (the "Option Notice") to the Company setting forth his desire to sell
such Option Shares, which Option Notice shall be accompanied by a photocopy of
the original executed Bona Fide Offer and shall set forth at least the name and
address of the Offeror and the price. The Company shall have an assignable
option to purchase any or all of the Option Shares specified in the Option
Notice, exercisable by giving, within thirty (30) days after the receipt of the
Option Notice (the "Exercise Period"), a counter-notice in writing to the Option
Holder. If the Company or its assignee elects to purchase any or all of such
Option Shares, the Company or its assignee shall be obligated to purchase, and
the Option Holder shall be obligated to sell to the Company or its assignee,
such Option Shares at the price and terms indicated in the Bona Fide Offer,
within sixty (60) days from the date of the Company's receipt of the Option
Notice. The Option Holder may sell any or all of such Option Shares which the
Company or its assignee has not so elected to purchase during the thirty (30)
days following the expiration of the Exercise Period, provided that: (i) such
sale shall only be made pursuant to the terms of the Bona Fide Offer; (ii) the
Option Holder shall not sell such Option Shares if the Offeror is a competitor
of the Company and the Company gives written notice forbidding such sale to the
Option Holder within the Exercise Period; and (iii) prior to the sale of such
Option Shares to the Offeror, the Offeror shall execute an agreement with the
Company pursuant to which the Offeror agrees to be subject to the restrictions
on transfer and rights of first refusal set forth in this Section 7. If any and
all such Option Shares are not sold pursuant to a Bona Fide Offer within such
time period, the unsold Option Shares shall remain subject to the terms of this
Agreement.
(d) The rights of first refusal provided in this Section 7 shall not
apply (i) with respect to sales, transfers or exchanges of Option Shares to the
Company or in conjunction with the sale of the Company to an unaffiliated third
party whether by merger, consolidation or sale of stock in a transaction in
which the Option Holder's Option Shares are also sold or transferred or eligible
to be sold or transferred (herein, a "Sale of the Company") or (ii) on the first
to occur of (x) the tenth (10th) anniversary of the date hereof or (y)
immediately prior to the consummation of a firmly underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the account of
the Company from which the aggregate net proceeds to the Company are at least
$15,000,000 and the price per share of such Common Stock is not less than $5.00
(as equitably adjusted whenever there is a stock split, combination, stock
dividend, reclassification or similar event affecting the Common Stock).
(e) Each certificate evidencing any of the Option Shares shall bear a
legend substantially as follows:
"The shares represented by this certificate are subject to restrictions on
transfer and may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of, whether voluntarily or by operation of law, except in
accordance with and subject to all the terms and conditions of a certain
Incentive Stock Option Agreement dated as of ______________, 1998, as amended or
amended and restated from time to time, a copy of which the Company will furnish
to the holder of this certificate upon request and without charge."
8. Investment Representations.
(a) Restrictions. Regardless of whether the offering and sale of shares
of the Option Stock under the Plan have
40
<PAGE> 17
been registered under the Securities Act or have been registered or qualified
under the securities laws of any state, the Company may impose restrictions upon
the sale, pledge or other transfer of Option Shares (including the placement of
appropriate legends on stock certificates) if, in the judgment of the Company
and its counsel, such restrictions are necessary or desirable in order to
achieve compliance with the provisions of the Securities Act, the securities
laws of any state or any other laws.
(b) Investment Intent at Grant. Option Holder represents and agrees
that the shares of Option Stock to be acquired upon exercising this option will
be acquired for investment, and not with a view to the sale or distribution
thereof.
(c) Investment and Intent at Exercise. In the event that the sale of
shares of Option Stock under the Plan is not registered under the Securities
Act, but an exemption from registration is available which requires an
investment representation or other representation, Option Holder shall represent
and agree at the time of exercise that the shares of Option Stock being acquired
upon exercising this option are being acquired for investment, and not with a
view to the sale or distribution thereof, and shall make such other reasonable
investment representations as are deemed necessary or appropriate by the Company
and its counsel.
(d) Legend. All certificates evidencing shares of Option Stock acquired
under this Agreement in an unregistered transaction shall bear the following
legend (and such other restrictive legends as are required or deemed advisable
under the provisions of any applicable law):
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED."
