<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 JANUARY 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)
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)
(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:
CLASS OUTSTANDING AT FEBRUARY 18, 1999
---------------------------- --------------------------------
Common stock. $.01 par value 103,381,736
Page 1 of 17 pages
<PAGE> 2
CIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters ended January 31, 1998
and January 31, 1999 3
Consolidated Balance Sheets
October 31, 1998 and January 31, 1999 4
Consolidated Statements of Cash Flows
Quarters ended January 31, 1998 and
January 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended January 31,
--------------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue .................................................. $ 145,092 $ 100,417
Cost of goods sold ....................................... 58,980 65,778
--------- ---------
Gross profit ........................................... 86,112 34,639
--------- ---------
Operating expenses:
Research and development ............................... 10,203 17,416
Selling and marketing .................................. 9,968 12,568
General and administrative ............................. 3,792 4,261
--------- ---------
Total operating expenses ............................ 23,963 34,245
--------- ---------
Income from operations ................................... 62,149 394
Interest and other income (expense), net ................. 3,775 3,117
Interest expense ......................................... (84) (58)
--------- ---------
Income before income taxes ............................... 65,840 3,453
Provision for income taxes ............................... 26,142 1,191
--------- ---------
Net income ............................................... $ 39,698 $ 2,262
========= =========
Basic net income per common share ........................ $ 0.39 $ 0.02
========= =========
Diluted net income per common share and dilutive potential
common share ........................................... $ 0.37 $ 0.02
========= =========
Weighted average basic common shares outstanding ......... 100,641 103,292
========= =========
Weighted average basic common and dilutive potential
common shares outstanding .............................. 107,552 107,826
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 227,397 $ 194,683
Marketable debt securities ................................................ 15,993 89,702
Accounts receivable, net .................................................. 85,472 80,257
Inventories, net .......................................................... 70,908 58,571
Deferred income taxes ..................................................... 15,301 11,525
Prepaid income taxes ...................................................... 8,558 -
Prepaid expenses and other ................................................ 4,415 9,626
--------- ---------
Total current assets .................................................... 428,044 444,364
Equipment, furniture and fixtures, net ........................................ 123,405 124,317
Goodwill and other intangible assets, net ..................................... 16,270 15,361
Other assets .................................................................. 4,705 4,644
--------- ---------
Total assets .............................................................. $ 572,424 588,686
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 25,686 $ 30,576
Accrued liabilities ....................................................... 34,328 37,414
Income taxes payable ...................................................... - 3,145
Deferred revenue .......................................................... 1,084 785
Other current obligations ................................................. 838 792
--------- ---------
Total current liabilities ............................................... 61,936 72,712
Deferred income taxes ..................................................... 34,125 34,314
Other long-term obligations ............................................... 1,414 1,255
--------- ---------
Total liabilities ....................................................... 97,475 108,281
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;
103,239,704 and 103,367,378 shares issued and outstanding ............... 1,032 1,034
Additional paid-in capital ................................................ 294,926 298,117
Notes receivable from stockholders ........................................ (357) (355)
Cumulative translation adjustment ......................................... (107) (108)
Retained earnings ......................................................... 179,455 181,717
--------- ---------
Total stockholders' equity .............................................. 474,949 480,405
--------- ---------
Total liabilities and stockholders' equity ................................ $ 572,424 $ 588,686
========= =========
</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>
Three Months Ended January 31,
--------------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 39,698 $ 2,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash charges from equity transactions ........................ 10 10
Amortization of premiums on marketable debt securities ........... 77 42
Effect of translation adjustment ................................. (32) (1)
Depreciation and amortization .................................... 5,634 11,401
Provision for inventory excess and obsolescence .................. 557 1,533
Provision for warranty and other contractual obligations ......... 1,721 2,218
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable .................. (16,969) 5,215
Increase in prepaid expenses and other ...................... (1,720) (5,153)
(Increase)/decrease in inventories .......................... (20,836) 10,804
(Increase)/decrease in deferred income tax asset ............ (567) 3,776
Decrease in prepaid income taxes ............................ - 8,558
(Increase)/decrease in other assets ......................... (1,178) 61
Increase in accounts payable and accruals ................... 9,385 5,758
Increase in income taxes payable ............................ 17,156 3,145
Increase in deferred income tax liability ................... 979 189
Increase/(decrease) in deferred revenue and other obligations 720 (299)
--------- ---------
Net cash provided by operating activities ........................ 34,635 49,519
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures ....................... (21,060) (11,404)
Purchases of marketable debt securities .............................. (31,166) (73,809)
Net cash paid for business combination ............................... (1,005) -
--------- ---------
Net cash used in investing activities ............................ (53,231) (85,213)
--------- ---------
Cash flows from financing activities:
Repayment of other obligations ....................................... (419) (205)
Net proceeds for issuance of common stock ............................ 1,025 257
Tax benefit related to exercise of stock options ..................... 6,827 2,928
--------- ---------
Net cash provided by financing activities .................. 7,433 2,980
--------- ---------
Net decrease in cash and cash equivalents .................. (11,163) (32,714)
Cash and cash equivalents at beginning of period ........................ 268,588 227,397
--------- ---------
Cash and cash equivalents at end of period .............................. $ 257,425 $ 194,683
========= =========
</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 (the "Company") have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, financial statements
included in this report reflect all normal recurring adjustments which
the Company considers necessary for the fair presentation of the results
of operations for the interim periods covered and of the financial
position of the Company at the date of the interim balance sheet. Certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures
are adequate to understand the information presented. The operating
results for interim periods are not necessarily indicative of the
operating results for the entire year. These financial statements should
be read in conjunction with the Company's October 31, 1998 audited
consolidated financial statements and notes thereto included in the
Company's Form 10-K annual report for the fiscal year ended October 31,
1998.
