<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 APRIL 30, 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 MAY 21, 1999
---------------------------- ---------------------------
Common stock. $.01 par value 121,375,665
Page 1 of 25 pages
<PAGE> 2
CIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and six months ended April 30, 1998
and April 30, 1999 3
Consolidated Balance Sheets
October 31, 1998 and April 30, 1999 4
Consolidated Statements of Cash Flows
Six months ended April 30, 1998 and
April 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
April 30, April 30, April 30, April 30,
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 142,718 $ 111,490 $ 287,810 $ 211,907
Cost of goods sold 63,915 71,238 122,895 137,016
---------------- ---------------- ---------------- ----------------
Gross profit 78,803 40,252 164,915 74,891
---------------- ---------------- ---------------- ----------------
Operating expenses:
Research and development 16,706 21,167 26,909 40,950
Selling and marketing 11,063 12,427 21,031 25,301
General and administrative 4,519 5,467 8,311 10,229
Merger costs - 2,253 - 2,253
Purchased research and development 9,503 - 9,503 -
Pirelli litigation 10,000 - 10,000 -
---------------- ---------------- ---------------- ----------------
Total operating expenses 51,791 41,314 75,754 78,733
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 27,012 (1,062) 89,161 (3,842)
Interest and other income (expense), net 3,433 3,614 7,208 6,876
Interest expense (81) (94) (165) (168)
---------------- ---------------- ---------------- ----------------
Income before income taxes 30,364 2,458 96,204 2,866
Provision for income taxes 15,154 864 41,296 989
---------------- ---------------- ---------------- ----------------
Net income $ 15,210 $ 1,594 $ 54,908 $ 1,877
================ ================ ================ ================
Basic net income per common share $ 0.14 $ 0.01 $ 0.53 $ .02
================ ================ ================ ================
Diluted net income per common share
and dilutive potential common share $ 0.14 $ 0.01 $ 0.50 $ .01
================ ================ ================ ================
Weighted average basic common shares
outstanding 106,245 121,135 103,443 120,646
================ ================ ================ ================
Weighted average basic common and
dilutive potential dilutive
potential common shares
outstanding 112,455 128,910 110,045 127,824
================ ================ ================ ================
</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, April 30,
1998 1999
------------------ -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 239,780 $ 194,920
Marketable debt securities 15,993 100,021
Accounts receivable, net 85,472 96,448
Inventories, net 70,908 54,062
Deferred income taxes 16,421 13,514
Prepaid income taxes 8,558 -
Prepaid expenses and other 4,524 9,615
------------------ -------------------
Total current assets 441,656 468,580
Equipment, furniture and fixtures, net 124,792 127,085
Goodwill and other intangible assets, net 16,270 14,446
Other assets 4,848 4,737
------------------ -------------------
Total assets $ 587,566 $ 614,848
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,925 $ 24,144
Accrued liabilities 34,437 40,773
Income taxes payable - 9,216
Deferred revenue 1,084 719
Other current obligations 953 1,276
------------------ -------------------
Total current liabilities 62,399 76,128
Deferred income taxes 34,125 36,580
Other long-term obligations 2,257 3,703
------------------ -------------------
Total liabilities 98,781 116,411
------------------ -------------------
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;
119,817,209 and 121,330,173 shares issued and outstanding 1,198 1,213
Additional paid-in capital 310,888 319,268
Unearned compensation - (687)
Notes receivable from stockholders (568) (629)
Cumulative translation adjustment (107) 21
Retained earnings 177,374 179,251
------------------ -------------------
Total stockholders' equity 488,785 498,437
------------------ -------------------
Total liabilities and stockholders' equity $ 587,566 $ 614,848
================== ===================
</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>
Six Months Ended April 30,
-------------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,908 $ 1,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash charges from equity transactions 20 262
Amortization of premiums on marketable debt securities 164 87
Effect of Translation Adjustments (24) 128
Purchased research and development 9,503 -
Depreciation and amortization 13,928 23,501
Allowance for doubtful accounts 194 -
Provision for inventory excess and obsolescence 1,683 2,033
Provision for warranty and other contractual obligations 6,400 4,617
Changes in assets and liabilities:
Increase in accounts receivable (59,848) (10,976)
Increase in prepaid expenses and other (4,565) (5,178)
Decrease in prepaid income tax - 8,558
(Increase) decrease in inventories (29,529) 14,813
(Increase) decrease in deferred income tax asset (1,247) 2,907
(Increase) decrease in other assets (3,670) 111
Increase (decrease) in accounts payable and accruals 16,956 (62)
Increase in income taxes payable 1,919 9,216
Increase in deferred income tax liability 1,957 2,455
Increase (decrease) in deferred revenue and other
obligations 1,131 (365)
------------------- -------------------
Net cash provided by operating activities 9,880 53,984
------------------- -------------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (58,155) (23,970)
Purchases of marketable debt securities (88,305) (118,277)
Maturities of marketable debt securities 36,376 34,249
Net cash paid for business combination (2,103) -
------------------- -------------------
Net cash used in investing activities (112,187) (107,998)
------------------- -------------------
Cash flows from financing activities:
Net (repayment of) proceeds from other obligations (495) 1,769
Proceeds for issuance of common stock and warrants 10,962 3,497
Tax benefit related to exercise of stock warrants 6,885 3,796
Repayment of notes receivable from stockholders - 92
------------------- -------------------
Net cash provided by financing activities 17,352 9,154
------------------- -------------------
Net increase (decrease) in cash and cash equivalents (84,955) (44,860)
Cash and cash equivalents at beginning of period 268,588 239,780
------------------- -------------------
Cash and cash equivalents at end of period $ 183,633 $ 194,920
=================== ===================
</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 April 1, 1999 and amended on April 5, 1999.
As more fully described in Note 5, CIENA acquired Lightera Networks
Incorporated ("Lightera") in March 1999. The acquisition was accounted for as a
pooling of interests, and the historical consolidated financial statements of
CIENA for all periods prior to this acquisition have been restated to include
the financial position, results of operations and cash flows of Lightera.
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified. 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
<TABLE>
<CAPTION>
Inventories are comprised of the following (in thousands):
October 31, April 30,
1998 1999
---------------- ---------------
<S> <C> <C>
Raw materials $ 43,268 $ 30,409
Work-in-process 8,592 13,086
Finished goods 30,202 21,047
---------------- ---------------
82,062 64,542
Less reserve for excess and obsolescence (11,154) (10,480)
---------------- ---------------
$ 70,908 $ 54,062
================ ===============
</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,
stock options and warrants using the treasury stock method. (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Quarter ended April 30,
-----------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Net Income.......................... $ 15,210 $ 1,594
================= =================
Weighted average shares-basic....... 106,245 121,135
----------------- -----------------
Effect of dilutive securities:
Employee stock options......... 6,210 7,775
----------------- -----------------
Weighted average shares-diluted..... 112,455 128,910
================= =================
Basic EPS........................... $ 0.14 $ 0.01
================= =================
Diluted EPS......................... $ 0.14 $ 0.01
================= =================
<CAPTION>
Six months ended April 30,
-----------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Net Income.......................... $ 54,908 $ 1,877
=================== =================
Weighted average shares-basic....... 103,443 120,646
------------------- -----------------
Effect of dilutive securities:
Employee stock options............. 6,602 7,178
------------------- -----------------
Weighted average shares-diluted.... 110,045 127,824
=================== =================
Basic EPS........................... $ 0.53 $ 0.02
=================== =================
Diluted EPS......................... $ 0.50 $ 0.01
=================== =================
</TABLE>
Stock options to purchase 298,500 and 258,316 shares of common stock were
outstanding during the quarter ended and six months ended April 30,1999,
respectively, but were not included in the computation of diluted EPS as the
effect would be antidilutive.
(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: however, the adoption of this statement had no impact on CIENA'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 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 second quarter of
fiscal 1998 and 1999, total comprehensive income, which includes net income and
changes in foreign currency translation adjustments, amounted to $15,218,000 and
$1,723,000 of comprehensive income, respectively. During the six months ended
April 30, 1998 and 1999, total comprehensive income, which includes net income
and changes in foreign currency translation adjustments, amounted to $54,884,000
and $2,005,000 of comprehensive income, respectively.