9. Rights as a Stockholder.
Option Holder shall not be deemed for any purpose to be a stockholder
of the Company with respect to any shares subject to this option except to the
extent that this option shall have been exercised with respect thereto and, in
addition, a certificate shall have been issued therefor and delivered to Option
Holder. No adjustment shall be made for dividends (ordinary or extraordinary,
and whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 6.
10. Employment Rights.
This option shall not confer upon Option Holder any right with respect
to the continuance of Option Holder's employment by the Company or by a parent
or subsidiary of the Company, nor shall it interfere in any way with the right
of any of such corporations to terminate such employment at any time.
11. Tax Consequences and Withholding Taxes.
The Option Holder recognizes that this option is being granted as a
result of his performance of services for the Company and that, under current
federal income tax laws, the Option Holder must include as gross income, for any
year in which the Option Holder exercises any options hereunder, the excess of
the fair market value of the Option Shares acquired over the amount paid for
such Option Shares and that, as the Company is obligated to withhold certain
federal and state taxes in connection with Option Holder's exercise, the Option
Holder agrees to pay to the Company the amount of any such required withholding
41
<PAGE> 18
12. Notices.
Any notice required or permitted to be given hereunder shall be in
writing and shall be deemed to be properly given when sent by registered or
certified mail, return receipt requested, by Federal Express, DHL, or other
guaranteed overnight delivery service or by facsimile transmission, addressed as
follows:
If to the Company: Omnia Communications, Inc.
100 Nickerson Road
Marlborough, MA 01752
Telecopy: (508) 229-7766
with a copy to: Posternak, Blankstein & Lund, L.L.P.
100 Charles River Plaza
Boston, MA 02114
Attention: Donald H. Siegel, P.C.
Telecopy: (617) 367-2315
If to the Option Holder: ___________________________
___________________________
___________________________
All notices, requests, consents and other communications hereunder
shall be deemed to have been received (a) if by hand, at the time of the
delivery thereof to the receiving party at the address of such party set forth
above or as so designated, (b) if made by telecopy or facsimile transmission, at
the time that receipt thereof has been acknowledged by electronic confirmation
or otherwise, (c) if sent by overnight courier, on the next business day
following the day such notice is delivered to the courier service, or (d) if
sent by registered or certified mail, on the fifth (5th) business day following
the day such mailing is made.
13. Waiver, Amendment and Termination.
The provisions of the Agreement may not waived, amended, modified or
terminated except with written consent of the parties hereto.
14. Entire Agreement and Amendments.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. To the extent any term or other provision
of any other agreement or instrument by which any party hereto is bound
conflicts with this Agreement, this Agreement shall have precedence over such
conflicting term or provision.
15. Governing Law; Successors and Assigns.
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts (without regard to choice of law provisions) and shall be binding
upon the heirs, personal representatives, executors, administrators, successors
and permitted assigns of the parties.
16. Waivers.
No waiver of any breach or default hereunder shall be considered valid
unless in writing, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or similar nature.
17. Severability.
If any provision of this Agreement shall be held to be illegal, invalid
or unenforceable, such illegality, invalidity or unenforceability shall attach
only to such provision and shall not in any manner affect or render illegal,
invalid or
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<PAGE> 19
unenforceable any other provision of this Agreement, and this Agreement shall be
carried out as if any such illegal, invalid or unenforceable provision were not
contained herein.
18. Captions.
Captions are for convenience only and are not deemed to be part of this
Agreement.
19. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
OMNIA COMMUNICATIONS, INC.
By:_________________________________
OPTION HOLDER:
_________________________________
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<PAGE> 20
OMNIA COMMUNICATIONS, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
(Stockholder:____________)
AGREEMENT made as of the day of __________, 1999 between Omnia
Communications, Inc., a Delaware corporation (the "Company"), and __________
(the "Stockholder").
WHEREAS, the Company desires to provide the Stockholder with an
incentive to promote the business of the Company and to encourage the
Stockholder to continue his employment; and
WHEREAS, to effectuate that desire the Company has determined to offer
to the Stockholder an opportunity to purchase shares of the Company's common
stock under and pursuant to the terms and provisions of the Company's 1997 Stock
Option Plan (the "Plan").