Revenue Recognition
The Company recognizes product revenue in accordance with the
shipping terms specified. For transactions where the Company has yet to
obtain customer acceptance, revenue is deferred until the terms of
acceptance are satisfied. Revenue for installation services is recognized
as the services are performed unless the terms of the supply contract
combine product acceptance with installation, in which case revenues for
installation services are recognized when the terms of acceptance are
satisfied and installation is completed. Revenues from installation
service fixed price contracts are recognized on the percentage of costs
incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are recorded as deferred
revenue. For distributor sales where risks of ownership have not
transferred, the Company recognizes revenue when the product is shipped
through to the end user.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1999
----------- ----------
<S> <C> <C>
Raw materials $ 43,268 $ 36,373
Work-in-process 8,592 9,066
Finished goods 30,202 26,514
----------- ----------
82,062 71,953
Less reserve for excess and obsolescence (11,154) (13,382)
----------- ----------
$ 70,908 $ 58,571
=========== ==========
</TABLE>
6
<PAGE> 7
(3) EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and
denominators of the basic net income per common share ("basic EPS") and
diluted net income per common and dilutive potential common share
("diluted EPS"). Basic EPS is computed using the weighted average number
of common shares outstanding. Diluted EPS is computed using the weighted
average number of common shares outstanding, and stock options using the
treasury stock method. (in thousands except per share amounts).
<TABLE>
<CAPTION>
Quarter ended January 31,
--------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net Income........................... $ 39,698 $ 2,262
============ ============
Weighted average shares-basic........ 100,641 103,292
------------ ------------
Effect of dilutive securities:
Employee stock options.......... 6,911 4,534
------------ ------------
Weighted average shares-diluted...... 107,552 107,826
============ ============
Basic EPS............................ $ 0.39 $ 0.02
============ ============
Diluted EPS.......................... $ 0.37 $ 0.02
============ ============
</TABLE>
During the quarter ended January 31, 1999 approximately 1,548,000
anti-diluted weighted shares from employee stock options have been
excluded from the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
shares.
(4) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS No.130),
"Comprehensive Income". SFAS No.130 became effective for the Company's
fiscal year 1999. SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components: however, the
adoption of this statement had no impact on the Company's net income or
shareholders' equity. SFAS No. 130 requires that changes in the amounts
of certain items, including foreign currency translation adjustments and
gains and loses on certain securities be shown in the financial
statements. The Company's accumulated other comprehensive income is
comprised entirely of accumulated foreign currency translation
adjustments and is shown as a separate amount on the Company's
Consolidated Balance Sheets. During the first quarter of fiscal 1998 and
1999, total comprehensive income, which includes net income and changes
in foreign currency translation adjustments, amounted to $39,666,000 and
$2,261,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements
that involve risks and uncertainties. The Company has set forth in Form
10-K Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Risk Factors," as filed with the Securities and
Exchange Commission on December 10, 1998, a detailed statement of risks
and uncertainties relating to the Company's business. In addition, set
forth below under the heading "Risk Factors" is a further discussion of
certain of those risks as they relate to the period covered by this
report, the Company's near-term outlook with respect thereto, and the
forward-looking statements set forth herein; however, the absence in this
quarterly report of a complete recitation of or update to all risk
factors identified in the Form 10-K should not be interpreted as
modifying or superseding any such risk factor, except to the extent set
forth below. Investors should review this quarterly report in combination
with the Form 10-K in order to have a more complete understanding of the
principal risks associated with an investment in the Company's Common
Stock.
7
<PAGE> 8
OVERVIEW
CIENA Corporation is a market leader of open
architecture, optical networking systems leveraging the bandwidth
enhancing abilities of dense wavelength division multiplexing ("DWDM")
technology. As a leader in the implementation of new technology in a
rapidly evolving and often unpredictable industry, the Company'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.
The Company has increased the number of optical transport
equipment customers from a total of seven customers during the first
quarter ended January 31, 1998 to thirteen customers for current quarter
ended January 31, 1999. This reflects the Company's ongoing strategy in
the face of aggressive price competition to continue to build market
share potentially at the cost of reduced margins. The Company intends to
preserve and enhance its market leadership and eventually build on its
installed base with new and additional products. The Company believes
that its product and service quality, manufacturing experience, and
proven track record of delivery will enable it to endure gross margin
pressure while it concentrates on efforts to reduce product costs and
maximize production efficiencies.
The Company is committed to achieving commercial availability of
MultiWave(R) Metro(TM), the Company's 24-channel system designed for use
in metropolitan ring applications within the next several months, as well
as 10 gigabit per second transmission capability for its MultiWave
Sentry(TM) line of products in the second half of the year. The
commercial availability of the Company's next generation long-distance
optical transport system, a MultiWave platform capable of 96-channel
configuration, is also expected in the second half of the year. The
Company's performance on these commitments relative to customer
expectations will likely have a material impact on the Company's
near-term operating results, as well as on its ability to further
solidify its position in the communications industry as a credible,
long-term supplier of multiple products and successive next-generation
solutions. The Company believes it will be successful in this effort, but
there is no assurance of that, and there will likely be few objective
"leading indicators" of the Company's success or failure, other than
purchasing by its customers.
Pursuit of these strategies, in conjunction with increased
investments in research and development, selling, marketing, and customer
service activities, will likely limit the Company's operating
profitability over at least the first half of fiscal 1999, and may result
in near-term operating losses.
