<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, 2000
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 18, 2000
------------------------------- ---------------------------
Common stock. $0.01 par value 141,226,221
Page 1 of 26 pages
CIENA CORPORATION
<PAGE> 2
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
quarters and six months ended April 30, 1999
and April 30, 2000 3
Consolidated Balance Sheets
October 31, 1999 and April 30, 2000 4
Consolidated Statements of Cash Flows
six months ended April 30, 1999 and
April 30, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- ---------------------------
April 30, April 30, April 30, April 30,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 111,490 $ 185,679 $ 211,907 $ 337,892
Cost of goods sold 71,238 104,205 137,016 191,208
--------- --------- --------- ---------
Gross profit 40,252 81,474 74,891 146,684
--------- --------- --------- ---------
Operating expenses:
Research and development 24,094 29,965 46,312 59,707
Selling and marketing 13,092 20,331 26,700 38,453
General and administrative 5,849 7,176 10,885 14,047
Merger costs 2,253 - 2,253 -
--------- --------- --------- ---------
Total operating expenses 45,288 57,472 86,150 112,207
--------- --------- --------- ---------
Income (loss) from operations (5,036) 24,002 (11,259) 34,477
Interest and other income (expense), net 3,698 3,357 7,094 6,403
Interest expense (115) (89) (210) (185)
--------- --------- --------- ---------
Income (loss) before income taxes (1,453) 27,270 (4,375) 40,695
Provision (benefit) for income taxes (468) 8,863 (1,509) 13,226
--------- --------- --------- ---------
Net income (loss) $ (985) $ 18,407 $ (2,866) $ 27,469
========= ========= ========= =========
Basic net income (loss) per common share $ (0.01) $ 0.13 $ (0.02) $ 0.20
========= ========= ========= =========
Diluted net income (loss) per common share
and dilutive potential common share $ (0.01) $ 0.12 $ (0.02) $ 0.18
========= ========= ========= =========
Weighted average basic common shares
outstanding 132,530 140,081 132,041 139,300
========= ========= ========= =========
Weighted average basic common and
dilutive potential common shares
outstanding 132,530 149,563 132,041 148,977
========= ========= ========= =========
</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 AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, April 30,
1999 2000
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 143,440 $ 90,004
Marketable debt securities 118,956 147,137
Accounts receivable, net 144,348 197,771
Inventories, net 79,608 107,566
Deferred income taxes 25,385 26,605
Prepaid income taxes - 15,735
Prepaid expenses and other 21,262 31,502
--------- ---------
Total current assets 532,999 616,320
Equipment, furniture and fixtures, net 125,252 146,109
Goodwill and other intangible assets, net 12,635 10,817
Other assets 6,949 7,588
--------- ---------
Total assets $ 677,835 $ 780,834
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,399 $ 42,629
Accrued liabilities 58,486 78,446
Income taxes payable 8,697 -
Deferred revenue 2,954 1,294
Other current obligations 992 722
--------- ---------
Total current liabilities 105,528 123,091
Deferred income taxes 36,953 36,953
Other long-term obligations 4,881 5,002
--------- ---------
Total liabilities 147,362 165,046
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $0.01; 20,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock - par value $0.01; 460,000,000 shares authorized;
138,187,356 and 141,165,194 shares issued and outstanding 1,382 1,412
Additional paid-in capital 360,082 417,855
Notes receivable from stockholders (210) (31)
Accumulated other comprehensive income (40) (176)
Retained earnings 169,259 196,728
--------- ---------
Total stockholders' equity 530,473 615,788
--------- ---------
Total liabilities and stockholders' equity $ 677,835 $ 780,834
========= =========
</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,
--------------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,866) $ 27,469
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash charges from equity transactions 262 20
Amortization of premiums on marketable debt securities 87 -
Effect of translation adjustments 128 (136)
Depreciation and amortization 23,580 28,432
Provision for doubtful accounts - 250
Provision for inventory excess and obsolescence 2,533 7,483
Provision for warranty and other contractual obligations 4,617 5,830
Changes in assets and liabilities:
Increase in accounts receivable (10,976) (53,673)
Decrease (increase) in inventories 14,190 (35,441)
Decrease (increase) in deferred income tax asset 2,907 (1,220)
Decrease (increase) in prepaid income tax 11,688 (15,735)
Increase in prepaid expenses and other (5,245) (10,842)
Increase in accounts payable and accruals 369 22,360
Increase (decrease) in income taxes payable 4,457 (8,697)
Increase in deferred income tax liability 2,455 -
Decrease in deferred revenue and other obligations (365) (1,660)
--------- ---------
Net cash provided (used) by operating activities 47,821 (35,560)
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (24,668) (47,471)
Purchases of marketable debt securities (118,277) (172,263)
Maturities of marketable debt securities 34,249 144,045
--------- ---------
Net cash used in investing activities (108,696) (75,689)
--------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations 1,738 (149)
Proceeds for issuance of common stock and warrants 5,188 19,088
Tax benefit related to exercise of stock options 3,796 38,695
Repayment of notes receivable from stockholders 92 179
--------- ---------
Net cash provided by financing activities 10,814 57,813
--------- ---------
Net decrease in cash and cash equivalents (50,061) (53,436)
Cash and cash equivalents at beginning of period 250,714 143,440
--------- ---------
Cash and cash equivalents at end of period $ 200,653 $ 90,004
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation
(the "Company") have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, financial statements included in this report reflect all
normal recurring adjustments which the Company considers necessary for the fair
presentation of the results of operations for the interim periods covered and of
the financial position of the Company at the date of the interim balance sheet.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
understand the information presented. The operating results for interim periods
are not necessarily indicative of the operating results for the entire year.