NOW, THEREFORE, the Company and the Stockholder agree as follows:
1. Defined Terms. As used in this Agreement, the following terms shall
have the following respective meanings:
(a) "Shares" shall mean all shares of Stock now owned or hereafter
acquired by the Stockholder.
(b) "Stock" shall mean all shares of Common Stock, and all other
securities of the Company which may be issued in exchange for or in respect of
shares of Common Stock (whether by way of stock split, stock dividend,
combination, reclassification, reorganization, or any other means).
(c) "Unvested Shares" shall mean the shares of Common Stock now or
hereafter owned by the Stockholder and which are subject to repurchase on
certain events as set forth in Section 4 hereof.
(d) "Vested Shares" shall mean the shares of Common Stock now or
hereafter owned by the Stockholder which are not, or no longer subject to,
repurchase in accordance with the provisions of Section 4 hereof.
2. Acquisition of Shares.
(a) The Stockholder hereby subscribes for _____________________shares
of Stock, at a price of $0.33 per share, for an aggregate purchase price of
$___________.
(b) The Stockholder represents, warrants and covenants as follows:
(i) The Stockholder is acquiring his Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution in violation of the Securities Act of 1933, as amended (the
"Securities Act"), or any rule or regulation under the Securities Act.
(ii) He has had such opportunity as he has deemed adequate to obtain
from representatives of the Company such information as is necessary to permit
him to evaluate the merits and risks of an investment in the Company.
(iii) He has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in an investment in
the Shares and to make an informed investment decision with respect to such
investment.
(iv) He can afford the complete loss of the value of the Shares and is
able to bear the economic risk of holding such Shares for an indefinite period.
(v) He understands that (x) the Restricted Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (y) the Restricted Shares cannot
be
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<PAGE> 21
sold, transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration is then
available; (z) in any event, the exemption from registration under Rule 144 will
not be available unless a public market then exists for the Common Stock,
adequate information concerning the Company is then available to the public, and
other terms and conditions of Rule 144 are complied with; and (aa) there is now
no registration statement on file with the Securities and Exchange Commission
with respect to any stock of the Company and the Company has no obligation or
current intention to register the Shares under the Securities Act.
3. Prohibited Transfers.
(a) The Stockholder shall not sell, assign, transfer, pledge,
hypothecate, mortgage, encumber or dispose of all or any of his Shares except to
the Company or as expressly provided in this Agreement. Notwithstanding the
foregoing, the Stockholder may transfer any or all of his Shares (i) by way of
gift to any member of his family (i.e., spouse, sibling, child (natural or
adopted), or any other lineal ancestor or descendant) or to any trust,
partnership or limited liability company for the benefit of, or the ownership
interests of which are wholly owned by, any such family member of the
Stockholder (each, a "Permitted Transferee"), or (ii) by will or the laws of
descent and distribution to or for the benefit of a Permitted Transferee,
provided that any such Permitted Transferee, as a condition to such transfer,
shall execute an Instrument of Adherence in the form of Exhibit A hereto,
agreeing to be bound by the terms of this Agreement to the same extent as if
such Permitted Transferee were the Stockholder and, without limiting the
foregoing, shall comply with the provisions of Section 5(d) below.
(b) If requested by the Company and the managing underwriter, the
Stockholder agrees to enter into a lock-up agreement pursuant to which the
Stockholder will not, from the date of such agreement and through a period of no
more than 180 days following the effective date of the first registration
statement for a public offering of the Company's securities, and for a period of
no more than 90 days following the effective date of any subsequent registration
statement, sell, assign, transfer, pledge, hypothecate, mortgage or dispose of,
by gift or otherwise, or in any way encumber, any of his Shares, except
transfers permitted by Section 3(a) above.