As of January 31, 1999 the Company employed 1,421 people, which
was an increase of 39 persons over the 1,382 employed on October 31,
1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1999
REVENUE. The Company recognized revenues of $145.1 million and
$100.4 million for the first quarters ended January 31, 1998 and 1999,
respectively. The approximate $44.7 million or 30.8% decrease in revenues
in the first quarter 1999 compared to the first quarter 1998 was largely
the result of decreased sales to Sprint and MCIWorldCom. This decrease
was partially offset by an increase in revenues recognized from thirteen
different optical transport equipment customers in the quarter ended
January 31, 1999, as compared to seven such customers in the same quarter
of the prior year. Additionally, during the quarter ended January 31,
1999, each of three optical transport equipment customers accounted for
at least 10% or more of the Company's quarterly revenue and combined
accounted for 71.0% of the Company's quarterly revenue. This compares to
the quarter ended January 31, 1998 where each of three optical transport
equipment customers, accounted for at least 10% or more of the Company's
quarterly revenue and combined accounted for approximately 84.9% of the
Company's quarterly revenue. Revenues derived from foreign sales
accounted for approximately 19.4% and 42.0% of the Company's revenues
during the first quarter ended January 31, 1998 and 1999, respectively.
Revenues in the Company's first quarter 1998 were largely
attributed to sales of the Company's 16 channel MultiWave(R) 1600 and
MultiWave Sentry(TM) 1600 systems. This compares to a large majority of
the revenues from first quarter 1999 attributable to sales of the
Company's 40 channel MultiWave Sentry 4000 systems, which were not
available for sale in the first quarter of 1998. Revenues derived from
engineering, furnishing and installation services were relatively
constant for the comparable first quarters. Sales from this
8
<PAGE> 9
activity increased as a percentage of total revenue from approximately
8.0% to 11.7% of the Company's revenue from the first quarter ended
January 31, 1998 compared to the first quarter ended January 31,1999,
respectively.
The Company expects revenues in the near term to be largely
dependent upon sales to several new customers and to be largely derived
from sales of MultiWave Sentry 4000, new products using a MultiWave
platform capable of 96-channel configuration, and MultiWave Metro. There
are material risks associated with the Company's dependence on these
customers, as well as the successful ramping up of 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 the Company's manufacturing and engineering, furnishing and
installation operations. Gross profits were $86.1 million and $34.6
million for the first quarters ended January 31, 1998 and 1999,
respectively. The approximate $51.5 million or 59.8% decrease in gross
profit in the first quarter 1999 compared to the first quarter 1998 was
the result of decreased revenues in the first quarter 1999 compared to
first quarter 1998. Gross margin as a percentage of revenues was 59.3%
and 34.5% for the first quarters 1998 and 1999, respectively. The
decrease in gross margin percentage for the first quarter 1999 compared
to the first quarter 1998 was largely attributable to aggressive price
competition resulting in lower selling prices for optical transport
systems.
The Company's gross margins may be affected by a number of
factors, including continued competitive market pricing, lower
manufacturing volumes and efficiencies and fluctuations in component
costs. During the remainder of fiscal 1999, the Company expects to face
continued pressure on gross margins, primarily as a result of substantial
price discounting by competitors seeking to acquire market share. See
"Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development
expenses were $10.2 million and $17.4 million for the first quarters
ended January 31, 1998 and 1999, respectively. During the first quarters
1998 and 1999, research and development expenses were 7.0% and 17.3% of
revenue, respectively. The approximate $7.2 million or 70.7% increase in
research and development expenses in the first quarter 1999 compared to
the first quarter 1998 was the result of increases in staffing levels,
usage of prototype materials, and depreciation expense. The Company
expects that its research and development expenditures will continue to
increase during the remainder of fiscal year 1999 to support the
continued development of MultiWave systems, the exploration and possible
purchase of new or complementary technologies, and the pursuit of various
cost reduction strategies. The Company expenses research and development
costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
were $10.0 million and $12.6 million for the first quarters ended January
31, 1998 and 1999, respectively. During the first quarters 1998 and 1999,
selling and marketing expenses were 6.9% and 12.5% of revenue,
respectively. The approximate $2.6 million or 26.1% increase in selling
and marketing expenses in the first quarter 1999 compared to the first
quarter 1998 was primarily the result of increased staffing levels in the
areas of sales, marketing, technical assistance and field support, and
costs for customer demonstration systems, travel expenditures and rent
expense. The Company anticipates that its selling and marketing expenses
will increase during the remainder of fiscal year 1999 as additional
personnel are hired and offices opened, particularly in support of
international market development, to allow the Company to pursue new
market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $3.8 million and $4.3 million for the first quarters ended
January 31, 1998 and 1999, respectively. During the first quarters 1998
and 1999, general and administrative expenses were 2.6% and 4.2% of
revenue, respectively. The approximate $0.5 million or 12.4% increase in
general and administrative expenses from the first quarter 1998 compared
to the first quarter 1999 was primarily the result of increased staffing
levels and outside consulting services. The Company believes that its
general and administrative expenses for the remainder of fiscal 1999 will
moderately increase due to the expansion of the Company's administrative
staff required to support its expanding operations.
OPERATING PROFIT. The Company's operating profits were $62.1
million and $0.4 million for the first quarters ended January 31, 1998
and 1999, respectively. The decrease in operating profit from first
quarter fiscal 1998 to first quarter fiscal 1999 was due to increased
competitive pricing pressures causing a reduction in gross profit margin
and increased operating expenses from investments in operating
infrastructure. If the Company is able to convert investments in sales
and marketing and in operating infrastructure into significant revenue
generation relationships and can improve on component costs and
manufacturing efficiencies the Company believes that future operating
profits can improve above the level experienced in the first quarter of
fiscal 1999.
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<PAGE> 10
There is no assurance of such improvement, as there are material risks
facing the Company's business. See "Risk Factors."