These financial statements should be read in conjunction with the Company's
October 31, 1999 audited consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report for the fiscal year ended
October 31, 1999.
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is reasonably assured. 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 sold to the end user.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 as amended by SFAS
No. 137 will be effective for the Company's fiscal year ending October 31, 2001.
The Company believes the adoption of SFAS No. 133 will not have a material
effect on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the Securities and Exchange Commission's view on revenue
recognition. CIENA believes its existing revenue recognition policies and
procedures are generally in compliance with SAB 101 and therefore, SAB 101's
adoption will have no material impact on CIENA's financial condition, results of
operations or cash flows.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25
"Accounting for Stock Issued to Employees." The effective date of the
interpretation is July 1, 2000. The provisions of the interpretation will apply
prospectively, but it will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The Company believes the adoption of FIN.
44 will not have an effect on the current or historical consolidated financial
statements, but may impact its future accounting regarding stock option
transactions.
6
<PAGE> 7
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, April 30,
1999 2000
--------- ---------
<S> <C> <C>
Raw materials $ 49,298 $ 60,805
Work-in-process 16,386 26,455
Finished goods 26,369 35,194
--------- ---------
92,053 122,454
Less reserve for excess and obsolescence (12,445) (14,888)
--------- ---------
$ 79,608 $ 107,566
========= =========
</TABLE>
(3) EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of
the basic net income per common share ("basic EPS") and diluted net income per
common and dilutive potential common share ("diluted EPS"). Basic EPS is
computed using the weighted average number of common shares outstanding. Diluted
EPS is computed using the weighted average number of common shares outstanding,
stock options and warrants using the treasury stock method (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Quarter ended April 30,
---------------------------
1999 2000
------------ --------
<S> <C> <C>
Net income (loss)......................... $ (985) $ 18,407
============ ========
Weighted average shares-basic............. 132,530 140,081
------------ --------
Effect of dilutive securities:
Employee stock options and warrants - 9,482
------------ --------
Weighted average shares-diluted........... 132,530 149,563
============ ========
Basic EPS................................. $ (0.01) $ 0.13
============ ========
Diluted EPS............................... $ ( 0.01) $ 0.12
============ ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended April 30,
----------------------------
1999 2000
------------ ---------
<S> <C> <C>
Net income (loss) .................. $ (2,866) $ 27,469
============ ========
Weighted average shares-basic ...... 132,041 139,300
------------ --------
Effect of dilutive securities:
Employee stock options ........ - 9,677
------------ --------
Weighted average shares-diluted 132,041 148,977
============ ========
Basic EPS .......................... $ ( 0.02) $ 0.20
============ ========
Diluted EPS ........................ $ ( 0.02) $ 0.18
============ ========
</TABLE>
Stock options to purchase 298,500 and 196,657 shares of common stock were
outstanding during the quarters ended April 30, 1999 and April 30, 2000,
respectively, but were not included in the computation of diluted EPS as the
effect would be anti-dilutive. In addition, stock options to purchase 258,316
and 133,840 shares of common stock were outstanding during the six months ended
April 30, 1999 and April 30, 2000, respectively, but were not included in the
computation of diluted EPS as the effect would be anti-dilutive.
7
<PAGE> 8
(4) COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter ended April 30, Six months ended April 30,
------------------------- ------------------------------
1999 2000 1999 2000
------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (985) $ 18,407 $ (2,866) $ 27,469
Change in accumulated translation adjustments 129 (174) 128 (136)
------------------------- ------------------------------
Total comprehensive income (loss) $ (856) $ 18,233 $ (2,738) $ 27,333
========================= ==============================
</TABLE>
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 in its Form 10-K Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors," as filed with the Securities and Exchange Commission
on December 10, 1999, a detailed statement of risks and uncertainties relating
to the Company's business. In addition, set forth below under the heading "Risk
Factors" is a further discussion of certain of those risks as they relate to the
period covered by this report, the Company's near-term outlook with respect
thereto, and the forward-looking statements set forth herein. Investors should
review this quarterly report in combination with the Form 10-K in order to have
a more complete understanding of the principal risks associated with an
investment in the Company's Common Stock.