4. Right of First Refusal on Dispositions.
(a) If, at any time the Stockholder desires to sell all or any part
of the Vested Shares and he has received in writing an irrevocable and
unconditional bona fide offer (the "Bona Fide Offer") for the purchase of such
Vested Shares from a party (the "Offeror"), the Stockholder shall give written
notice (the "Option Notice") to the Company setting forth his desire to sell
such Vested Shares, which Option Notice shall be accompanied by a photocopy of
the original executed Bona Fide Offer and shall set forth at least the name and
address of the Offeror and the price. The Company shall have an assignable
option to purchase any or all of the Vested Shares specified in the Option
Notice, exercisable by giving, within thirty (30) days after the receipt of the
Option Notice (the "Exercise Period"), a counter-notice in writing to the
Stockholder. If the Company or its assignee elects to purchase any or all of
such Vested Shares, the Company or its assignee shall be obligated to purchase,
and the Stockholder shall be obligated to sell to the Company or its assignee,
such Vested Shares at the price and terms indicated in the Bona Fide Offer,
within sixty (60) days from the date of the Company's receipt of the Option
Notice. The Stockholder may sell any or all of such Vested Shares which the
Company or its assignee has not so elected to purchase during the thirty (30)
days following the expiration of the Exercise Period, provided that: (i) such
sale shall only be made pursuant to the terms of the Bona Fide Offer; (ii) the
Stockholder shall not sell such Vested Shares if the Offeror is a competitor of
the Company and the Company gives written notice forbidding such sale to the
Stockholder within the Exercise Period; and (iii) prior to the sale of such
Vested Shares to the Offeror, the Offeror shall execute an agreement with the
Company pursuant to which the Offeror agrees to be subject to the restrictions
on transfer and rights of first refusal set forth in Sections 4 and 5 hereof. If
any and all such Vested Shares are not sold pursuant to a Bona Fide Offer within
such time period, the unsold Vested Shares shall remain subject to the terms of
this Agreement.
(b) The rights of first refusal provided in this Section 4 shall not
apply with respect to sales, transfers or exchanges of Shares to the Company or
in conjunction with the sale of the Company to an unaffiliated third party
whether by merger, consolidation or sale of stock in a transaction in which the
Stockholder's Shares are also sold or transferred or eligible to be sold or
transferred (herein, a "Sale of the Company").
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<PAGE> 22
5. Option to Repurchase Certain Shares of the Stockholder Upon Termination of
Employment.
(a) If the Stockholder shall cease to be employed by the Company for
any reason, with or without cause, the Company may within seventy-five (75) days
from the date upon which the Stockholder shall so cease to be employed (the
"Termination Date"), exercise its option under this Section 5 to purchase from
the Stockholder all or part of his Unvested Shares as of the Termination Date,
as provided in Section 5(b) hereof.
(b) The Shares subject to purchase under this section, i.e., Unvested
Shares, shall initially be all of the Shares purchased by the Stockholder
hereunder (such number of Shares being subject to equitable adjustment for any
stock split, stock dividend, combination of shares or the like and based upon
Common Stock or Common Stock equivalents). Such Shares shall be released from
the right of purchase set forth herein, and thereupon become Vested Shares as
follows: no shares shall vest for one year from the Commencement Date set forth
on the signature page hereto; thereafter, the Shares shall vest in thirty-six
(36) equal monthly increments, such that all Unvested Shares shall become Vested
Shares forty-eight (48) months after the Commencement Date.
(c) Notwithstanding the foregoing, upon a Change of Control
Transaction (as defined in Section 5(h)), 50% of any then remaining Unvested
Shares shall become Vested Shares and all remaining Unvested Shares shall become
vested in equal increments over the following twelve (12) months.
(d) The Stockholder shall, simultaneously with the Closing under the
Stock Purchase Agreement of even date herewith, deliver to and deposit with Hale
and Dorr LLP, as escrow agent (the "Escrow Agent"), pursuant to the Escrow
Instructions attached hereto as Exhibit B ("Escrow Instructions"), the stock
certificate(s) evidencing all of the Stockholder's Unvested Shares, together
with undated assignments therefor duly endorsed for transfer in blank.
(e) The purchase price of any Unvested Shares for which the Company
exercises its option under this Section 5 (the "Option Price") shall be $.33 per
Share (such price being subject to equitable adjustment for any stock split,
stock dividend, combination of shares or the like affecting the Common Stock).