-7-
<PAGE> 8
(5) ACQUISITION
Lightera
During March 1999, CIENA completed a merger with Lightera, a Delaware
Corporation headquartered in Cupertino, California, in a transaction valued at
approximately $463.5 million. Lightera is a developer of carrier class optical
core switches for fiberoptic communications networks. Under the terms of the
merger agreement with Lightera, CIENA acquired all of the outstanding shares of
Lightera in exchange for approximately 17.5 million shares of CIENA common
stock. In connection with the transaction CIENA also assumed outstanding stock
options and warrants which represent rights to acquire an additional 3.1 million
of CIENA stock. As a result of the transaction CIENA recorded a charge of $2.3
million for merger costs. These costs include fees for legal, accounting,
investment banking services and other related expenses. 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>
(in thousands)
Year Ended Six Months Ended
October 31, 1998 April 30, 1999
--------------------------------------
<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>
Omnia
On March 15, 1999 CIENA signed an Agreement and Plan of Merger with Omnia
Communications, Inc. ("Omnia"), a Delaware corporation located in Marlborough,
Massachusetts, in a transaction valued at approximately $429 million. Omnia is a
developer of carrier class optical access solutions for fiberoptic
communications networks. Under the terms of the agreement, CIENA will acquire
all of the outstanding shares of Omnia in exchange for approximately 16 million
shares of CIENA common stock. The merger is subject to shareholder approval by
Omnia stockholders and other customary conditions. The transaction is intended
to constitute a tax-free reorganization and will be accounted for as a pooling
of interests under Accounting Principles Board Opinion No. 16. Accordingly, all
prior period consolidated financial statements presented will be restated to
include the combined results of operations, financial position and cash flows of
Omnia as though it had been a part of CIENA once the merger is consummated. For
the six months ended April 30, 1998 and 1999, Omnia had no revenues and recorded
a net loss of 2,230,000 and 7,246,000, respectively. CIENA expects to incur
charges of approximately $10,600,000 in connection with the merger. Of the
$10,600,000, $7,900,000 is the estimated non-cash charge that relates to the
acceleration of certain Omnia warrants and the remaining $2,700,000 relates to
financial advisory fees, legal and accounting services and other integration
costs.
-8-
<PAGE> 9
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. As a leader in the
implementation of new technology in a rapidly evolving and often unpredictable
industry, CIENA's quarterly operating results have varied and are expected to
vary in the future. See "Risk Factors" for a detailed discussion of the many
factors that have caused such variation in the past, and may cause similar
variations in the future.
On March 15, 1999, CIENA announced agreements to acquire Lightera
Networks, Inc. ("Lightera") and Omnia Communications, Inc. ("Omnia"), both
privately held entities, in two separate transactions. Lightera is a developer
of carrier-class optical core switches for fiberoptic communications networks.
Omnia is a developer of carrier-class optical access solutions for fiberoptic
communications networks.
CIENA completed the merger with Lightera in a transaction valued at
approximately $463.5 million. Under the terms of the agreement, CIENA acquired
all of the outstanding shares of Lightera in exchange for approximately 17.5
million shares of CIENA common stock. In connection with the transaction, CIENA
also assumed outstanding stock options and warrants which represents rights to
acquire an additional 3.1 million of CIENA stock. The transaction constituted a
tax-free reorganization and has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. 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 acquisition of Omnia is a transaction valued at approximately $429
million and is expected to be completed in June or July 1999. Under the terms of
the merger agreement with Omnia, CIENA will acquire all of the outstanding
shares of Omnia in exchange for approximately 16 million shares of CIENA common
stock. The acquisition is subject to shareholder approval by Omnia stockholders
and other customary conditions. The transaction is intended to constitute a
tax-free reorganization and will be accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, once the
acquisition is completed, all prior period consolidated financial statements
presented will be restated to include the combined results of operations,
financial position and cash flows of Omnia as though it had been a part of
CIENA.
In conjunction with the agreements to acquire Lightera and Omnia, CIENA
announced its LightWorks(TM) Initiative, CIENA's vision of how to change the
fundamental economics of optical telecommunication service provider networks.
The eventual addition of Lightera's and Omnia's products to CIENA's product
suite will make it possible for CIENA to offer telecommunications service
providers a comprehensive next-generation optical network architecture that
dramatically reduces the total number of network elements, thereby lowering
network costs. By sweeping the functionality and performance of what are now
several network elements into dramatically fewer network elements, without
sacrificing network reliability or performance, CIENA LightWorks architecture
should lower both a carrier's equipment cost and its operational costs. In
addition, LightWorks network architecture may enhance the revenue generating
potential of carrier networks by shortening their service delivery intervals
and enabling them to offer their customers a wide variety of services from a
single network platform.
CIENA has increased the number of its optical transport equipment
customers from a total of seven during the six months ended April 30, 1998 to
seventeen for the six months ended April 30, 1999. This reflects CIENA's ongoing
strategy in the face of aggressive price competition to continue to build market
share at the cost of reduced margins.
-9-
<PAGE> 10
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.
CIENA believes that the need for customer financing assistance is
increasingly a factor among the new carriers seeking rapid buildout of their
networks. To date CIENA has not recognized revenue from customers with extended
payment terms beyond 90 days from customer acceptance. Revenue recognition from
future customers who require financing assistance may be deferred until
collection is probable.
CIENA is committed to achieving general commercial availability of
MultiWave(R) Metro(TM), CIENA's system designed for use in metropolitan ring
applications within the next several months, as well as 10 gigabit per second
transmission capability for its MultiWave Sentry(TM) line of products in the
second half of the year. The general commercial availability of CIENA's next
generation long-distance optical transport system, a MultiWave platform capable
of 96-channel configuration, is also expected in the second half of the year.
CIENA intends to continue the development of the CoreDirector(TM) product
developed by Lightera. CoreDirector is believed to be the world's first
intelligent optical core switch and reduces the cost of deploying and operating
telecommunication service provider networks with industry-leading capacity and
advanced networking software. Because it supports capacities from optical
wavelengths down to STS-1s with what CIENA believes is industry-leading scale
and density, the CoreDirector allows carriers to deliver a full range of
transport services, without costly SONET/SDH multiplexers or inflexible
"wavelength only" devices. The general commercial availability of the
CoreDirector is expected by the end of the first quarter calendar 2000.
Pursuit of these strategies, in conjunction with increased investments in
research and development, selling, marketing, and customer service activities,
will likely limit CIENA's operating profitability over the remaining six months
of fiscal 1999, and may result in operating losses during the period. CIENA
intends to continue to pursue new or complementary technologies either through
ongoing internal development or by acquisition in order to further broaden
CIENA's product line.
As of April 30, 1999 CIENA employed 1,557 people, which includes 69
persons as a result of CIENA's acquisition of Lightera. This was an increase of
175 persons over the 1,382 employed on October 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999
REVENUE. CIENA recognized $142.7 million and $111.5 million in revenue
for the second quarters ended April 30, 1998 and 1999, respectively. The
approximate $31.2 million or 21.9% decrease in revenues in the second quarter
1999 compared to the second quarter 1998 was largely the result of reduced
selling prices. CIENA recorded an increase in revenues recognized from fourteen
optical transport equipment customers in the quarter ended April 30, 1999, as
compared to six such customers in the same quarter of the prior year.
Additionally, during the quarter ended April 30, 1999, each of three optical
transport equipment customers accounted for at least 10% or more of CIENA's
quarterly revenue and combined accounted for 72% of CIENA's quarterly revenue.
This compares to the quarter ended April 30, 1998 where one customer accounted
for at least 10% or more of CIENA's quarterly revenue and in total that same
customer accounted for approximately 69% of CIENA's quarterly revenue. Revenues
derived from foreign sales accounted for approximately 10.3% and 27.2% of
CIENA's revenues during the second quarter ended April 30, 1998 and 1999,
respectively. The increase in foreign sales reflects an increase in sales to new
customers.
Revenues in CIENA's second quarter 1998 and 1999 were both largely
attributed to sales of CIENA's 40 channel MultiWave Sentry(TM) 4000 systems.
Revenues derived from engineering, furnishing and installation services
increased by less than 10% from second quarter 1998 compared to second quarter
1999. Sales from this activity
-10-
<PAGE> 11
increased as a percentage of total revenue from approximately 9.1% to 12.7% of
CIENA's revenue from the second quarter 1998 to second quarter 1999,
respectively.
CIENA expects revenue in the near term to be largely dependent upon sales
to several new customers and to be derived primarily from sales of MultiWave
Sentry 4000, new products using a MultiWave platform capable of 96-channel
configuration, products using 10 gigabit per second transmission capability, and
MultiWave Metro. Some of the new customers from whom CIENA expects to obtain
customer acceptance for product shipments and installation services during the
third and fourth quarters of fiscal 1999 have extended payment terms. This
revenue may be deferred until collection is probable. 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 $78.8 million and $40.3 million for the second quarters ended April
30, 1998 and 1999, respectively. The approximate $38.5 million or 48.9% decrease
in gross profit in the second quarter 1999 compared to the second quarter 1998
was the result of decreased revenues in the second quarter 1999 compared to
second quarter 1998. Gross margin as a percentage of revenues was 55.2% and
36.1% for the second quarters 1998 and 1999, respectively. The decrease in gross
margin percentage for the second quarter 1999 compared to the second 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.