OVERVIEW
CIENA is a leader in the rapidly emerging optical networking equipment
market. We offer a comprehensive portfolio of products for communications
service providers worldwide. Our customers include long-distance carriers,
competitive local exchange carriers, Internet service providers and wholesale
carriers. We offer optical transport, intelligent switching and multi-service
delivery systems that enable service providers to provision, manage and deliver
high-bandwidth services to their customers. We have pursued a strategy to
develop and leverage the power of disruptive technologies to change the
fundamental economics of building carrier-class communications networks,
providing our customers with a competitive advantage.
8
<PAGE> 9
During fiscal 1999 CIENA announced its LightWorks(TM) Initiative. CIENA's
LightWorks is an optical networking architecture designed to change the
fundamental economics of building service provider networks. LightWorks focuses
on the three critical areas of optical networking: optical transport, core
switching and service delivery. The products in CIENA's LightWorks combine the
functionality of several current network elements into a single network element,
thereby lowering the capital equipment requirements of a service provider and
simplifying the network, in order to reduce a carrier's network operating costs.
The products of CIENA's LightWorks architecture can be sold together as a
complete network solution or separately as best-of-breed solutions. Products
include four generations of long distance optical transport systems: MultiWave
1600(TM), MultiWave Sentry 1600(TM), MultiWave Sentry 4000(TM), and MultiWave
CoreStream(TM). LightWorks also includes CIENA's short distance optical
transport products: MultiWave Firefly(TM) and MultiWave Metro(TM). CIENA's
LightWorks architecture also includes the MultiWave EdgeDirector 500(TM), a
multi-service transport platform, which enables carriers to efficiently
transport voice and data services over a single integrated fiber access and
interoffice network and the MultiWave CoreDirector(TM) product. The MultiWave
CoreDirector is on intelligent optical core switch that allows carriers to
deliver a full range of transport services, without costly SONET/SDH
(synchronous optical networks/synchronous digital hierarchy) multiplexers or
inflexible "wavelength only" devices. We expect that units of the MultiWave
CoreDirector will be generally available in the second half of calendar 2000.
See "Risk Factors".
In November 1999, CIENA announced it was pursuing enhancements to its
MultiWave CoreStream product that will enable the system to offer the optimal
combination of ultra long-distance transport functionality and channel count to
further lower network costs for service providers. Using forward error
correction (FEC), nonlinearity management, and dispersion mapping technologies,
plus embedded system intelligence, MultiWave CoreStream will be able to support
optical spans longer than 5,000 kilometers without additional
optical-to-electrical signal regeneration. We expect to begin customer trials
with these features of this product in the second half of calendar 2000. See
"Risk Factors".
During January 2000, CIENA announced the LightWorks Toolkit(TM) for
Optical Services, a series of new optics-, silicon- and software-based service
enablers. CIENA's LightWorks Toolkit will assist carriers with the transition
from static service provisioning to real-time, on demand bandwidth delivery;
from bandwidths limited by traditional SONET/SDH to optical bandwidth of any
size; and from a single wavelength quality of service to a range of service
qualities that can be dynamically configured and monitored. These
service-enabling tools, including Wavelength Binding, Flexible Concatenation,
and VSR Optics, are scheduled to be integrated into CIENA's LightWorks products
in the second half of calendar 2000. See "Risk Factors".
During May 2000, CIENA announced the introduction of its newest
intelligent optical core switching product, MultiWave CoreDirector CI, an entry
version of CIENA's market-leading MultiWave CoreDirector switch. MultiWave
CoreDirector CI is designed to offer network operators all the intelligence,
real-time provisioning, dynamic network protection, and comprehensive network
management capabilities of MultiWave CoreDirector, but the CI model is optimized
for smaller central offices predominant in regional and metropolitan portions of
service provider networks. The initial release of MultiWave CoreDirector CI is
expected in limited availability for customer trials during the fourth quarter
of calendar 2000. See "Risk Factors".
During May 2000, CIENA announced the launch of its LightWorks
ON-Center(TM) Management Suite, a new fully integrated family of software-based
tools for comprehensive element, network and service layer management across
service provider networks. ON-Center is designed to enable accelerated
deployment of new, differentiating optical services, reduced network operating
and management costs, and innovative customer service solutions. The ON-Center
management suite is designed to help service providers use the built-in
networking intelligence of CIENA's LightWorks Toolkit for Optical Services and
network architecture to enable real-time service deployment, dynamic service
level agreement (SLA) management, multi-vendor optical service monitoring, full
Fault, Configuration, Accounting, Performance and Security (FCAPS) management
across CIENA systems, and Web-based customer service awareness tools. The
initial release of ON-Center is expected to be available by the end of calendar
2000.
CIENA has increased the number of optical networking equipment customers
from a total of sixteen customers during the six months ended April 30, 1999 to
twenty-seven customers for the six months ended April 30, 2000. We intend to
preserve and enhance our market leadership and eventually build on our installed
base with new and additional products. CIENA believes that its product and
service quality, manufacturing experience, and proven track record of delivery
will enable us to endure competitive pricing pressure while we concentrate on
efforts to reduce product costs and maximize production efficiencies. See "Risk
Factors".