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and
other income (expense), net were $3.8 million and $3.1 million for the
first quarters ended January 31, 1998 and 1999, respectively. The
approximate $0.7 million or 17.4% decrease in interest income and other
income (expense), net was largely attributable to lower interest rates
associated with invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income
taxes were $26.1 million and $1.2 million for the first quarters ended
January 31, 1998 and 1999, respectively. During the first quarters 1998
and 1999, the provision for income taxes were 39.7% and 34.5% of income
before income taxes, respectively. The decline in the income tax rate in
first quarter 1999 compared to first quarter 1998 was the result of a
lower combined effective state income tax expenses, increased benefits
derived from the Company's Foreign Sales Corporation, and an increase in
expected tax credits derived from research and development activities.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company's principal source of liquidity
was its cash and cash equivalents of $194.7 million and its marketable
debt securities of $89.7 million, which when combined represent an
increase of approximately $41.0 million from the October 31, 1998 cash
and cash equivalent and marketable debt securities combined balance. The
Company's marketable debt securities have maturities no longer than six
months.
Cash generated from operations was $49.5 million for the first
quarter ended January 31, 1999. This amount was principally attributable
to net income, the non-cash charges of depreciation, amortization,
provisions for inventory obsolescence and warranty, decreases in accounts
receivable and inventory, and increases in accounts payable, accrued
expenses and income tax payable.
Investment activities in the first quarter ended January 31, 1999
included the purchase of $73.8 million worth of corporate marketable debt
securities and $11.4 million invested in capital expenditures. Of the
amount invested in capital expenditures, $9.3 million was used for
additions to capital equipment and furniture and the remaining $2.1
million was invested in leasehold improvements. The Company expects to
use an additional $35 million to $40 million of capital during the
remainder of fiscal 1999 for construction of leasehold improvements for
its facilities and additional investments in capital equipment.
The Company believes that its existing cash balance and cash flows
from future operations will be sufficient to meet the Company's 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. The
Company's operations make use of a variety of computer equipment and
software. If the computer equipment and software used in the operation of
the Company and its products do not correctly recognize data information
when the year changes to 2000, there could be an adverse impact on the
Company's operations.
The Company has taken actions to understand the nature and extent
of work required, if any, to make its systems, products and
infrastructure Year 2000 compliant. Based on internal testing performed
to date and completed by the Company, the Company currently believes and
warrants to its customers that its products are Year 2000 compliant.
However, since all customer situations cannot be anticipated,
particularly those involving interaction of the Company's products with
third party products, the Company may 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 the Company's results of operations or financial condition.
The Company has concluded a comprehensive inventory and evaluation
of both information technology ("IT") or software systems and non-IT
systems used to run its systems. Non-IT systems typically include
embedded technology such as microcontrollers. Examples of the Company's
Non-IT systems include certain equipment used for production, research,
testing and measurement processes and calibration. The Company has begun
the process of upgrading or replacing those identified non-compliant
systems and the process is 10% complete. Completion is expected during
the third quarter of fiscal 1999. For the Year 2000 non-compliance
systems
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identified to date, the cost of remediation is not considered to be
material to the Company's financial condition or operating results.
However, if implementation of replacement systems is delayed, or if
significant new noncompliance issues are identified, the Company's
results of operations or financial condition may be materially adversely
affected.
The Company changed its main financial, manufacturing and
information system to a company-wide Year 2000 compliant enterprise
resource planning ("ERP") computer-based system during the fourth quarter
of fiscal 1998. The Company estimates that it has spent approximately
$4.0 million on its ERP implementation and estimates that it will likely
spend $100,000 to $200,000 to address identified Year 2000 issues. The
Company expects that it will use cash from operations for Year 2000
remediation and replacement costs. Approximately less than 2% of the
information technology budget is expected to be used for remediation. No
other information technology projects have been deferred due to the Year
2000 efforts. To date, the Company has not yet employed an independent
verification and validation process to assure the reliability of its risk
and cost estimates.
The Company has contacted its critical suppliers to determine that
suppliers' operations and the products and services they provide are Year
2000 compliant. To date, the Company's optical suppliers have represented
that they are year 2000 compliant or are in the process of becoming
compliant by December 31, 1999. If these suppliers fail to adequately
address the Year 2000 issue for the products they provide to the Company,
this could have a material adverse impact on the Company's operations and
financial results. Contingency plans will be developed if it appears the
Company or its key suppliers will not be Year 2000 compliant, and such
noncompliance is expected to have a material adverse impact on the
Company's operations.
The risk to CIENA resulting from the failure of third parties in
the public and private sector to attain Year 2000 readiness is the same
as other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that
could result in the event of one or more major failures of CIENA's
information systems, factories or facilities to be Year 2000 ready, or
similar major failures by one or more major third party suppliers to
CIENA: (1) information systems -- could include interruptions or
disruptions of business and transaction processing such as customer
billing, payroll, accounts payable and other operating and information
processes, until systems can be remedied or replaced; (2) factories and
facilities -- could include interruptions or disruptions of
manufacturing processes and facilities with delays in delivery of
products, until non-compliant conditions or components can be remedied
or replaced; and (3) major suppliers to CIENA -- could include
interruptions or disruptions of the supply of raw materials, supplies
and Year 2000 ready components which could cause interruptions or
disruptions of manufacturing and delays in delivery of products, until
the third party supplier remedied the problem or contingency measures
were implemented. Risks of major failures of CIENA's principal products
could include adverse functional impacts experienced by customers, the
costs and resources for CIENA to remedy problems or replace products
where CIENA is obligated or undertakes to take such action, and delays
in delivery of new products.