See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$16.7 million and $21.2 million for the second quarters ended April 30, 1998 and
1999, respectively. During the second quarters 1998 and 1999, research and
development expenses were 11.7% and 19.0% of revenue, respectively. The
approximate $4.5 million or 26.7% increase in research and development expenses
in the second quarter 1999 compared to the second quarter 1998 was the result of
increases in staffing levels, 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 $11.1
million and $12.4 million for the second quarters ended April 30, 1998 and 1999,
respectively. During the second quarters 1998 and 1999, selling and marketing
expenses were 7.8% and 11.1% of revenue, respectively. The approximate $1.4
million or 12.3% increase in selling and marketing expenses in the second
quarter 1999 compared to the second quarter 1998 was primarily the result of
increased staffing levels in the areas of sales, technical assistance and field
support. Increases in costs for customer demonstration systems and rent expense
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 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 $4.5 million and $5.5 million for the second quarters ended April 30, 1998
and 1999, respectively. During the second quarters 1998 and 1999, general and
administrative expenses were 3.2% and 4.9% of revenue, respectively. The
approximate $0.9 million or 21.0% increase in general and administrative
expenses from the second quarter 1998 compared to the second quarter 1999 was
primarily the result of increased staffing levels, outside consulting services
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 and London, England.
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MERGER COSTS. The merger costs for the second quarter ended April 30,
1999 of $2.3 million were costs related to the merger between CIENA and
Lightera. These costs include fees for legal, accounting, investment banking
services and other related expenses.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the second quarter 1998. These costs were for the
purchase of technology associated with the acquisition of Terabit during the
second quarter 1998.
PIRELLI LITIGATION. The Pirelli litigation expense for the second quarter
1998 was primarily the result of a $10.0 million charge for actual and estimated
legal and related costs associated with the litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $3.4 million and $3.6 million for the second quarters
ended April 30, 1998 and 1999, respectively. The approximate $0.2 million or
5.3% increase in interest income and other income (expense), net was
attributable to higher invested cash balances.
PROVISION FOR INCOME TAXES. CIENA's provision for income taxes were $15.2
million and $0.9 million for the second quarters ended April 30, 1998 and 1999,
respectively. During the second quarters 1998 and 1999, the provision for income
taxes were 38.0% and 35.0% of income before income taxes, respectively,
exclusive of the effect of one-time charges for purchased research and
development expenses. The decline in the income tax rate in second quarter 1999
compared to second 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.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1999
REVENUE. CIENA recognized $287.8 million and $211.9 million in revenue
for the six months ended April 30, 1998 and 1999, respectively. The approximate
$75.9 million or 26.4% decrease in revenues in the six months ended April 30,
1999 compared to the six months ended April 30, 1998 was largely the result of
decreased selling prices. CIENA recognized revenues from seventeen different
optical transport equipment customers in the six months ended April 30, 1999, as
compared to seven such customers in the same six months of the prior year.
Additionally, during the six months ended April 30, 1999, each of two optical
transport equipment customers accounted for at least 10% or more of CIENA's
revenue and combined accounted for 53.2% of CIENA's revenue. This compares to
the six months ended April 30, 1998 where two customers accounted for at least
10% or more of CIENA's revenue and combined accounted for approximately 71.5% of
CIENA's revenue. Revenues derived from foreign sales accounted for approximately
14.9% and 34.5% of CIENA's revenues during the six months ended April 30, 1998
and 1999, respectively. The increase in foreign sales reflects an increase in
sales to new customers.
Revenues during CIENA's six months ended April 30, 1998 were largely
attributable to both sales of 16 channel MultiWave Sentry and 40 channel
MultiWave Sentry 4000 systems. Revenues during CIENA's six months ended April
30, 1999 were largely attributed to sales of CIENA's MultiWave Sentry 4000
systems. Revenues derived from engineering, furnishing and installation services
increased by less than 10% from the six months ended April 30, 1998 compared to
the six months ended April 30, 1999. Sales from this activity increased as a
percentage of total revenue from approximately 8.3% to 12.2% of CIENA's revenue
from the first six months of 1998 to the first six months of 1999, respectively.
GROSS PROFIT. Gross profits were $164.9 million and $74.9 million for the
six months ended April 30, 1998 and 1999, respectively. The approximate $90.0
million or 54.6% decrease in gross profit in the first six months of 1999
compared to the first six months of 1998 was the result of decreased revenues
for those periods. Gross margin as a percentage of revenues was 57.3% and 35.3%
for the first six months of 1998 and 1999, respectively. The decrease in gross
margin percentage for the first six months of 1999 compared to the first six
months of 1998 was largely attributable to aggressive price competition
resulting in lower selling prices for MultiWave optical transport systems.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$26.9 million and $41.0 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, research and
development expenses were 9.3% and 19.3% of revenue, respectively. The
approximate $14.0 million or 52.2% increase in research and development expenses
in the first six months of 1999 compared to the first six months of 1998 was the
result of increases in staffing levels, consumption of prototype materials,
utilization of outside consultants for certain development efforts and higher
costs of test equipment used to develop and test new products and features.
CIENA expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $21.0
million and $25.3 million for the six months ended April 30, 1998 and 1999,
respectively. During the first six months of 1998 and 1999, selling and
marketing expenses were 7.3% and 11.9% of revenue, respectively. The approximate
$4.3 million or 20.3% increase in selling and marketing expenses in the first
six months of 1999 compared to the first six months of 1998 was primarily the
result of increased staffing levels in the areas of sales, technical assistance
and field support, and increases in commissions earned, trade show
participation, promotional costs, travel expenditures and rent expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $8.3 million and $10.2 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, general and
administrative expenses were 2.9% and 4.8% of revenue, respectively. The
approximate $1.9 million or 23.1% increase in general and administrative
expenses in the first six months of 1999 compared to the first six months of
1998 was primarily due to increases in staffing levels and outside consulting
services.
MERGER COSTS. The merger costs for the six months ended April 30, 1999 of
$2.3 million were costs related to the merger between CIENA and Lightera. These
costs include fees for legal, accounting, investment banking services and other
related expenses.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the six months ended April 30, 1998. These costs
were for the purchase of technology associated with the acquisition of Terabit
during the second quarter 1998.
PIRELLI LITIGATION. The Pirelli litigation expense for the six months
ended 1998 was primarily the result of a $10.0 million charge for actual and
estimated legal and related costs associated with the litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $7.2 million and $6.9 million for the six months
ended April 30, 1998 and 1999, respectively. The approximate $0.3 million or
4.6% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION FOR INCOME TAXES. CIENA's provision for income taxes were $41.3
million and $1.0 million for the six months ended April 30, 1998 and 1999,
respectively. During the first six months of 1998 and 1999, the provision for
income taxes were 38.4% and 34.5% of income before income taxes, respectively,
exclusive of the effect of one-time charges for purchased research and
development expenses. The decline in the income tax rate in the first six months
of 1999 compared to 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 April 30, 1999, CIENA's principal source of liquidity was its cash and
cash equivalents of $194.9 million and its marketable debt securities of $100.0
million. CIENA's marketable debt securities have maturities no longer than six
months.
Cash generated from operations was $54.0 million for the six months ended
April 30, 1999. This amount was principally attributable to the non-cash charges
of depreciation, amortization, provisions for inventory obsolescence and
warranty, and reductions in inventories, increases in accounts payable, accrued
expenses and income tax payable.
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<PAGE> 14
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 six months ended April 30, 1999 included the
net purchase of $84.0 million worth of corporate debt securities and $24.0
million invested in capital expenditures. Of the amount invested in capital
expenditures, $21.6 million was used for additions to capital equipment and
furniture and the remaining $2.4 million was invested in leasehold improvements.
CIENA expects to use an additional $50.0 million to $60.0 million of
capital during the remainder of fiscal 1999 to complete the construction of
leasehold improvements for its facilities and additional investments in capital
equipment.
CIENA believes that its existing cash balance and cash flows from future
operations will be sufficient to meet CIENA's capital requirement for at least
the next 18 to 24 months.
YEAR 2000 READINESS DISCLOSURE
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. CIENA's operations make
use of a variety of computer equipment and software. If the computer equipment
and software used in the operation of CIENA and its products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on CIENA's operations.
CIENA has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by CIENA,
CIENA currently believes and warrants to its customers that its products are
Year 2000 compliant. However, since all customer situations cannot be
anticipated, particularly those involving interaction of CIENA's products with
third party products, CIENA may experience warranty and other claims as a result
of the Year 2000 transition. The impact of customer claims, if broader than
anticipated, could have a material adverse impact on CIENA's results of
operations or financial condition.
CIENA has concluded a comprehensive inventory and evaluation of both
information technology ("IT") or software systems and non-IT systems used to run
its systems with the exception of the systems it acquired in its merger with
Lightera. Non-IT systems typically include embedded technology such as
microcontrollers. Examples of CIENA's Non-IT systems include certain equipment
used for production, research, testing and measurement processes and
calibration. CIENA has begun the process of upgrading or replacing those
identified non-compliant systems and the process is 60% complete. Completion is
expected during the third quarter of fiscal 1999. For the Year 2000
non-compliance systems identified to date, the cost of remediation is not
considered to be material to CIENA's financial condition or operating results.
However, if implementation of replacement systems is delayed, or if significant
new noncompliance issues are identified, CIENA's results of operations or
financial condition may be materially adversely affected.