As of April 30, 2000 CIENA employed 2,230 people, which was a net
increase of 302 persons over the 1,928 employed on October 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 2000
REVENUE. CIENA recognized $111.5 million and $185.7 million in revenue
for the second quarters ended April 30, 1999 and 2000, respectively. The
approximate $74.2 million or 66.5% increase in revenues in the second quarter
2000 compared to the second quarter 1999 was the result of an increase in
revenues recognized from twenty-two optical
9
<PAGE> 10
networking customers in the quarter ended April 30, 2000, as compared to
fourteen such customers in the same quarter of the prior year. Additionally,
during the quarter ended April 30, 2000, two optical transport equipment
customers each accounted for 10% or more of CIENA's quarterly revenue and
combined accounted for 63.0% of CIENA's quarterly revenue. This compares to the
quarter ended April 30, 1999, where three customers accounted for 10% or more of
our quarterly revenue and combined accounted for approximately 72.0% of our
quarterly revenue. Revenues derived from foreign sales accounted for
approximately 27.8% and 28.1% of our revenues during the second quarters ended
April 30, 1999 and 2000, respectively. The increase in foreign sales reflects an
increase in sales to new and existing customers.
Revenues during CIENA's second quarter 2000 were largely attributed to
sales of MultiWave CoreStream, MultiWave Sentry 4000 and MultiWave Sentry 1600
long distance optical transport systems. This compares to CIENA's second quarter
1999 revenues, which were largely attributed to sales of CIENA's MultiWave
Sentry 4000 and MultiWave Sentry 1600 systems. MultiWave CoreStream systems were
not available for sale in CIENA's second quarter 1999. Second quarter 2000
revenues also included sales of MultiWave Metro systems which also were not
available for sale during CIENA's second quarter 1999. Revenues derived from
engineering, furnishing and installation services decreased as a percentage of
total revenue from approximately 12.7% to 9.2% of the Company's revenues in the
second quarter ended April 30, 1999 compared to the second quarter ended
April 30, 2000, respectively.
We expect revenues in the near term to be largely dependent upon sales to
several existing customers and to be largely derived from continued sales of the
MultiWave CoreStream, MultiWave Sentry 4000 and MultiWave Metro. There are
material risks associated with our dependence on these customers, as well as
the successful ramping up of manufacturing of these products. See "Risk
Factors".
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to CIENA's
manufacturing and engineering, furnishing and installation operations. Gross
profits were $40.3 million and $81.5 million for the second quarters ended April
30, 1999 and 2000, respectively. The approximate $41.2 million or 102.4%
increase in gross profit in the second quarter 2000 compared to the second
quarter 1999 was the result of increased revenues and improved gross margins in
the second quarter 2000 compared to second quarter 1999. Gross margin as a
percentage of revenues was 36.1% and 43.9% for the second quarters 1999 and
2000, respectively. The increase in gross margins for the second quarter 2000
compared to the second quarter 1999 was largely attributable to reductions in
product costs and an increase in production efficiencies partially offset by
aggressive price competition resulting in lower selling prices for optical
transport systems.
Our 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 2000, we
expect 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
$24.1 million and $30.0 million for the second quarters ended April 30, 1999 and
2000, respectively. During the second quarters 1999 and 2000, research and
development expenses were 21.6% and 16.1% of revenue, respectively. The
approximate $5.9 million or 24.4% increase in research and development expenses
in the second quarter 2000 compared to the second quarter 1999 was the result of
increases in staffing levels, utilization of outside consultants, facility costs
and depreciation expense. We expect that our research and development
expenditures will continue to increase during the remainder of fiscal year 2000
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. We expense
research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $13.1
million and $20.3 million for the second quarters ended April 30, 1999 and 2000,
respectively. During the second quarters 1999 and 2000, selling and marketing
expenses were 11.7% and 10.9% of revenue, respectively. The approximate $7.2
million or 55.3% increase in selling and marketing expenses in the second
quarter 2000 compared to the second quarter 1999 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 to the comparable quarter to quarter selling and marketing
expense increase. We anticipate that our selling and marketing expenses will
increase during the remainder of fiscal year 2000 as additional personnel are
hired and offices are opened, particularly in support of international market
development, to allow us to pursue new market opportunities.
10
<PAGE> 11
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.8 million and $7.2 million for the second quarters ended April 30, 1999
and 2000, respectively. During the second quarters 1999 and 2000, general and
administrative expenses were 5.2% and 3.9% of revenue, respectively. The
approximate $1.3 million or 22.7% increase in general and administrative
expenses from the second quarter 1999 compared to the second quarter 2000 was
primarily the result of increased staffing levels, outside consulting services
and facility costs. We believe that our general and administrative expenses for
the remainder of fiscal 2000 will increase due to the expansion of our
administrative staff required to support our expanding operations.
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.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $3.7 million and $3.4 million for the second quarters
ended April 30, 1999 and 2000, respectively. The approximate $0.3 million or
9.2% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision (benefit) for
income taxes were $(0.5) million and $8.9 million for the second quarters ended
April 30, 1999 and 2000, respectively. During the second quarters 1999 and 2000,
the provision (benefit) for income taxes were 32.2% and 32.5% of income (loss)
before income taxes, respectively.