RISK FACTORS
IMPACTS OF CHANGES IN CUSTOMER MIX. With the Company's equipment
now widely deployed in the Sprint network, with MCIWorldCom resuming
purchasing but at modest levels, and without the likelihood of another
comparably sized long-distance service provider as a potential customer,
the Company's near-term operating results are now highly dependent on
successful sales efforts over a greater number of smaller opportunities.
The Company believes the pace of bandwidth demand is strong enough to
create a number of smaller opportunities sufficient to support revenue
growth over the long-term. However, the smaller opportunities often
represent new carriers working aggressively to establish scalable new
capacity. These new carriers face a number of problems which the
established carriers do not; specifically, they must attempt to balance
the need to build their own customer base, acquire all necessary rights
of way and interconnections necessary for saleable network service, and
build out new capacity sufficient to meet anticipated needs, all while
working within capital budget constraints or working to raise capital in
volatile financial markets. These aspects of newer carriers tend to make
them even less predictable as to either timing or volume of purchasing
than the established carriers; in turn, this tends to exacerbate the
problem of limited visibility which the Company has regularly struggled
with in conducting sales forecasting, materials and manufacturing
planning, and in providing guidance to analysts as part of investor
relations activities. See "Stock Price Volatility." While the broadening
of the Company's customer base can temper this risk over time, the
near-term dependence on more of these newer and comparatively smaller
opportunities increases the likelihood of unanticipated changes in
customer purchasing plans which could adversely impact the Company's
results relative to investor expectations. Most of the Company's
anticipated revenue over the next several quarters is comprised of less
than $25 million orders from each of several customers. Slips in timing
of purchases, or changes in the amount of purchases at any one or more of
these customers could have a material adverse effect on the Company's
results of operations and relative to investor expectations. See "Stock
Price Volatility."
DEPENDENCE ON SUPPLIERS. Suppliers in the specialized, high
technology sector of the optical communications industry are generally
not as plentiful or, in some case, as reliable, as suppliers in more
mature industries. Moreover, as the demand for higher capacity equipment
has accelerated, the performance specifications required of component
vendors has substantially increased, but the number of vendors able to
meet such specifications has generally not kept pace with this increase.
The Company is dependent on a limited number of suppliers for key
components of its MultiWave systems as well as equipment used to
manufacture the MultiWave systems. The Company's highest capacity product
platform, capable of 96-channel configurations, includes several higher
capacity components for which reliable, high-volume suppliers are
particularly limited. MultiWave systems in general, collectively utilize
approximately 1,400 components, and certain key optical and electronic
components are currently available only from sole sources. While
alternative suppliers have been identified for certain key optical and
electronic components, not all of those alternative sources have been
qualified by the Company. The
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<PAGE> 12
Company has, to date, conducted most of its business with suppliers
through the issuance of conventional purchase orders against the
Company's forecasted requirements. The Company also pursues long-term
supply agreements with some key suppliers, but a large majority of its
business with vendors continues to be done without such agreements. The
Company has from time to time experienced minor delays in the receipt of
key components, and 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 the
company's business, financial condition and results of operations.
Uniphase Corporation and JDS FITEL, Inc., both of which are significant
suppliers to the Company, recently announced a planned merger. The
Company has enjoyed positive relationships with both companies, and
believes the merger can be beneficial to the Company's interests as a
customer. If, however, the merger and related integration activities or
other factors were to result in delayed deliveries of key components from
either of these sources, such delays could have a material adverse effect
on the Company's near-term results of operations.
NEW PRODUCT DEVELOPMENT DELAYS. The Company's ability to
anticipate changes in technology, industry standards, customer
requirements and product offerings and to develop and introduce new and
enhanced products in a timely fashion relative to customer expectations
of increasingly short product development cycles, will be significant
factors in the Company's ability to remain a market leader in the
deployment of DWDM systems and in the optical communications market
generally. The complexity of the technology involved in product
development efforts in the optical transport field, including product
customization efforts for individual customers, can result in
unanticipated delays. The qualification and ramping up of new suppliers
for new or customized products requires extensive planning and can result
in unanticipated delays which affect the Company's ability to deliver
such products in a timely fashion. See "Dependence on Suppliers." The
software certification process for new telecom equipment used in Regional
Bell Operating Companies, ("RBOC"), networks--a process traditionally
conducted by Bellcore on behalf of the RBOCs--can also result in
unanticipated delays, and has resulted in some delay in the commercial
introduction of MultiWave Sentry and Firefly for the RBOC market. The
failure to deliver new and improved products, or appropriately customized
products, in a timely fashion relative to customer expectations (which
can be influenced by competitors' announcements of competing products),
would have a material adverse effect on the Company's competitive
position and financial condition. See "Competition." The Company has made
a general commitment to the commercial availability of MultiWave Metro
within the next several months, as well as for 10 gigabit per second
transmission capability in its MultiWave Sentry line of products in the
second half of the year. Enhanced optical amplifiers necessary for the
operation of a 96-channel configuration platform are also expected to be
available in the second half of the year. The Company's execution on
these commitments relative to customer expectations and commitments will
likely have a material impact on the Company's near-term operating
results, as well as on its ability to further solidify its position in
the communications industry as a credible, long-term supplier of multiple
products and successive next-generation solutions. The Company believes
it will be successful in this effort, but there is no assurance of that,
and there will likely be few objective "leading indicators" of the
Company's success or failure, other than purchasing by its customers.