(f) If the Company desires to exercise its option to purchase, it
shall do so by communicating in writing its election to purchase to the
Stockholder, which communication shall state the basis for the Company's right
to purchase the Unvested Shares, the number of Unvested Shares the Company is
electing to purchase and the aggregate Option Price and shall be delivered in
person or mailed to the Stockholder at his address set forth in accordance with
Section 15 below within the seventy-five (75) day period provided for in Section
5(a). A copy of such notice accompanied by a request to release such Shares from
escrow shall be sent to the Escrow Agent. The sale of the Shares to be sold to
the Company pursuant to this Section 5 shall be made at the principal executive
office of the Company on the 15th day following the date of the Company's
written election to purchase (or if such 15th day is not a business day, then on
the next succeeding business day). Such sale shall be effected by release from
escrow and delivery to the Company of (i) a certificate or certificates
evidencing the Shares to be purchased by it, and (ii) stock assignments therefor
endorsed by the Stockholder for transfer to the Company, against payment by the
Company to the Stockholder of the aggregate Option Price for such Shares to be
purchased by the Company.
(g) Any Vested Shares held in escrow shall be released to the
Stockholder upon written request by the Stockholder in compliance with the
provisions of the Escrow Instructions.
(h) For purposes of this Agreement, the term "Change of Control
Transaction" means any single or related series of transactions after which more
than fifty (50%) percent of the voting stock of the Company outstanding
immediately after the effective date of such Change of Control Transaction is
owned of record or beneficially by persons other than the holders of such
capital stock immediately prior to such Change of Control Transaction.
6. Failure to Deliver Shares. If the Stockholder (or his legal
representative) becomes obligated to sell Shares to the Company or its assignee
under this Agreement and fails to deliver such Shares to the Company or its
assignee in accordance with the terms of this Agreement, the Company or its
assignee may, at its option, in additional to all other remedies it may have,
send to the Stockholder (or his legal representative) by registered mail, return
receipt requested, the purchase price for such Shares as is herein specified.
Thereupon, the Company, upon written notice to the Stockholder,
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<PAGE> 23
(a) shall cancel on its books the certificate or certificates, representing the
Shares to be sold; and (b) shall issue, in lieu thereof, a new certificate or
certificates in the name of the Company or its assignee, as applicable,
representing such Shares which may remain; and thereupon all of the
Stockholder's rights in and to such Shares shall terminate.
7. Specific Enforcement. The Stockholder expressly agrees that the
Company will be irreparably damaged if this Agreement is not specifically
enforced. Upon a breach or threatened breach of the terms, covenants or
conditions of this Agreement by the Stockholder, the Company shall, in addition
to all other remedies, each be entitled to a temporary or permanent injunction,
without showing any actual damage, and a decree for specific performance, in
accordance with the provisions hereof.
8. Legend. Each certificate evidencing any of the Shares shall be a
legend substantially as follows:
"The shares represented by this certificate are subject to restrictions on
transfer and may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of, whether voluntarily or by operation of law, except in
accordance with and subject to all the terms and conditions of a certain
Restricted Stock Purchase Agreement as amended or amended and restated from time
to time, a copy of which the Company will furnish to the holder of this
certificate upon request and without charge."
9. Notices. Any notice required or permitted to be given hereunder
shall be in writing and shall be deemed to be properly given when sent by
registered or certified mail, return receipt requested, by Federal Express, DHL,
or other guaranteed overnight delivery service or by facsimile transmission,
addressed as follows:
If to the Company: Omnia Communications, Inc.
100 Nickerson Road
Marlborough, MA 01752
Telecopy: (508) 229-7766
with a copy to: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: Peter B. Tarr, Esq.
Telecopy: (617) 526-5000
If to the Stockholder:
All notices, requests, consents and other communications hereunder
shall be deemed to have been received (a) if by hand, at the time of the
delivery thereof to the receiving party at the address of such party set forth
above or as so designated, (b) if made by telecopy or facsimile transmission, at
the time that receipt thereof has been acknowledged by electronic confirmation
or otherwise, (c) if sent by overnight courier, on the next business day
following the day such notice is delivered to the courier service, or (d) if
sent by registered or certified mail, on the fifth (5th) business day following
the day such mailing is made.
10. Waiver, Amendment and Termination. The provisions of the Agreement
may not waived, amended, modified or terminated except with written consent of
the parties hereto. This Agreement shall terminate (a) immediately prior to the
consummation of a firmly underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Company from which the
aggregate net proceeds to the Company are at least $15,000,000 and the price per
share of such Common Stock is not less than $5.00 (as equitably adjusted
whenever there is a stock split, combination, stock dividend, reclassification
or similar event affecting the Common Stock) or (b) on the tenth anniversary of
the date of this Agreement, whichever first occurs, provided that the provisions
of Section 3(b) shall continue in full force and effect until the tenth
anniversary of the date of this Agreement.