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO SIX MONTHS ENDED APRIL 30, 2000
REVENUE. CIENA recognized $211.9 million and $337.9 million in revenue
for the six months ended April 30, 1999 and 2000, respectively. The approximate
$126.0 million or 59.5% increase in revenues in the six months ended April 30,
2000 compared to the six months ended April 30, 1999 was the result of an
increase in revenues recognized from twenty-seven optical networking customers
in the six months ended April 30, 2000, as compared to sixteen such customers in
the same period of the prior year. Additionally, during the six months ended
April 30, 2000, three optical transport equipment customers each accounted for
10% or more of CIENA's revenue and combined accounted for 54.0% of CIENA's
revenue. This compares to the six months ended April 30, 1999 where two
customers accounted for 10% or more of CIENA's revenue and combined accounted
for approximately 53.2% of CIENA's revenue. Revenues derived from foreign sales
accounted for approximately 34.5% and 34.4% of CIENA's revenues during the six
months ended April 30, 1999 and 2000, respectively. The increase in foreign
sales in absolute dollars reflects an increase in sales to new and existing
customers.
Revenues during CIENA's six months ended April 30, 2000 were largely
attributed to sales of MultiWave CoreStream, MultiWave Sentry 4000 and MultiWave
Sentry 1600 systems. This compares to CIENA's six months ended April 30, 1999
revenues, which were largely attributed to sales of CIENA's MultiWave Sentry
4000 and MultiWave Sentry 1600 systems. MultiWave CoreStream systems were not
available for sale during CIENA's six months ended April 30, 1999. Revenues
during the six month period ended April 30, 2000 also included sales of
MultiWave Metro systems which also were not available for sale during CIENA's
same period of the prior year. Revenues derived from engineering, furnishing and
installation services decreased as a percentage of total revenue from
approximately 12.2% to 9.4% of CIENA's revenues from the six months ended April
30, 1999 compared to the six months ended April 30, 2000, respectively.
GROSS PROFIT. Gross profits were $74.9 million and $146.7 million for the
six months ended April 30, 1999 and 2000, respectively. The approximate $71.8
million or 95.9% increase in gross profit in the first six months of 2000
compared to the first six months of 1999 was the result of increased revenues
and improved gross margins during the first six months of 2000. Gross margin as
a percentage of revenues was 35.3% and 43.4% for the first six months of 1999
and 2000, respectively. The increase in gross margins during the first six
months of 2000 compared to the first six months of 1999 was largely attributable
to reductions in product costs and an increase in production efficiencies
partially offset by aggressive price competition resulting in 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 2000, 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
$46.3 million and $59.7 million for the six months ended April 30, 1999 and
2000, respectively. During the first six months of 1999 and 2000, research and
development expenses were 21.9% and 17.7% of revenue, respectively. The
approximate $13.4 million or 28.9%
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increase in research and development expenses in the first six months of 2000
compared to the first six months of 1999 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 $26.7
million and $38.5 million for the six months ended April 30, 1999 and 2000,
respectively. During the first six months of 1999 and 2000, selling and
marketing expenses were 12.6% and 11.4% of revenue, respectively. The
approximate $11.8 million or 44.0% increase in selling and marketing expenses in
the first six months of 2000 compared to the first six months of 1999 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 $10.9 million and $14.0 million for the six months ended April 30, 1999 and
2000, respectively. During the first six months of 1999 and 2000, general and
administrative expenses were 5.1% and 4.2% of revenue, respectively. The
approximate $3.2 million or 29.0% increase in general and administrative
expenses in the first six months of 2000 compared to the first six months of
1999 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.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $7.1 million and $6.4 million for the six months
ended April 30, 1999 and 2000, respectively. The approximate $0.6 million or
9.7% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision (benefit) for
income taxes were $(1.5) million and $13.2 million for the six months ended
April 30, 1999 and 2000, respectively. During the first six months of 1999 and
2000, the provision for income taxes were 34.5% and 32.5% of income before
income taxes, respectively. The decline in the income tax rate in the first six
months of 2000 compared to 1999 was the result of 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, 2000, CIENA's principal source of liquidity was its cash and
cash equivalents of $90.0 million and its marketable debt securities of $147.1
million. CIENA's marketable debt securities have maturities no longer than six
months.
Cash generated from operations was $47.8 million for the six months ended
April 30, 1999. Cash used by operations was $35.6 million for the six months
ended April 30, 2000. The reduction of cash generated from operations was
approximately $83.4 million from the first six months of 1999 compared to the
first six months of 2000. The decline was principally attributable to increases
in accounts receivable, inventories, prepaid taxes and a decrease in income
taxes payable due to increases in revenue and general business activity. These
were partially offset by increases in the non-cash charges of depreciation,
amortization, provisions for inventory obsolescence and warranty, and increases
in accounts payable and net income.