CIENA has begun the process of evaluating the systems acquired in the
Lightera merger and has not to date evaluated in detail the systems in use by
Omnia. CIENA expects to complete the evaluation process concerning the Lightera
systems during the third quarter of fiscal 1999. CIENA plans to begin the
process of upgrading or replacing those identified non-compliant systems by the
end of the third fiscal quarter of 1999 with completion expected by the end of
the fourth quarter of fiscal 1999. Depending on the timing of the closing of its
merger with Omnia, CIENA expects to evaluate, upgrade and or replace as
necessary those systems identified as non-compliant systems by December 1, 1999.
CIENA changed its main financial, manufacturing and information system to
a company-wide Year 2000 compliant enterprise resource planning ("ERP")
computer-based system during the fourth quarter of fiscal 1998. CIENA estimates
that it has spent approximately $4.0 million on its ERP implementation and
during the six months ended April 30, 1999 CIENA has spent approximately
$300,000 to address identified Year 2000 issues. CIENA estimates that it will
likely spend an additional $100,000 to $200,000 to address remaining identified
Year 2000 issues. CIENA expects that
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<PAGE> 15
it will use cash from operations for Year 2000 remediation and replacement
costs. Approximately less than 2% of the information technology budget is
expected to be used for remediation. No other information technology projects
have been deferred due to the Year 2000 efforts. CIENA has employed an
independent verification consultant to validate CIENA's processes in order to
assure the reliability of CIENA's risk and cost estimates.
CIENA has contacted its critical suppliers to determine that suppliers'
operations and the products and services they provide are Year 2000 compliant.
To date, CIENA's optical suppliers have represented that their products are year
2000 compliant and have represented that they are in the process of becoming
fully compliant by December 31, 1999. If these suppliers fail to adequately
address the Year 2000 issue for the products they provide to CIENA, this could
have a material adverse impact on CIENA's operations and financial results.
Contingency plans will be developed if it appears CIENA or its key suppliers
will not be Year 2000 compliant, and such noncompliance is expected to have a
material adverse impact on CIENA's operations.
The risks to CIENA resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness are generally similar to
those faced by other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that could
result in the event of one or more major failures of CIENA's information
systems, factories or facilities to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to CIENA: (1) information
systems - could include interruptions or disruptions of business and transaction
processing such as customer billing, payroll, accounts payable and other
operating and information processes, until systems can be remedied or replaced;
(2) factories and facilities - could include interruptions or disruptions of
manufacturing processes and facilities with delays in delivery of products,
until non-compliant conditions or components can be remedied or replaced; and
(3) major suppliers to CIENA - could include interruptions or disruptions of the
supply of raw materials, supplies and Year 2000 ready components which could
cause interruptions or disruptions of manufacturing and delays in delivery of
products, until the third party supplier remedied the problem or contingency
measures were implemented. Risks of major failures of CIENA's principal products
could include adverse functional impacts experienced by customers, the costs and
resources for CIENA to remedy problems or replace products where CIENA is
obligated or undertakes to take such action, and delays in delivery of new
products.
RISK FACTORS
OUR QUARTERLY AND ANNUAL RESULTS HAVE FLUCTUATED AND WE EXPECT THEM TO CONTINUE
TO FLUCTUATE
Our 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 timing of order placement, size of orders,
satisfaction of contractual customer acceptance criteria, as well as order
delays or deferrals and shipment delays and deferrals. Delays or deferrals in
purchasing decisions may increase as competitors introduce new competing
products, customers change purchasing practices, and we develop and introduce
new products or move to next-generation versions of existing products.
We will base our expense levels in the future partially on our
expectations of long term future revenue. Net income for any quarterly period in
which material orders are delayed or not forthcoming could vary significantly.
Our expense levels to some extent reflect our substantial investment in
financial, engineering, manufacturing and logistics support resources to
position ourselves for successful commercial relationships with large potential
customers, even though there is no assurance as to the volume, duration or
timing of any purchases which might ensue from them. As a result of this
investment of resources, we have experienced and may continue to experience:
- - increased inventory levels and operating expenses
- - a rise in manufacturing and general overhead and expense structure
These factors are magnified over the near term by the acquisitions of
Lightera and Omnia, both of which have ongoing development and operating
expenses but are not expected to contribute materially to revenues until
calendar 2000.
Accordingly, near term results of operations may be only at break-even
levels 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.
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<PAGE> 16
INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY COULD HURT OUR SALES AND
PROFITABILITY
A small number of very large companies have historically dominated the
global telecommunications industry. Our competitors include Lucent, Alcatel,
Nortel, NEC, Pirelli, Siemens, Ericsson, Fujitsu, and Hitachi. Many of them have
substantial economic interests in continuing sales of the legacy equipment that
has dominated the historical network architecture designed for voice traffic.
New market entrants like us, that sell systems which displace legacy equipment,
can represent a specific threat to these established companies. Our completed
acquisition of Lightera and our pending acquisition of Omnia are likely to
increase this perceived threat. As a result, we expect continued aggressive
tactics from many of our competitors. In the past, these tactics have included
the following:
- - Substantial and increasing price discounting - Customers are under
increasing competitive pressure to deliver bandwidth to their customers
at the lowest possible cost. As a result of this pressure, the price of
DWDM products is an increasingly important factor in customer decisions.
This may favor larger competitors who can spread the effect of price
discounts in their DWDM products across an array of products and
services, and a larger customer base. This also increases pressure on our
gross margins.
- - Early announcements of competing or alternative systems - When
competitors make early announcements of competing products, our customers
may delay their purchasing decisions, particularly if they believe the
claimed performance of the announced product, and the time within which
it will be available. Customer orders for our products may also diminish
if competitors are able to develop these announced products, if the
products perform as advertised, and if competitors can manufacture the
products in sufficient volume. If customers delay purchasing our products
while they evaluate a competitor's product, we could experience
substantial revenue swings and potentially material and adverse effects
on our quarterly financial condition and results of operations.
- - Packaged, "one-stop shopping deals" - Most of our competitors provide a
full range of telecommunications equipment in addition to systems similar
to the ones that we offer.
- - Customer financing assistance - This is becoming an important factor
primarily to new carriers that are trying to quickly build their
networks. Our competitors are in a better position to offer longer and
more attractive financing terms to these customers than we are because
our competitors are larger and more heavily capitalized than we are. As a
result, we may lose new business opportunities where financing is a key
factor.
As competitors are able to manufacture products that are realistic
alternatives to ours, our customers may reduce their purchases from us. Sprint
has long indicated that it intends to establish a second vendor for our
products. We don't know when Sprint will select a second vendor or what impact
the selection might have on Sprint's purchases from us. This decision may result
in Sprint reducing the amount of products it purchases from us, which could in
turn have a material adverse effect on our financial condition and results of
operations.
Competitors may also engage in intellectual property disputes with us as
part of their effort to reduce our leadership position and limit our ability to
achieve greater market share. Some of our competitors are also key suppliers of
components for our products, and could harm us through delay, interruption or
other failures to supply us with appropriate quality supplies. See "Certain of
Our Suppliers are Also Our Competitors".
We have also observed an increase in the funding of new companies
intending to develop new products for the rapidly evolving telecom industry.
These companies may provide additional competition for our existing products as
well as our future products.
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<PAGE> 17
DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS COULD HURT OUR NEAR TERM PROSPECTS AND
IMPACT OUR ABILITY TO REMAIN A MARKET LEADER
Our ability to remain a market leader, and, to a lesser extent, avoid
significant fluctuation in our quarterly results, depends on our ability to:
- - anticipate changes in technology, industry standards, customer
requirements, and product offerings, and
- - develop and introduce new and enhanced products in a timely fashion
For us to develop and qualify new suppliers for our products requires
extensive planning and can result in unanticipated delays. The software
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 affect the commercial introduction of our products for the RBOC market.
Failure to deliver new and improved products would have a material adverse
effect on our competitive position and financial condition. See "Intense
Competition in the Telecommunications Industry Could Hurt Our Sales and
Profitability".
We have committed to producing one of our new products, MultiWave Metro,
within the next few months. We expect that Omnia's complementary "edge services"
delivery product will become available at about the same time. We also expect to
have 10 gigabit per second transmission, or higher single channel transmission
capacity, in our products in the second half of the year. Enhanced optical
amplifiers necessary for the long distance operation of our most recent high
capacity product, the fully-configured 96-channel system, are also expected to
be available in the second half of this year. If we are unable to meet customer
expectations with respect to these commitments, our leadership position in our
portion of the communications industry will be adversely impacted. In order to
meet these commitments, we will need to finalize component sourcing, which we
have not yet completed. Any delays in shipment could result in delays in
recognizing revenues and, ultimately, could adversely affect our customer
relationships.
OUR TRANSITION TO A MIX OF SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN DEMAND
AND IN OUR RESULTS
We are focusing our sales efforts on a greater number of smaller
opportunities now that:
- - Sprint has installed our equipment in much of its network
- - MCI WorldCom is purchasing at relatively modest levels, and
- - There is little likelihood of any additional, comparably sized customers.