-47-
<PAGE> 24
11. Entire Agreement and Amendments. This Agreement constitutes the
entire agreement of the parties with respect to the subject matter hereof. To
the extent any term or other provision of any other agreement or instrument by
which any party hereto is bound conflicts with this Agreement, this Agreement
shall have precedence over such conflicting term or provision.
12. Governing Law; Successors and Assigns. This Agreement shall be
governed by the laws of the Commonwealth of Massachusetts (without regard to
choice of law provisions) and shall be binding upon the heirs, personal
representatives, executors, administrators, successors and permitted assigns of
the parties.
13. Waivers. No waiver of any breach or default hereunder shall be
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature.
14. Severability. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
15. Captions. Captions are for convenience only and are not deemed to
be part of this Agreement.
16. Continuation of Employment. Nothing in this Agreement shall create
an obligation on the Company to continue the Stockholder's employment with the
Company.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-48-
<PAGE> 25
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
OMNIA COMMUNICATIONS, INC.
By:_________________________________
Name:
Title:
STOCKHOLDER:
________________________________
Commencement Date (for purposes of Section 5(b)): _____________________.
-49-
<PAGE> 26
EXHIBIT A
OMNIA COMMUNICATIONS, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
INSTRUMENT OF ADHERENCE
The undersigned, a holder of shares of Common Stock, $0.001 par value,
of Omnia Communications, Inc., a Delaware corporation (the "Company"), hereby
joins in and agrees to be bound by all the terms and provisions of that certain
Restricted Stock Purchase Agreement dated as of ________ ___, _____, shall for
all purposes be deemed to be the Stockholder thereunder, subject to all of the
obligations of the Stockholder set forth therein, and hereby agrees that all
shares of Common Stock now or hereafter held by the undersigned shall be subject
to the restrictions on transfer, rights of purchase and co-sale and other
provisions of said Agreement.
EXECUTED on this ___ day of ________, _____.
___________________________________
-50-
<PAGE> 27
EXHIBIT B
OMNIA COMMUNICATIONS, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
ESCROW INSTRUCTIONS
____________, 1999
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Ladies and Gentlemen:
Simultaneous herewith ___________________ (the "Stockholder") is
depositing in escrow with you __________ shares of Common Stock (and undated
stock assignments therefor) of Omnia Communications, Inc. (the "Company) (the
Stockholder and the Company are called singularly "Party" and collectively
"Parties") pursuant to the provisions of Section 5 of that certain Restricted
Stock Purchase Agreement of even date by and between the Company and the
Stockholder (the "Agreement"). All defined terms used herein and not otherwise
defined have the meanings set forth in the Agreement. You are hereby authorized
and directed to hold the stock certificates for such shares (herein the "Escrow
Shares") and all stock assignments therefor in escrow for the benefit of the
Company and the Stockholder, and to release same to the Stockholder or to the
Company in accordance with the following instructions:
If the Company shall have the right to purchase all or any of the Escrow Shares,
or the Stockholder shall have the right to a release of any of the Escrow
Shares, in either case pursuant to the applicable provisions of Section 4, the
Party entitled to purchase or to the release of such Escrow Shares (the
"Requesting Party") shall give written notice (the "Release Notice") hereof to
you, as Escrow Agent, and to the other Party, specifying the number of Escrow
Shares to be released and the reason for the release thereof (you may also send
a copy of such Release Notice to the other party). You are authorized and
directed to release the Escrow Shares and related stock assignments therefor
referred to in the Release Notice of the Requesting Party to the Requesting
Party ten business days after (i) receipt by you of the Release Notice from the
Requesting Party and (ii) your sending of a copy of such Release Notice to the
other Party, unless within such time period you have received written
instructions not to do so from the other Party; provided, however, that if,
within such 10-day period the other Party consents in writing delivered to you,
to the Requesting Party's request, then you may release such shares upon receipt
of such consent, if earlier than the 10-day period described above.
If you receive contrary notices or instructions from the Parties, you shall
continue to hold such Escrow Shares until directed to dispose of same by written
agreement signed by both the Company and the Stockholder, or as provided in an
order of a court of competent jurisdiction, which order has become final after
expiration of all appeal periods without appeal being taken.