Investment activities included the net purchase of $84.0 million and
$28.2 million worth of corporate debt securities and U.S. government obligations
during the six months ended April 30, 1999 and 2000, respectively. Investment
activities also included $24.7 million and $47.5 million invested in capital
expenditures during the six months ended April 30, 1999 and 2000, respectively.
Of the amount invested in capital expenditures, $21.6 million and $40.7 million
was used for additions to capital equipment and furniture and the remaining $2.4
million and $6.8 million was invested in leasehold improvements during the six
months ended April 30, 1999 and 2000, respectively. CIENA expects to use an
additional $80.0 million to $90.0 million of capital during the remainder of
fiscal 2000 to complete the construction of leasehold improvements for its
facilities and additional investments in capital equipment.
Cash generated from financing activities for the six months ended April
30, 1999 and 2000 was $10.8 million and $57.8 million, respectively. Included in
the financing activities was cash generated from the exercise of employee stock
options of $5.2 million and $19.1 million for the six months ended April 30,
1999 and April 30, 2000, respectively. The tax benefit related
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to the exercise of stock options generated $3.8 million and $38.7 million for
the six months ended April 30, 1999 and April 30, 2000, respectively.
We believe that our 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.
RISK FACTORS
OUR REVENUE AND OPERATING RESULTS CAN BE UNPREDICTABLE
Our ability to recognize revenue during a quarter from a customer depends
upon our ability to ship product and satisfy other contractual obligations of a
customer sale in that quarter. In general, revenue and operating results in any
reporting period may fluctuate due to factors including:
- loss of a customer;
- the timing and size of orders from customers;
- changes in customers' requirements, including changes to
orders from customers;
- the introduction of new products by us or our competitors;
- changes in the price or availability of components for our
products;
- readiness of customer sites for installation;
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- satisfaction of contractual customer acceptance criteria and
related revenue recognition issues;
- manufacturing and shipment delays and deferrals; and
- increased service or warranty costs.
Our optical networking products require a relatively large investment and
our target customers are highly demanding and technically sophisticated. There
are only a limited number of potential customers in each geographic market and
each customer has unique needs. As a result, the sales cycles for our products
are long, often more than a year between our initial contact with the customer
and their commitment to purchase.
We budget expense levels on our expectations of long-term future revenue.
These budgets reflect our substantial investment in the financial, engineering,
manufacturing and logistics support resources we think we may need for large
potential customers, even though we do not know the volume, duration or timing
of any purchases from them. In addition, we make a substantial investment in
financial and engineering resources for the development of new and enhanced
products. As a result, we may continue to experience high inventory levels,
operating expenses and general overhead.
We have experienced rapid expansion in all areas of our operations,
particularly in the manufacturing of our products. Our future operating results
will depend on our ability to continue to expand our manufacturing facilities in
a timely manner so that we can satisfy our delivery commitments to our
customers. Our failure to expand these facilities in a timely manner and meet
our customer delivery commitments would harm our business, financial condition
and results of operations.
Our Core Switching Division and Access Systems Division are incurring
ongoing development and operating expenses and are not expected to contribute
materially to our revenues until at least the second half of calendar 2000. Any
delay in the contributions of new products by these divisions could harm our
business.
CHANGES IN TECHNOLOGY OR THE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT
OUR NEAR TERM PROSPECTS
The market for optical networking equipment is changing at a rapid pace.
The accelerated pace of deregulation in the telecommunications industry likely
will intensify the competition for improved technology. Our ability to develop,
introduce and manufacture new and enhanced products will depend upon our ability
to anticipate changes in technology, industry standards and customer
requirements. Our failure to deploy new and enhanced products in a timely
manner, could harm our competitive position and financial condition. Several of
our new products, including the MultiWave CoreDirector and the MultiWave
CoreStream products, are based on complex technology which could result in
unanticipated delays in the development, manufacturing or deployment of these
products. In addition, our ability to recognize revenue from these products
could be adversely affected by the extensive testing required for these
products. The complexity of technology associated with support equipment for
these products could result in unanticipated delays in their deployment. These
delays could harm our competitive and financial condition.
The introduction of new products embodying new technologies, a change in
the requirements of our customers, or the emergence of new industry standards
could delay or hinder the purchase and deployment of our products and could
render our existing products obsolete, unmarketable or uncompetitive from a
pricing standpoint. The long certification process for new telecommunications
equipment used in the networks of the regional Bell operating companies,
referred to as RBOCs, has in the past resulted in and may continue to result in
unanticipated delays which may affect the deployment of our products for the
RBOC market.
Any delays in component availability for any of our products or test
equipment could result in delays in deployment of these products and in our
ability to recognize revenue from such products. These delays could harm our
customer relationships and our results of operations.
WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
The market for optical networking equipment is extremely competitive.