Smaller opportunities in our business are still in the millions of
dollars, and typically represent new or less established carriers trying to
break into local, regional or national markets. Such carriers can be even less
predictable as to both timing and volume of purchasing than established
carriers, due to a variety of factors including their need to build their own
customer base, acquire all necessary rights of way and interconnections
necessary to sell network service, and build out new capacity sufficient to meet
anticipated needs, while working within capital budget constraints. This tends
to exacerbate our problem of limited visibility, one with which we regularly
struggle in conducting sales forecasting and materials and manufacturing
planning, and in communicating with investors. It may also increase fluctuations
in quarterly operating results and stock price volatility. See "Our Stock Price
May Exhibit Volatility". Newer carriers are also increasingly seeking financing
assistance with their purchases, as they seek to leverage their capital and
build out their networks as quickly and extensively as possible. It is possible
that CIENA's ability to recognize revenue from financed sales to such carriers
will be impacted by their financial condition and results of operations at the
time of product acceptance.
Unanticipated changes in customer purchasing plans could adversely impact
our results relative to investor expectations. Most of our anticipated revenue
over the next several quarters is comprised of less than $25 million orders from
each of several customers, some of which have been provided extended payment
terms or other financing assistance. Slips in timing of purchases, or changes in
the amount of purchases by one or more of these customers, or the customer's
slowness or inability to raise capital to properly fund their network buildouts,
could have a material adverse effect on our results of operations and relative
to investor expectations.
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<PAGE> 18
OUR GROWTH DEPENDS ON DEMAND FOR BANDWIDTH WHICH WE CANNOT PREDICT OR CONTROL
We are uncertain whether we can accurately anticipate changes in
direction or magnitude of demand for bandwidth. Unanticipated reductions in
demand would adversely affect our profitability. Depending on the size of the
gap between actual demand, reduced demand, and investor expectation of demand,
we could experience changes in our stock price, irrespective of our overall
competitive position and long term prospects.
Most of our products enable high capacity transmission over long
distance, and some of our products, the MultiWave Firefly and MultiWave Metro,
enable high capacity transmission over certain short-haul portions of optical
communications networks. Our Core Director switching products are targeted to
high capacity applications. Our customers and target customers, however,
determine:
- the quantity of bandwidth needed
- the timing of its deployment, and
- the equipment configurations and network architectures they want.
Some carriers believe the deployment of large-scale bandwidth quickly is
a competitive advantage. As a result, these carriers engage in prompt and
widespread deployment of high capacity systems. Other carriers have adopted a
wait-and-see approach, which dictates a more gradual deployment of higher
capacity systems. New carriers sometimes try to combine these viewpoints. They
favor rapid and widespread installation of the foundational elements of high
capacity systems, but employ pricing and other supply agreement features which
allow them to delay broader deployment until necessary. Carriers' views in this
regard 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, and carriers' willingness to aggressively lower
their charges for services as a means of accelerating consumption of the higher
bandwidth. These views are also subject to abrupt change as our customers
respond to their own competitive pressures as well as pressures to raise capital
and meet financial performance expectations.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. As CIENA has grown and matured, competitors' efforts to entice our
employees to leave have intensified, particularly among competitive startups and
other early stage companies seeking to replicate CIENA's experience. CIENA and
its employees are parties to agreements that limit the employee's ability to
work for a competitor following termination of employment. We expect our
competitors will respect these agreements and not interfere with them. But we
can make no assurances of that, or that we will be able to retain all of our key
contributors or attract new personnel 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 DEPEND ON AN UNUSUALLY SMALL NUMBER OF SUPPLIERS FOR KEY COMPONENTS FOR OUR
PRODUCTS
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, the MultiWave Sentry which is capable of 96-channel
configurations, includes several higher performance components for which
reliable, high volume suppliers are particularly limited. On occasion, we have
experienced delays in receipt of key components. Any future difficulty in
obtaining sufficient and timely delivery of them could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations. Uniphase
Corporation and JDS FITEL, Inc., both of which are significant suppliers to
CIENA, recently announced a planned merger. If this merger and related
integration activities result in delayed deliveries of key components from
either of these sources, those delays could have a material adverse effect on
CIENA's near-term results of operations.
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<PAGE> 19
OUR NEW PRODUCTS COULD EXPERIENCE OCCASIONAL PROBLEMS AS THEIR TECHNOLOGY AND
MANUFACTURING METHODS MATURE
The production of new fiberoptic systems with high technology content
involves occasional problems as the technology and manufacturing methods mature.
We are aware of instances domestically and internationally, of delayed
installation and activation of some of our products due to faulty components. If
recurring or material reliability, quality or network monitoring problems should
develop, a number of material and adverse effects could result. Those effects
include:
- - 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 we maintain accruals for product warranties, we cannot make any
assurances that actual costs will not exceed these amounts. The pace at which
the customer requires upgrades from 16 to 40 to higher channel count products
can further complicate our assessment of appropriate product warranty reserves.
From time to time, we expect to experience 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. In the
event we experience significant interruptions or delays that we can not promptly
identify, diagnose and resolve, confidence in our products could be undermined.
Undermined confidence in our products would have a material adverse effect on
our customer relationships, business, financial condition and results of
operations.
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND NEW COMPANIES COULD RESULT IN MORE
COMPETITION
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. Our ability to anticipate
changes in technology, industry standards, customer requirements and product
offerings, and to develop and introduce new and enhanced products will impact
our ability to remain the leader in the deployment of open architecture DWDM
products and other high-capacity solutions. We cannot make any assurances that
we will succeed in doing so.
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. We have 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. New companies may
provide additional competition as to CIENA'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 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.
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OUR STOCK PRICE MAY EXHIBIT VOLATILITY
Our common stock price has experienced substantial volatility in the
past, and is likely to remain volatile in the future. Volatility can arise as a
result of the activities of short sellers and risk arbitrageurs, and may have
little relationship to our financial results or prospects. Volatility can also
result from any divergence between our actual or anticipated financial results
and published expectations of analysts, and announcements we may make. This
occurred in 1998. We attempt to address this possible divergence through our
public announcements and reports; however, the degree of specificity we can
offer in such announcements, and the likelihood that any forward-looking
statements we make will prove correct in actual results, can and will vary. This
is due primarily to:
- - the uncertainties associated with our dependence on a small number of
existing and potential customers
- - the impact of changes in the customer mix
- - the actions of competitors
- - long and unpredictable sales cycles and customer purchasing programs
- - the absence of unconditional minimum purchase commitments from any
customer
- - a lack of visibility into our customers' deployment plans over the course
of the capital equipment procurement year, and
- - the lack of reliable data on which to anticipate core demand for high
bandwidth transmission capacity
Divergence will likely occur from time to time in the future, with
resulting stock price volatility, irrespective of our overall year-to-year
performance or long-term prospects. As long as we continue to depend on
relatively few customers, and particularly when a substantial majority of their
purchases consist of newly-introduced products such as the 96-channel MultiWave
Sentry and MultiWave Metro, there is substantial risk of widely varying
quarterly results, including the so-called "missed quarter" relative to investor
expectations. See "Our Growth Depends on Demand for Bandwidth which We Cannot
Predict or Control".
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
In August 1998, shareholder class action lawsuits were filed against us
and certain of our officers and directors. We believe the lawsuits, now
consolidated into one, are without merit and are defending vigorously against
them. However, because the consolidated lawsuit is at an early stage, it is not
possible to predict the outcome at this time. If decided adversely to CIENA,
however, it could have a material adverse effect on our financial condition and
results of operations. See Part II, "Legal Proceedings" for a description of the
lawsuit and current state of the proceedings.
CERTAIN OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Certain of our component suppliers are both primary sources for such
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.
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<PAGE> 21
LIGHTERA AND OMNIA ACQUISITION RISK FACTORS
WE MAY NOT BE ABLE TO MANUFACTURE LIGHTERA AND OMNIA PRODUCTS SUCCESSFULLY
Both Lightera and Omnia's products are in the laboratory testing phase
but the products have not matured into commercially manufacturable units
suitable for field deployment. We expect that field deployable units of Omnia's
products will be available in the second half of calendar 1999, and Lightera's
products by the end of the first quarter of calendar 2000. The maturing process
from laboratory prototype to manufacturable units involves a number of steps,
including:
- - 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, and
- - establishment of systems integration and burn in requirements
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's, in particular, are key to the timely introduction of
Lightera's and Omnia's products, and schedule delays are common in the final
testing and manufacture of such components. In addition, unexpected intellectual
property disputes, failure of critical design elements, and a host of other
execution risks may delay or even prevent the introduction of these products.
WE MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES OF LIGHTERA AND OMNIA
Because of the high valuation we placed on Lightera and Omnia, their key
founders and employees have received or will receive a substantial number of
CIENA shares and can sell these shares at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before the products of either company have fully matured into commercially
deliverable products commanding reasonable market share. Additionally, startup
and other companies will seek out these individuals due to the financial result
they have achieved for their investors. Under the circumstances, we face a
difficult and significant task of retaining and motivating the key personnel of
both companies to stay committed to us. We do not have employment contracts with
these personnel. We may not be successful in retaining them.