COMPETITION. Competition in the global telecommunications industry
historically has been dominated by a small number of very large
companies, each of which have greater financial, technical and marketing
resources, greater manufacturing capacity, broader product lines and more
extensive and established customer relationships with network operators
than the Company. Nortel, Lucent, Alcatel, Ericsson, NEC, Pirelli,
Siemens, Fujitsu, and Hitachi, most of which provide a broad complement
of switches, fiberoptic transmission terminals and fiberoptic signal
regenerators in addition to DWDM equipment, are examples of this type of
company. Many of them have substantial economic interests in continuing
sales of the legacy equipment which has dominated the historical network
architecture designed for voice traffic; those interests are best served
by containing the pace at which paradigm-shifting new technologies are
adopted, such as direct transport of data-centric traffic via DWDM
equipment. At the same time, these companies must participate in new
technology markets or face potentially significant loss of account
control and market share in the overall telecommunications equipment
marketplace. New market entrants like CIENA, which appear to be achieving
rapid and widespread market acceptance of new equipment, can represent a
specific threat to these established companies. As a result, the Company
expects and has observed aggressive competitive moves from many of these
industry participants, which have to date included early announcement of
competing or alternative products, substantial and increasing price
discounting, customer financing assistance, packaged, "one-stop-shopping"
deals combining DWDM equipment with other network equipment and supplies,
and other tactics. Early announcements of competing products can and does
cause confusion and delay in customer purchasing decisions, particularly
if the announcements are viewed as credible in terms of both the
anticipated performance of the announced product, and the time within
which it is expected to be available.
12
<PAGE> 13
The Company has also observed an increase in the funding of new
companies intending to develop new products for the rapidly evolving
telecom industry. The business and product plans for these companies are
not always publicly known, but they are recognized as having the
potential for time-to-market advantages due to the narrow and exclusive
focus of their efforts. Such new companies may provide additional
competition as to the Company's existing product lines as well as
potential future products.
There can be no assurance that large, established competitors as
well as new startup competitors will not make early announcements of
competing products in the future, with adverse impacts on customer
purchasing decisions. Further, if new competing products are in fact
developed, perform as advertised, and are manufacturable in volume
quantities in the near future, the likelihood of significant orders for
the Company's MultiWave systems may diminish. The timing of shipments by
the Company and corresponding revenue, if delayed by reason of deferred
deployment of MultiWave systems pending evaluation of a competitor's
product, could and likely would cause substantial swings, and potentially
material and adverse effects, on the Company's quarterly financial
condition and results of operations.
While competition in general is broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as
on the comprehensiveness of the system solution in meeting immediate
network needs and foreseeable scalability requirements, the Company's
customers are themselves under increasing competitive pressure to deliver
bandwidth to their customers at the lowest possible cost. This pressure
may result in pricing for DWDM systems becoming a more important factor
in customer decisions, which may favor larger competitors which can
spread the effect of price discounts in their DWDM product lines across
an array of products and services, and a customer base, which are larger
than the Company's.
The Company's customers generally prefer to have at least two
sources for key network equipment such as optical transport systems, but
the Company believes it has until recently been the only supplier of
16-channel, or greater than 16-channel, open-architecture DWDM systems.
As competitors catch up with manufacturable DWDM systems which are
realistic alternatives to those supplied by the Company, the Company's
customers may reduce the portion of their DWDM purchases allocated to the
Company. Sprint has, for several quarters, indicated it intends to
establish a second vendor for DWDM equipment. Although the Company
recently negotiated a contract with Sprint which conferred "preferred
vendor" status on the Company through 1999, the timing of Sprint's
selection of a second vendor, and the impact a selection might have on
relative purchasing from the Company and the second vendor, are decisions
which are not under the control of the Company. There can be no assurance
that these decisions will not result in a reduction in future purchasing
from the Company, which could in turn have a material adverse effect on
the Company's financial condition and results of operations.
Intellectual property disputes may also be asserted as part of a
competitive effort to reduce the Company's leadership position and limit
its ability to achieve greater market share, even if the merits of
specific disputes are doubtful. Some of the Company's competitors are
also key suppliers of components for the Company's systems, and could
harm the Company through delay, interruption or other failures to supply
the Company with appropriate quality items.
While the Company will consider all appropriate means to position
itself to compete successfully, including taking legal action where the
tactics of competitors are believed to be unlawful, there can be no
assurance that the Company will be able to compete successfully with its
competitors or that aggressive competitive moves faced by the Company
will not result in lost sales, significantly lower prices for the
Company's products, additional decreases in gross profit margins, and
otherwise have a material adverse effect on its business, financial
condition and results of operations.
FLUCTUATION IN QUARTERLY AND ANNUAL RESULTS. The Company's revenue
and operating results have varied and are likely to continue to vary
significantly from quarter to quarter and from year to year as a result
of a number of factors, including the size and timing of orders, product
mix and shipments of systems. The timing of order placement, size of
orders, satisfaction of contractual customer acceptance criteria, the
adequacy of customer financing, as well as order delays or deferrals and
shipment delays and deferrals, have also caused and may continue to cause
material fluctuations in revenue. See "Competition" and "Impacts of
Changes in Customer Mix." Consolidation among the Company's customers and
target customers, such as that involved in the WorldCom/MCI merger, and
the distraction and/or reorganization attendant to such consolidation -
which may continue well after consummation - may also lead to delay or
deferral of purchasing decisions. The Company believes its present
13
<PAGE> 14
limited visibility into MCIWorldcom's purchasing plan is in part a
reflection of this phenomenon. Changes in customers' approaches to
bandwidth deployment can also materially impact purchasing decisions. See
"Anticipating Demand for Bandwidth."
The Company's expense levels in the future will be partially based
on its expectations of long-term future revenue and as a result net
income for any quarterly period in which material orders are shipped or
delayed or not forthcoming could vary significantly. The Company's
expense levels for the next few quarters to some extent reflect the
substantial investment in financial, engineering, manufacturing and
logistics support resources already incurred in order to position the
Company to successfully serve potentially large commercial relationships.