Competition in the optical networking market is based on varying combinations of
price, functionality, software functionality, manufacturing capability,
scalability and the ability of the system solution to meet customers' immediate
and future network requirements. A small number of very large companies,
including Alcatel, Cisco Systems (including the DWDM business acquired from
Pirelli), Fujitsu Group, Hitachi, Lucent Technologies, NEC Corporation, Nortel
Networks, Siemens AG and Telefon AB LM Ericsson, have historically dominated the
telecommunications equipment industry. These companies have substantial
financial, marketing, manufacturing and intellectual property resources. In
addition, these companies have substantially greater resources to develop or
acquire new technologies than we do. We sell systems that compete directly with
product offerings of these
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companies and in some cases displace or replace equipment they have
traditionally supplied for telecommunications networks. As such, we represent a
specific threat to these companies. The continued expansion of our product
offerings with products such as the MultiWave CoreDirector and MultiWave
EdgeDirector likely will increase this perceived threat. We expect continued
aggressive tactics from many of these competitors, including:
- substantial price discounting;
- early announcements of competing products and other marketing
efforts;
- "one-stop shopping" appeals;
- customer financing assistance; and
- intellectual property disputes.
These tactics can be particularly effective in a highly concentrated
customer base such as ours. Our customers are under increasing competitive
pressure to deliver their services at the lowest possible cost. This pressure
may result in pricing for optical networking systems becoming a more important
factor in customer decisions, which may favor larger competitors that can spread
the effect of price discounts in their optical networking product lines across a
larger array of products and services and across a larger customer base than
ours. Our inability to compete successfully against our competitors would harm
our business.
Several of our customers have indicated that they intend to establish a
second vendor for optical transport products. We do not know when or if these
customers will select a second vendor or what impact the selection might have on
purchases from us. These customers could reduce their purchases from us, which
could in turn have a material adverse effect on us.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding for new
companies focused on the development of new products for the optical networking
market. These companies may achieve commercial availability of their products
more quickly due to the narrow and exclusive focus of their efforts. They may
also in some cases offer stock in their companies to attract new customers. In
particular, a number of companies, including several start-up companies, have
announced products that compete with our MultiWave CoreStream, MultiWave Metro,
MultiWave CoreDirector and MultiWave EdgeDirector products.
WE MAY NOT BE ABLE TO COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL ACCEPTANCE OF
NEW PRODUCTS
Our MultiWave CoreDirector is in the customer trials phase. We expect
that units of the MultiWave CoreDirector will be generally available in the
second half of calendar 2000. Enhancements to the MultiWave CoreStream product
to offer ultra long-distance transport functionality and our MultiWave
CoreDirector CI product are in the development phase and are not yet ready for
commercial manufacturing or deployment. We expect to begin customer trials of
the ultra long-distance features of our MultiWave CoreStream product in the end
of the third quarter of fiscal 2000. We expect to begin customer trials of our
MultiWave CoreDirector CI product in the fourth calendar quarter of 2000. The
maturing process from laboratory prototype to customer trials, and subsequently
to general availability involves a number of steps, including:
- completion of product development;
- the qualification and multiple sourcing of critical components,
including application-specific integrated circuits, referred to as
ASICs;
- validation of manufacturing methods and processes;
- extensive quality assurance and reliability testing, and staffing
of testing infrastructure;
- validation of embedded software validation;
- establishment of systems integration and systems test validation
requirements; and
- identification and qualification of component suppliers.
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could decrease the
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speed and scope of product introduction and marketplace acceptance of the
products. Specialized ASICs and intensive embedded software testing and
validation, in particular, are key to the timely introduction of the MultiWave
CoreDirector, and schedule delays are common in the final validation phase, as
well as in the manufacture of specialized ASICs. 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. If we do not develop these products in a timely manner, our business,
financial condition and results of operations would be harmed.
The markets for our MultiWave CoreDirector and MultiWave CoreDirector CI
products are relatively new. We have not established commercial acceptance of
these products, and we cannot assure you that the substantial sales and
marketing efforts necessary to achieve commercial acceptance in traditionally
long sales cycles will be successful. If the markets for these products do not
develop or the products are not accepted by the market, our business, financial
condition and results of operations would suffer.
We are in the laboratory testing phase for the second release of our
MultiWave EdgeDirector product. This release expands upon the limited
functionality of the initial release of the MultiWave EdgeDirector and address
anticipated market requirements. Initial market reaction to the MultiWave
EdgeDirector have been disappointing. We can not assure you that we will
achieve market acceptance for the initial release or new release of the
MultiWave EdgeDirector or that we will be able to introduce future releases of
the MultiWave EdgeDirector in a timely manner. Our business, financial
condition and results of operations could be harmed if market acceptance of the
initial, new release, or future releases of the MultiWave EdgeDirector is
limited, or we are unable to develop future releases of the MultiWave
EdgeDirector.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE
SUBSTITUTE SUPPLIERS
We depend on a limited number of suppliers for components of our
products, as well as equipment used to manufacture and test our products. Our
highest capacity product currently being shipped, the MultiWave CoreStream,
includes several higher performance components for which reliable, high volume
suppliers are particularly limited. Furthermore, certain key optical and
electronic components we use in our optical transport systems are currently
available only from sole sources, and in some cases, that sole source is also a
competitor. A worldwide shortage of some electrical components has caused an
increase in the price of components.