The Parties hereto agree that your duties as Escrow Agent hereunder are solely
ministerial in nature. You shall not be deemed to be the agent of any Party
hereto, nor to have any legal or beneficial interest in the Escrow Shares. The
Parties agree that you, as Escrow Agent, shall not be liable for any act or
omission taken or suffered in good faith hereunder, unless such act or omission
is a result of your gross negligence or willful misconduct.
You shall not be obligated to transfer any Escrow Shares or other items held
by you hereunder, unless the provisions of these Escrow Instructions have been
complied with by the Parties hereto. You shall not be responsible in any manner
for the validity or sufficiency of any notice received by you hereunder from any
Party, and believed by you to be genuine. You shall be fully protected and
indemnified by each of the Company and the Stockholder with respect to any
action taken or suffered hereunder in good faith by you, and each of the Company
and the Stockholder agrees to so indemnify you and hold you harmless from and
against any and all costs, claims, expenses and liabilities (including
reasonable attorneys' fees and expenses). You may consult with counsel, which
may be members of your firm, and shall be fully protected with respect to any
action taken or suffered hereunder in good faith by you in accordance with the
opinion of such counsel. You shall not be bound or in any way affected by any
notice of any modification, cancellation, abrogation or rescission hereof, or of
any fact or circumstances affecting or alleged to affect the rights and
liabilities of the Parties hereto other than as expressly set forth herein,
unless such modification, cancellation, abrogation, rescission, fact or
circumstance is communicated to you in writing. Nor, in the case of any
modification hereto, unless such modification shall be satisfactory to you and
assented to in writing by
-51-
<PAGE> 28
you. You may resign effective upon notice to the Company and the Stockholder and
delivery of the Escrow Shares and related stock assignments to a successor
designated by the Parties hereto.
You are hereby expressly authorized to comply with and obey all orders,
judgments or decrees of any court of competent jurisdiction. In case you obey or
comply with any such order, judgment or decree of any court, you shall not be
liable to any of the Parties hereto or to any other person, firm or corporation,
by reason of such compliance, notwithstanding that any such order, judgment or
decree shall subsequently be reversed, modified annulled, set aside or vacated
or found to have been entered into without jurisdiction.
By signing this letter you become party hereto only for the purpose of
acting as Escrow Agent and you do not become a party to the Agreement.
The provisions hereof shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts (without regard to choice of
law provisions).
OMNIA COMMUNICATIONS, INC.
By:____________________________
Name:
Title:
STOCKHOLDER:_______________________________
RECEIVED AND AGREED TO:
HALE AND DORR LLP
By:____________________________
Peter B. Tarr, Esq.
-52-
<PAGE> 29
STOCK ASSIGNMENT
For the value received, the undersigned, ____________________ hereby
gives, assigns, and transfers unto __________________________, ____ shares of
the Common Stock of Omnia Communications, Inc., a Delaware corporation, standing
in my name on the books of said corporation and represented by Stock Certificate
No. ___ herewith, and do hereby irrevocably constitute and appoint
________________________ attorney to transfer the said stock on the books of
said corporation with full power of substitution in the premises.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand and seal this _____ day of ____________, 1999.
__________________________
In presence of: _____________________
53
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATION AND STATEMENT OF CASH FLOWS INCLUDED IN CIENA'S
FORM 10-Q FOR THE PERIOD ENDING JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 142,599
<SECURITIES> 155,657
<RECEIVABLES> 104,684
<ALLOWANCES> 1,528
<INVENTORY> 64,638
<CURRENT-ASSETS> 497,178
<PP&E> 204,224
<DEPRECIATION> 75,891
<TOTAL-ASSETS> 644,897
<CURRENT-LIABILITIES> 88,775
<BONDS> 0
0
0
<COMMON> 1,373
<OTHER-SE> 541,021
<TOTAL-LIABILITY-AND-EQUITY> 644,897
<SALES> 128,826
<TOTAL-REVENUES> 128,826
<CGS> 79,361
<TOTAL-COSTS> 79,361
<OTHER-EXPENSES> 61,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (8,485)
<INCOME-TAX> (2,928)
<INCOME-CONTINUING> (5,557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,557)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