Over the near term, this investment of resources has been evident in a
rise in the Company's manufacturing and general overhead and expense
structure, with the result that the Company's near-term results of
operations may be only modestly profitable or may involve operating
losses, even if revenues sequentially increase. In general,
quarter-to-quarter sequential revenue and operating results over the next
12 months are likely to fluctuate and therefore may not be reliable
indicators of annual performance.
ANTICIPATING DEMAND FOR BANDWIDTH. The Company's systems enable
high capacity transmission over long distance, and with the introduction
of MultiWave Firefly and MultiWave Metro(TM), certain short-haul portions
of, optical communications networks; however, the Company's customers and
target customers determine how much capacity is required, when it will be
deployed, and what equipment configurations will be used, if any. The
Company has encountered a wide variety of customer views of how much
capacity will be needed in what portions of the network and over what
periods of time, as well as how to convert such capacity into revenue.
Those views reflect the customers' differing competitive strategies and
financial and marketing resources, and result in widely varying patterns
and timing of evaluation, purchase and deployment of the Company's
systems, other DWDM systems or other capacity solutions. Certain carriers
believe the deployment of large-scale capacity quickly is a competitive
advantage--i.e., they believe the accelerating demand for bandwidth will
continue and the added capacity will be utilized quickly. This viewpoint
leads to prompt and widespread deployment of high-channel count DWDM
systems. Other carriers have adopted more of a wait-and-see approach,
which dictates a more gradual channel-by-channel deployment of higher
capacity systems. New carrier entrants sometimes try to combine these
viewpoints, favoring rapid and widespread installation of the
foundational elements of high capacity systems, while opting for pricing
and other supply agreement features which allow for deferral of channel
purchases until the need is demonstrated. These views are further
influenced by the pace at which the higher bandwidth available over long
distance routes is distributed or distributable over "the last mile" of
the networks, as well as the willingness of carriers to aggressively
lower their charges for services as a means of accelerating consumption
of the higher bandwidth. All of these views are also subject to abrupt
change, as competition and the evolving marketplace may demand. As an
example of the impact of the evolving marketplace, during fiscal 1998 the
Company shipped equipment to and recognized revenue from several new
customers attempting to build out new networks--under circumstances where
the Company had not even identified these customer opportunities as of a
year prior to shipment.
Under these circumstances, for so long as the Company remains
dependent on comparatively few customers, the Company will be vulnerable
to significant quarterly fluctuations, and to difficulty in predicting
the direction or magnitude of future demand for the Company's systems.
The Company believes growth in data communications and in
commercial and consumer use of the Internet remains solid as a market
driver of demand for bandwidth, which in turn fuels demand for DWDM
systems and other high-bandwidth solutions. The Company also is confident
that its products are well targeted toward the visible emerging
chokepoints in the networks. The Company is less certain whether it will
be able to accurately anticipate changes in direction or magnitude of
near-term demand. Unanticipated reductions in demand would adversely
affect the Company's profitability and, depending on the size of the gap
between actual, reduced demand, and investor expectation of such demand,
could result in further stock price volatility irrespective of the
Company's overall competitive position and long-term prospects.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The Company expects that
new technologies will emerge, and existing technologies will rapidly
evolve, as competition in the telecommunications industry increases and
the need for higher and more cost efficient bandwidth expands. The
Company's ability to anticipate changes in technology, industry
standards, customer requirements and product offerings and to develop and
introduce new and enhanced products will be significant factors in the
Company's ability to remain the leader in the deployment of open
architecture DWDM systems and other high-capacity solutions. There is no
assurance of the Company's ability to successfully do so. The market for
telecommunications equipment is characterized by substantial capital
14
<PAGE> 15
investment and diverse and competing technologies such as fiberoptic,
cable, wireless and satellite technologies. The accelerating pace of
deregulation in the telecommunications industry will likely intensify the
competition for improved technology. Many of the Company's competitors
have substantially greater financial, technical and marketing resources
and manufacturing capacity with which to develop or acquire new
technologies and generally to compete for market acceptance of their
products. The Company has also observed an increase in the funding of new
companies intending to develop new products for the rapidly evolving
telecom industry. The business and product plans for these companies are
not always publicly known, but they are recognized as having the
potential for time-to-market advantages due to the narrow and exclusive
focus of their efforts. Such new companies may provide additional
competition as to the Company's 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 the
Company's existing products uncompetitive from a pricing standpoint,
obsolete or unmarketable. Any of these outcomes would have a material
adverse effect on the Company's business, financial condition and results
of operations.
RECENT PRODUCT INTRODUCTION. The MultiWave 1600 has been
operational and carrying live traffic for approximately two years; the
MultiWave Sentry 1600 and MultiWave Sentry 4000 for less than a year; and
the MultiWave Firefly has only recently been introduced into the field.