THE SUCCESS OF OUR ACQUISITIONS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE
LIGHTERA, OMNIA, AND CIENA
Lightera is based in Cupertino, California and has approximately 69
employees; Omnia is based in Marlborough, Massachusetts and has approximately 70
employees; and CIENA is based in Linthicum, Maryland and has approximately 1,000
employees in Maryland (1,557 employees overall). We face the significant task of
efficiently integrating the people at these sites operationally and culturally,
while preserving the focus and momentum of their individual efforts. Our ability
to do so will be a key determiner of the success or failure of the acquisitions.
We have limited experience with this type of integration, and can make no
assurances that we will succeed in so doing.
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<PAGE> 22
WE MAY FACE GREATER COMPETITION AS A RESULT OF OUR ACQUISITIONS OF LIGHTERA AND
OMNIA
We expect the competitive response to our acquisitions to be intense and
wide-ranging, and more intensive than the competition we faced when we were more
narrowly focused on the DWDM transport sector of the market. Competitive
responses may include, among other things:
- - early announcement of new or different competing products
- - substantial price discounting
- - customer financing assistance
- - intellectual property disputes, and
- - packaged, "one-stop-shopping" deals combining next generation equipment
with legacy equipment and supplies
We can make no assurances that we will succeed against the kind of
tactics large competitors may employ.
WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE
We have historically experienced substantial stock price volatility. The
range of stock prices has not tracked with valuations based on traditional
price/earnings multiples, and takeover speculation appears to have been an
influence on the stock price at various times. However, both Lightera and Omnia
are still completing their respective development stages, and we do not expect
either of them to generate any revenue or earnings for at least several months.
As a result, we expect to report approximately breakeven results of operations,
and may report operating losses, for the balance of the fiscal year. Under these
circumstances, we can expect significant volatility over the next several
quarters as investors make judgments as to our relative progress in:
- - bringing the Lightera and Omnia products to market
- - integrating the two companies
- - managing retention issues, and
- - generally executing on the strategic vision.
Additionally, the shares issued to Lightera shareholders are likely to
become eligible for sale without restriction in June 1999 and the vast majority
of shares issued to Omnia shareholders are likely to become eligible for sale
without restriction in late August 1999. Together, these shares will account for
approximately 25% of the outstanding shares of CIENA. If a large portion of
these shares are sold immediately or soon after they are eligible for sale, 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 April 30, 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.
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<PAGE> 23
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 the CIENA's foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of April 30, 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 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 remain at an early stage. No discovery has been taken, and CIENA
moved on April 15, 1999 to dismiss the case in its entirety. No prediction can
be made as to the outcome of this motion or the case as a whole. CIENA believes
the suit is without merit and intends to defend itself vigorously. CIENA filed a
motion to dismiss the consolidated complaint on April 16, 1999. A hearing on the
motion is currently scheduled for July 16, 1999. There is no assurance the
motion will be successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended April 30, 1999, CIENA issued an aggregate of
17,546,016 shares of Common Stock to the shareholders of Lightera in exchange
for all of the outstanding shares of Lightera stock. These shares were not
registered in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Registration D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Registrant was held on March
10, 1999. At the annual meeting, the stockholders voted on the following
matters:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained Non-Votes
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Election of two Class 2 Directors
Harvey B. Cash 83,389,344 656,854
Michael J. Zak 83,345,376 700,822
To ratify the selection of
PricewaterhouseCoopers LLP as
independent public accounts for
the corporation 83,707,936 228,830 113,432 -
</TABLE>
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<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description
10.19 Lightera 1998 stock option plan and form of stock
option agreement
27.0 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K : Form 8-K filed April 1, 1999, April 5, 1999
and Form 8-K/A filed April 5, 1999
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<PAGE> 25
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: May 21, 1998 By: /s/ Patrick H. Nettles
----------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: May 21, 1998 By: /s/ Joseph R. Chinnici
------------ ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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<PAGE> 1
Exhibit 10.19
LIGHTERA NETWORKS, INC.
1998 STOCK PLAN
(Adopted March 17, 1998)
(Amended May 11, 1998)
(Amended August 27, 1998)
1. PURPOSES OF THE PLAN. The purposes of this 1998 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) and (b) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Lightera Networks, Inc., a Delaware
corporation.
(g) "CONSULTANT" means any person, including an advisor,
who is engaged by the Company or any Parent or Subsidiary to render services and
is compensated for such services, and any director of the Company whether
compensated for such services or not.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT"
means the absence of any interruption or termination of service as an Employee
or Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its
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<PAGE> 2
Subsidiaries or their respective successors. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute an interruption of Continuous Status as an Employee or
Consultant.
(i) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company, with the status of employment determined based upon such minimum number
of hours or periods worked as shall be determined by the Administrator in its
discretion, subject to any requirements of the Code. The payment by the Company
of a director's fee to a director shall not be sufficient to constitute
"employment" of such director by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written Option Agreement.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(n) "OPTION" means a stock option granted pursuant to the Plan.
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<PAGE> 3
(o) "OPTION AGREEMENT" means a written agreement between an
Optionee and the Company reflecting the terms of an Option granted under the
Plan and includes any documents attached to such Option Agreement, including,
but not limited to, a notice of stock option grant and a form of exercise
notice.
(p) "OPTIONED STOCK" means the Common Stock subject to an
Option or a Stock Purchase Right.
(q) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(r) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
(s) "PLAN" means this 1998 Stock Plan.
(t) "REPORTING PERSON" means an officer, director, or greater
than 10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(u) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(v) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written
agreement between a holder of a Stock Purchase Right and the Company
reflecting the terms of a Stock Purchase Right granted under the Plan and
includes any documents attached to such agreement.
(w) "RULE 16b-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(x) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "STOCK EXCHANGE" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(z) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 10 below.
(aa) "SUBSIDIARY" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 5,648,251 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any
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<PAGE> 4
reason without having been exercised in full, the unpurchased Shares that were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. In addition, any Shares of Common
Stock which are retained by the Company upon exercise of an Option or Stock
Purchase Right in order to satisfy the exercise or purchase price for such
Option or Stock Purchase Right or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan. Shares repurchased by the Company pursuant to any repurchase right
which the Company may have shall not be available for future grant under the
Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon
which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a Committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE
COMPANY BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS.
With respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a Committee designated by the Board to make grants to Reporting Persons
under the Plan, which Committee shall be constituted in such a manner as to
permit grants under the Plan to comply with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
make grants to Reporting Persons under the Plan, all to the extent permitted by
Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of Incentive Stock Option plans, if
any, of applicable corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution
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<PAGE> 5
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any Stock Exchange, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights or any combination thereof may from time to
time be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(ix) to determine the terms and restrictions applicable
to Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options or Stock Purchase Rights
to participants who are foreign nationals or employed outside of the United
States in order to recognize differences in local law, tax policies or customs.
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<PAGE> 6
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has been
granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the
Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or
Stock Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated
in the Option Agreement; provided, however, that the term shall be no more than
ten years from the date of grant thereof or such shorter term as may be provided
in the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
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<PAGE> 7
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board and set forth in the applicable agreement, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than 10%
of the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the
grant of such Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under
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<PAGE> 8
the Applicable Laws. In making its determination as to the type of consideration
to accept, the Administrator shall consider if acceptance of such consideration
may be reasonably expected to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or performance criteria with respect to the
Company and/or the Optionee; provided, however, that such Option shall become
exercisable at the rate of at least 20% per year over five years from the date
the Option is granted. In the event that any of the Shares issued upon exercise
of an Option should be subject to a right of repurchase in the Company's favor,
such repurchase right shall lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer, director or Consultant of the Company
or any Parent or Subsidiary of the Company, the Option may become fully
exercisable, and a repurchase right, if any, in favor of the Company shall
lapse, at any time or during any period established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP.