The in-service reliability of the Company's equipment has to date
substantially exceeded statistical standards predicted for equipment of
this kind. However, the introduction of new fiberoptic systems with high
technology content is likely to involve occasional problems as the
technology and manufacturing methods mature, and the Company's experience
has been consistent with this expectation. Further, the Company's history
of installation activity indicates that the newness and high precision
nature of DWDM equipment may require enhanced customer training and
installation support from the Company. The Company is aware of instances
domestically and internationally in which installation and activation of
certain MultiWave systems have been delayed due to faulty components
found in certain portions of these systems. The Company is aware of
relatively few performance issues once the systems are installed and
operational. However, if recurring or material reliability, quality or
network monitoring problems should develop, a number of material and
adverse effects could result, including manufacturing rework costs, high
service and warranty expense, high levels of product returns, delays in
collecting accounts receivable, reduced orders from existing customers
and declining level of interest from potential customers. Although the
Company maintains accruals for product warranties for expected amounts of
rework costs, service and warranty expense, there can be no assurance
that actual costs will not exceed these amounts. The pace at which the
customer requires upgrades from 16 to 40 to higher channel count systems
occurs (which in some cases can involve replacement of portions of the
existing equipment) can further complicate the assessment of appropriate
product warranty reserves. The Company expects there will be
interruptions or delays from time to time in the activation of the
systems and the addition of channels, particularly because the Company
does not control all aspects of the installation and activation
activities. The Company believes its record to date of problem
identification, diagnosis and resolution has been good, but if
significant interruptions or delays occur, or if their cause is not
promptly identified, diagnosed and resolved, confidence in the MultiWave
systems could be undermined. An undermining of confidence in the
MultiWave systems would have a material adverse effect on the Company's
customer relationships, business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success has always
depended in large part upon its ability to attract and retain
highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. The Company believes its heritage as an entrepreneurial
startup has been an important factor in its success to date in attracting
and retaining key personnel. However, competition for such personnel is
intense and often increases when a company becomes party to a merger, as
various recruiters look for key personnel interested in leaving. The
terminated merger with Tellabs, the attendant publicity and media
speculation regarding its outcome and impact on the Company, and the
Company's near-term operating results, have intensified competitors'
efforts to entice employees to leave the Company. Startup companies also
compete for personnel with the promise of early equity participation. The
Company and its employees are parties to agreements which limit the
employee's ability to work for a competitor for a defined period of time
following termination of employment. The Company expects its competitors
will respect these agreements and not interfere with them. However, there
can be no assurance that the Company will be able to retain all of its
key contributors or attract new personnel to add to or replace them.
Failure to retain the Company's key personnel, or to attract new
personnel likely would have a material adverse effect on the Company's
business, financial condition and results of operations.
LEGAL PROCEEDINGS. See Part II, "Legal Proceedings" for disclosure
concerning recent shareholder class action lawsuits filed against the
Company and certain of its officers and directors. An amended complaint
consolidating
15
<PAGE> 16
the lawsuits was recently filed. The Company believes the lawsuit is
without merit and is defending itself vigorously. However, because the
lawsuit is at an early stage, it is not possible to predict the outcome
at this time, and there is no assurance that the outcome would not have a
material adverse effect on the Company's financial condition and results
of operations.
STOCK PRICE VOLATILITY. The Company's Common Stock price has experienced
substantial price volatility, and is likely to continue to do so. Such
volatility can arise as a result of the activities of short sellers, risk
arbitrageurs, and takeover speculators, and may have little relationship
to the Company's financial results or prospects. Volatility can also
arise as a result of any divergence between the Company's actual or
anticipated financial results and published expectations of analysts and
as a result of announcements by the Company, as occurred in the fiscal
year just ended. The Company attempts to address this possible divergence
through its public announcements and reports; however, the degree of
specificity the Company can offer in such announcements, and the
likelihood that any forward-looking statements made by the Company will
prove correct in actual results, can and will vary, due primarily to the
uncertainties associated with the actions of competitors, delays by
component suppliers, the impacts of changes in the customer mix, long and
unpredictable sales cycles and customer purchasing programs, a lack of
visibility into its customers' deployment plans, and the lack of reliable
data on which to anticipate core demand for high bandwidth transmission
capacity. Divergence between the Company's actual or anticipated
financial results and published expectations of stock analysts therefore
can occur notwithstanding the Company's efforts to address those
expectations through public announcements and reports. Such divergence
will likely occur from time to time in the future, with resulting stock
price volatility, irrespective of the Company's overall year to year
performance or long-term prospects. See "Impact of Changes in Customer
Mix;" and "Anticipating Demand for Bandwidth."
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, have been filed. These cases were
consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. The complaint
alleges that CIENA and certain officers and directors violated certain
provisions of the federal securities laws, including Section 10(b) and
Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other
actions intending to artificially inflate and maintain the market price
of CIENA's common stock during the Class Period of May 21, 1998 to
September 14, 1998, inclusive. The plaintiffs seek designation of the
suit as a class action on behalf of all persons who purchased shares of
CIENA's common stock during the Class Period and the awarding of
compensatory damages in an amount to be determined at trial and
attorneys' fees. The proceedings are at an early stage. No discovery has
been taken, and no prediction can be made as to its outcome. The Company
believes the suit is without merit and intends to defend itself
vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit Description
------- -----------
<S> <C> <C>
27.0 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
Reports on Form 8-K: No reports on Form 8-K were filed during the
period.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
Date: February 18, 1999 By: /s/ Patrick H. Nettles
----------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: February 18, 1999 By: /s/ Joseph R. Chinnici
----------------- ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATION AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDING JANUARY 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> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 194,683
<SECURITIES> 89,702
<RECEIVABLES> 81,785
<ALLOWANCES> 1,528
<INVENTORY> 58,571
<CURRENT-ASSETS> 444,364
<PP&E> 175,953
<DEPRECIATION> 51,636
<TOTAL-ASSETS> 588,686
<CURRENT-LIABILITIES> 72,712
<BONDS> 0
0
0
<COMMON> 1,034
<OTHER-SE> 479,371
<TOTAL-LIABILITY-AND-EQUITY> 588,686
<SALES> 100,417
<TOTAL-REVENUES> 100,417
<CGS> 65,778
<TOTAL-COSTS> 65,778
<OTHER-EXPENSES> 34,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 3,453
<INCOME-TAX> 1,191
<INCOME-CONTINUING> 2,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,262
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