Subject to Section 9(c) below, in the event of termination of an Optionee's
Continuous Status as an Employee or Consultant with the Company, such Optionee
may, but only within three months (or such other period of time not less than 30
days as is determined by the Administrator, with such determination in the case
of an Incentive Stock Option being made at the time of grant of the Option and
not exceeding three months) after the date of such
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termination (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise his or her Option to the
extent that the Optionee was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate. No termination shall be deemed to occur and this Section
9(b) shall not apply if (i) the Optionee is a Consultant who becomes an
Employee, or (ii) the Optionee is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability which
does not fall within the meaning of total and permanent disability (as set forth
in Section 22(e)(3) of the Code), such Optionee may, but only within six months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three months of the date of such termination, the Option
will not qualify for ISO treatment under the Code. To the extent that the
Optionee was not entitled to exercise the Option at the date of termination, or
if the Optionee does not exercise such Option to the extent so entitled within
six months from the date of termination, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
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(e) RULE 16b-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
for Plan transactions.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer), and the time within which such person must accept such
offer, which shall in no event exceed 30 days from the date upon which the
Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that with respect to an Optionee
who is not an officer, director or Consultant of the Company or of any Parent or
Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in
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this paragraph. When an Optionee incurs tax liability in connection with an
Option or Stock Purchase Right, which tax liability is subject to tax
withholding under applicable tax laws, and the Optionee is obligated to pay the
Company an amount required to be withheld under applicable tax laws, the
Optionee may satisfy the withholding tax obligation by one or some combination
of the following methods: (a) by cash or check payment, or (b) out of the
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than the Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon
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cancellation or expiration of an Option or Stock Purchase Right, as well as the
price per share of Common Stock covered by each such outstanding Option or Stock
Purchase Right, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
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 of Common Stock subject to an Option or Stock
Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the Company
with or into another corporation where the successor corporation issues its
securities to the Company's stockholders, each outstanding Option or Stock
Purchase Right shall be assumed or an equivalent option or right shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the successor corporation does not agree to assume
the Option or Stock Purchase Right or to substitute an equivalent option or
right, in which case such Option or Stock Purchase Right shall terminate upon
the consummation of the merger or sale of assets. For purposes of this Section
12(c), an Option or a Stock Purchase Right shall be considered assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
such merger or sale of assets, each holder of an Option or a Stock Purchase
Right would be entitled to receive upon exercise of the Option or Stock Purchase
Right the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of such transaction if the holder had been, immediately
prior to such transaction, the holder of the number of Shares of Common Stock
covered by the Option or the Stock Purchase Right at such time (after giving
effect to any adjustments in the number of Shares covered by the Option or Stock
Purchase Right as provided for in this Section 12).
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
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13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall adversely affect Options already granted, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
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17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced
by written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in the
degree and manner required under applicable state and federal law and the rules
of any Stock Exchange upon which the Common Stock is listed. All Options and
Stock Purchase Rights issued under the Plan shall become void in the event such
approval is not obtained.
20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. The Company
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares Pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and any
agreement(s) pursuant to which securities granted under the Plan are issued.
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<PAGE> 15
LIGHTERA NETWORKS, INC.
1998 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
<<Optionee>>
<<OptioneeAddress1>>
<<OptioneeAddress2>>
You have been granted an option to purchase Common Stock "Common Stock"
of Lightera Networks, Inc. (the "Company") as follows:
Board Approval Date: February 22, 1999
Date of Grant: February 22, 1999
Vesting Commencement Date: <<VCD>>
Exercise Price per Share: $13.75
Total Number of Shares Granted: <<NoofShares>>
Total Exercise Price: $<<TotalExercisePrice>>
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: February 22, 2009
Vesting Schedule: This Option may be exercised, in
whole or in part, in accordance with
the following schedule: 1/4th of the
Shares subject to the Option shall
vest on the one year anniversary of
the Vesting Commencement Date (the
"VCD") and 1/48th of the total number
of Shares subject to the Option shall
vest on the each monthly anniversary
of the VCD thereafter as long as the
Optionee remains an employee of, or
consultant to, the Company.
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Termination Period: This Option may be exercised for 60
days after termination of employment
or consulting relationship except as
set out in Sections 6 and 7 of the
Stock Option Agreement (but in no
event later than the Expiration
Date).
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the 1998 Stock Plan and the Stock Option
Agreement, both of which are attached and made a part of this document.
<<OPTIONEE>>: LIGHTERA NETWORKS, INC.
By:
- ----------------------------------- -----------------------------------
Signature
- ----------------------------------- -----------------------------------
Print Name Print Name and Title
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<PAGE> 17
Exhibit 10.19
LIGHTERA NETWORKS, INC.
1998 STOCK PLAN
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. Lightera Networks, Inc., a Delaware corporation
(the "Company"), hereby grants to <<Optionee>> ("Optionee"), an option (the
"Option") to purchase a total number of shares of Common Stock (the "Shares")
set forth in the Notice of Stock Option Grant, at the exercise price per share
set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to
the terms, definitions and provisions of the Lightera Networks, Inc. 1998 Stock
Plan (the "Plan") adopted by the Company, which is incorporated herein by
reference. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to
qualify as an Incentive Stock Option as defined in Section 422 of the Code.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
Term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Section 9 of the Plan as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a
share.
(ii) In the event of Optionee's death, disability or
other termination of employment, the exercisability of the Option is governed by
Sections 5, 6 and 7 below, subject to the limitation contained in Section
2(a)(i).
(iii) In no event may this Option be exercised after the
Expiration Date of this Option as set forth in the Notice of Stock Option Grant.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
execution and delivery of the Exercise Notice and Restricted Stock Purchase
Agreement attached hereto as Exhibit A (the "Exercise Agreement") or of any
other form of written notice approved for such purpose by the Company which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
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No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of
applicable law and the requirements of any stock exchange upon which the Shares
may then be listed. Assuming such compliance, for income tax purposes the Shares
shall be considered transferred to Optionee on the date on which the Option is
exercised with respect to such Shares.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination thereof, at the election of Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company
which (i) in the case of Shares acquired pursuant to the exercise of a Company
option, have been owned by Optionee for more than six months on the date of
surrender, and (ii) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) if there is a public market for the Shares and they are
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds required to pay the Exercise Price.
4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
such time as the Plan has been approved by the stockholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
5. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "Termination
Date"), exercise this Option during the Termination Period set forth in the
Notice of Stock Option Grant. To the extent that Optionee was not entitled to
exercise this Option at such Termination Date, or if Optionee does not exercise
this Option within the Termination Period, the Option shall terminate.
6. DISABILITY OF OPTIONEE.
(a) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's Continuous Status as an Employee or
Consultant as a result of Optionee's total and permanent disability (as defined
in Section 22(e)(3) of the Code), Optionee may, but only within twelve months
from the Termination Date (but in no event
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<PAGE> 19
later than the Expiration Date set forth in the Notice of Stock Option Grant),
exercise this Option to the extent Optionee was entitled to exercise it as of
such Termination Date. To the extent that Optionee was not entitled to exercise
the Option as of the Termination Date, or if Optionee does not exercise such
Option (to the extent so entitled) within the time specified in this Section
6(a), the Option shall terminate.
(b) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's consulting relationship or Continuous Status
as an Employee as a result of disability not constituting a total and permanent
disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but
only within six months from the Termination Date (but in no event later than the
Expiration Date set forth in the Notice of Stock Option Grant), exercise the
Option to the extent Optionee was entitled to exercise it as of such Termination
Date; provided, however, that if this is an Incentive Stock Option and Optionee
fails to exercise this Incentive Stock Option within three months from the
Termination Date, this Option will cease to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the Exercise
Price for the Shares and the Fair Market Value of the Shares on the date of
exercise. To the extent that Optionee was not entitled to exercise the Option at
the Termination Date, or if Optionee does not exercise such Option to the extent
so entitled within the time specified in this Section 6(b), the Option shall
terminate.
7. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the Term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, or (b) within 30 days after Optionee's
Termination Date, the Option may be exercised at any time within six months
following the date of death (but in no event later than the Expiration Date set
forth in the Notice of Stock Option Grant), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the Termination
Date.
8. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by him or her. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
9. TERM OF OPTION. This Option may be exercised only within the Term
set forth in the Notice of Stock Option Grant, subject to the limitations set
forth in Section 7 of the Plan.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A
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<PAGE> 20
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option
qualifies as an Incentive Stock Option, there will be no regular federal or
California income tax liability upon the exercise of the Option, although the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price will be treated as an adjustment to the alternative
minimum tax for federal tax purposes and may subject Optionee to the alternative
minimum tax in the year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does
not qualify as an Incentive Stock Option, there may be a regular federal income
tax liability and a California income tax liability upon the exercise of the
Option. Optionee will be treated as having received compensation income (taxable
at ordinary income tax rates) equal to the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price. If Optionee
is an employee, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
(c) DISPOSITION OF SHARES. In the case of a Nonstatutory Stock
Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an Incentive Stock Option, if
Shares transferred pursuant to the Option are held for at least one year after
exercise and are disposed of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and California income tax purposes. In either case, the
long-term capital gain will be taxed for federal income tax and alternative
minimum tax purposes at a maximum rate of 28% if the Shares are held more than
one year but less than 18 months after exercise and at 20% if the Shares are
held more than 18 months after exercise. If Shares purchased under an Incentive
Stock Option are disposed of within one year after exercise or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the fair market
value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
(d) NOTICE OF DISQUALIFYING DISPOSITION OF INCENTIVE STOCK
OPTION SHARES. If the Option granted to Optionee herein is an Incentive Stock
Option, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to the Incentive Stock Option on or before the later of (i)
the date two years after the Date of Grant, or (ii) the date one year after the
date of exercise, Optionee shall immediately notify the Company in writing of
such disposition. Optionee acknowledges and agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
by Optionee from the early disposition by payment in cash or out of the current
earnings paid to Optionee.
-46-
<PAGE> 21
11. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the Exercise Price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Exchange Act. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation, or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income. Additionally, Optionee may at some point be required to
satisfy tax withholding obligations with respect to the disqualifying
disposition of an Incentive Stock Option. Optionee shall satisfy his or her tax
withholding obligation arising upon the exercise of this Option by one or some
combination of the following methods: (a) by cash payment, (b) out of Optionee's
current compensation, (c) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares which (i) in the case of Shares previously
acquired from the Company, have been owned by Optionee for more than six months
on the date of surrender, and (ii) have a Fair Market Value on the date of
surrender equal to or greater than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value equal to the amount required to be withheld. For this
purpose, the Fair Market Value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").
If Optionee is subject to Section 16 of the Exchange Act (an "Insider"),
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3").
All elections by Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
-47-
<PAGE> 22
12. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as may be requested by
the Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the
Company's initial public offering.
[Signature Page Follows]
-48-
<PAGE> 23
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
document.
LIGHTERA NETWORKS, INC.
By:
--------------------------------
--------------------------------
(Print name and title)
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated:
--------------------------- ---------------------------
<<Optionee>>
-49-
<PAGE> 24
EXHIBIT A
LIGHTERA NETWORKS, INC.
1998 STOCK PLAN
EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement ("Agreement") is made as of ______________, by and between
Lightera Networks, Inc., a Delaware corporation (the "Company"), and
<<Optionee>> ("Purchaser"). To the extent any capitalized terms used in this
Agreement are not defined, they shall have the meaning ascribed to them in the
Lightera Networks, Inc. 1998 Stock Plan.
1. EXERCISE OF OPTION. Subject to the terms and conditions hereof,
Purchaser hereby elects to exercise his or her option to purchase __________
shares of the Common Stock (the "Shares") of the Company under and pursuant to
the Company's 1998 Stock Plan (the "Plan") and the Stock Option Agreement dated
______________, (the "Option Agreement"). The total purchase price of the Shares
shall be $_______________. The term "Shares" refers to the purchased Shares and
all securities received in replacement of the Shares or as stock dividends or
splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Purchaser is
entitled by reason of Purchaser's ownership of the Shares.
2. TIME AND PLACE OF EXERCISE. The purchase and sale of the Shares
under this Agreement shall occur at the principal office of the Company
simultaneously with the execution and delivery of this Agreement in accordance
with the provisions of Section 2(b) of the Option Agreement. On such date, the
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the exercise price therefor by Purchaser by (a) check made payable to
the Company, (b) cancellation of indebtedness of the Company to Purchaser, (c)
delivery of shares of the Common Stock of the Company in accordance with Section
3 of the Option Agreement, or (d) a combination of the foregoing.
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser
or any transferee of Purchaser (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 3(a) (the "Right of First Refusal").
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "Notice") stating: (i)
the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii)
the name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the terms and conditions of each proposed sale or transfer. The
<PAGE> 25
Holder shall offer the Shares at the same price (the "Offered Price") and upon
the same terms (or terms as similar as reasonably possible) to the Company or
its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time
within 30 days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price ("Purchase
Price") for the Shares purchased by the Company or its assignee(s) under this
Section 3(a) shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(iv) PAYMENT. Payment of the Purchase Price shall be
made, at the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section
3(a), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 3 shall continue to apply
to the Shares in the hands of such Proposed Transferee. If the Shares described
in the Notice are not transferred to the Proposed Transferee within such period,
or if the Holder proposes to change the price or other terms to make them more
favorable to the Proposed Transferee, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to
the contrary contained in this Section 3(a) notwithstanding, the transfer of any
or all of the Shares during Purchaser's lifetime or on Purchaser's death by will
or intestacy to Purchaser's Immediate Family (as defined below) or a trust for
the benefit of Purchaser's Immediate Family shall be exempt from the provisions
of this Section 3(a). "Immediate Family" as used herein shall mean spouse,
lineal descendant or antecedent, father, mother, brother or sister. In such
case, the transferee or other recipient shall receive and hold the Shares so
transferred subject to the provisions of this Section, and there shall be no
further transfer of such Shares except in accordance with the terms of this
Section 3.
51
<PAGE> 26
(b) INVOLUNTARY TRANSFER.
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY
TRANSFER. In the event, at any time after the date of this Agreement, of any
transfer by operation of law or other involuntary transfer (including death or
divorce, but excluding a transfer to Immediate Family as set forth in Section
3(a)(vi) above) of all or a portion of the Shares by the record holder thereof,
the Company shall have an option to purchase all of the Shares transferred at
the greater of the purchase price paid by Purchaser pursuant to this Agreement
or the Fair Market Value of the Shares on the date of transfer. Upon such a
transfer, the person acquiring the Shares shall promptly notify the Secretary of
the Company of such transfer. The right to purchase such Shares shall be
provided to the Company for a period of 30 days following receipt by the Company
of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any
stock to be transferred pursuant to Section 3(b)(i), the price per Share shall
be a price set by the Board of Directors of the Company that will reflect the
current value of the stock in terms of present earnings and future prospects of
the Company. The Company shall notify Purchaser or his or her executor of the
price so determined within 30 days after receipt by it of written notice of the
transfer or proposed transfer of Shares. However, if the Purchaser does not
agree with the valuation as determined by the Board of Directors of the Company,
the Purchaser shall be entitled to have the valuation determined by an
independent appraiser to be mutually agreed upon by the Company and the
Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(c) ASSIGNMENT. The right of the Company to purchase any part
of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the Company or other persons or organizations; provided,
however, that an assignee, other than a corporation that is the Parent or a 100%
owned Subsidiary of the Company, must pay the Company, upon assignment of such
right, cash equal to the difference between the original purchase price and Fair
Market Value, if the original purchase price is less than the Fair Market Value
of the Shares subject to the assignment.
(d) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement. Any sale or transfer of the
Company's Shares shall be void unless the provisions of this Agreement are
satisfied.
(e) TERMINATION OF RIGHTS. The Right of First Refusal granted
the Company by Section 3(a) above and the option to repurchase the Shares in the
event of an involuntary transfer granted the Company by Section 3(b) above shall
terminate upon the first sale of Common Stock of the Company to the general
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"). Upon termination of the Right of First Refusal
described in Section 3(a) above, a new certificate or certificates representing
the Shares not repurchased shall be issued, on request, without the legend
referred to in Section 6(a)(ii) herein and delivered to Purchaser.
52
<PAGE> 27
4. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
Purchaser is purchasing these securities for investment for his or her own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act.
(b) Purchaser understands that the securities have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Purchaser must hold the Shares indefinitely unless they
are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection with the purchase or disposition of the Shares and
that Purchaser is not relying on the Company for any tax advice.
5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing the
Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE, DISTRIBUTION OR
OTHER DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO FOR
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE
53
<PAGE> 28
TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Agreement or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in
any manner whatsoever the right or power of the Company, or a Parent or
Subsidiary of the Company, to terminate Purchaser's employment or consulting
relationship, for any reason, with or without cause.
7. MARKET STAND-OFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the Company's
initial public offering.
8. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement,
54
<PAGE> 29
(ii) the balance of the Agreement shall be interpreted as if such provision were
so excluded and (iii) the balance of the Agreement shall be enforceable in
accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient when delivered personally or
sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
(h) California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
55
<PAGE> 30
The parties have executed this Exercise Notice and Restricted Stock
Purchase Agreement as of the date first set forth above.
COMPANY:
LIGHTERA NETWORKS, INC.
By:
------------------------------------------
Name:
----------------------------------------
(print)
Title:
----------------------------------------
Address:
10201 Bubb Road
Cupertino CA 95014
PURCHASER:
<<OPTIONEE>>
---------------------------------------------
(Signature)
---------------------------------------------
(Print Name)
Address:
---------------------------------------------
---------------------------------------------
I, ______________________, spouse of <<Optionee>>, have read and hereby approve
the foregoing Agreement. In consideration of the Company's granting my spouse
the right to purchase the Shares as set forth in the Agreement, I hereby agree
to be bound irrevocably by the Agreement and further agree that any community
property or similar interest that I may have in the Shares shall hereby be
similarly bound by the Agreement. I hereby appoint my spouse as my
attorney-in-fact with respect to any amendment or exercise of any rights under
the Agreement.
------------------------------------------
Spouse of <<Optionee>>
56
<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 April 30, 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> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 194,920
<SECURITIES> 100,021
<RECEIVABLES> 97,648
<ALLOWANCES> 1,200
<INVENTORY> 54,062
<CURRENT-ASSETS> 468,580
<PP&E> 189,984
<DEPRECIATION> 62,899
<TOTAL-ASSETS> 614,848
<CURRENT-LIABILITIES> 76,128
<BONDS> 0
0
0
<COMMON> 1,213
<OTHER-SE> 497,224
<TOTAL-LIABILITY-AND-EQUITY> 614,848
<SALES> 111,490
<TOTAL-REVENUES> 111,490
<CGS> 71,238
<TOTAL-COSTS> 71,238
<OTHER-EXPENSES> 41,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 2,458
<INCOME-TAX> 864
<INCOME-CONTINUING> 1,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,594
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