On occasion, we have experienced delays in receipt of components. In
addition, we may receive components that do not perform according to their
specifications. Any future difficulty in obtaining sufficient and timely
delivery of these components could result in delays or reductions in product
shipments which, in turn, could harms our business. A recent wave of
consolidation among suppliers of these components, such as the recent purchase
of E-TEK by JDS Uniphase, could adversely impact the availability of components
on which we depend. Delayed deliveries of key components from these sources
could adversely effect our business.
SOME OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Some of our component suppliers are both primary sources for components
and major competitors in the market for system equipment. For example, we buy
components from:
- Alcatel;
- Lucent Technologies;
- NEC Corporation;
- Nortel Networks; and
- Siemens AG.
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 harm our business.
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SALES TO SMALLER CUSTOMERS MAY INCREASE THE UNPREDICTABILITY OF OUR RESULTS
As we continue to address smaller emerging carriers, timing and volume of
purchasing from these carriers can also be more unpredictable due to factors
such as their need to build a customer base, acquire rights of way and
interconnections necessary to sell network service, and build out new capacity,
all while working within their capital budget constraints. Sales to these
carriers may increase the unpredictability of our financial results because even
these smaller carriers purchase our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. A portion of our anticipated revenue over the
next several quarters is comprised of orders of less than $25 million each from
several customers, some of which involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
these carriers will depend on the relative financial condition of the specific
customer, among other factors. Further, we will need to evaluate the
collectibility of receivables from these customers if their financial condition
deteriorates in the future. Purchasing delays, changes in the financial
condition or the amount of purchases by any of these customers, could have a
material adverse effect on us.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new optical networking products and systems with high
technology content involves occasional problems as the technology and
manufacturing methods mature. We are aware of instances of delayed installation
and activation of some of our products due to faulty components. If significant
reliability, quality or network monitoring problems develop, a number of
negative effects on our business could result, including:
- costs associated with reworking our manufacturing processes;
- high service and warranty expense;
- high levels of product returns;
- delays in collecting accounts receivable;
- reduced orders from existing customers; and
- declining interest from potential customers.
Although we maintain accruals for product warranties, actual costs could
exceed these amounts. From time to time, there will be interruptions or delays
in the activation of our products and the addition of channels, particularly
because we do not control all aspects of the installation and activation
activities. If we experience significant interruptions or delays that we can not
promptly resolve, confidence in our products could be undermined, which could
harm our business.
OUR PROSPECTS DEPEND ON DEMAND FOR OUR PRODUCTS WHICH WE CANNOT PREDICT OR
CONTROL
We may not anticipate changes in direction or magnitude of demand for our
products. Unanticipated reductions or increases in demand for our products could
adversely affect us.
Our products enable high capacity transmission over long distance, and
certain short-haul portions, of optical communications networks. Our MultiWave
CoreDirector product is targeted at high capacity applications and our MultiWave
EdgeDirector product is targeted to providers of integrated fiber optic access
and transport networks. Customers, however, determine:
- the quantity of bandwidth needed;
- the timing of its deployment; and
- the equipment configurations and network architectures they want.
Customer determinations are subject to abrupt changes in response to
their own competitive pressures, capital requirements and financial performance
expectations. These changes could harm our business.
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Recently we have experienced an increased level of sales activity that
could lead to an upsurge in demand that is reflected in the overall increase in
demand for optical networking and similar products in the telecommunications
industry. Our results may suffer if we are unable to address this demand
adequately by successfully scaling up our manufacturing capacity and hiring
additional qualified personnel. To date we have largely depended on our own
manufacturing and assembly facilities to meet customer expectations, but we
cannot be sure that we can satisfy our customers' expectations in all cases by
internal capabilities. In that case, we face the challenge of adequately
managing customer expectations and finding alternative means of meeting them.
If we fail to manage these expectations we could lose customers or receive
smaller orders from customers.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. Our key founders and employees, together with the key founders and
employees of acquired companies have received a substantial number of our shares
and vested options that can be sold at substantial gains. In many cases, these
individuals could become financially independent through these sales, before our
future products have matured into commercially deliverable products. These
circumstances may make it difficult to retain and motivate these key personnel.
As we have grown and matured, competitors' efforts to hire our employees
have intensified, particularly among competitive start-up companies and other
early stage companies. We have agreements in place with our employees that limit
their ability to work for a competitor and prohibit them from soliciting our
other employees and our customers following termination of their employment. Our
employees and our competitors may not respect these agreements. We have in the
past been required to enforce, and are currently in the process of enforcing,
some of these agreements. We expect in the future to continue to be required to
resort to legal actions to enforce these agreements and could incur substantial
costs in doing so. We may not be successful in these legal actions, and we may
not be able to retain all of our key employees or attract new personnel to add
to or replace them. The loss of key personnel would likely harm our business.
OUR ABILITY TO COMPETE COULD BE HARMED IF WE ARE UNABLE TO PROTECT AND ENFORCE
OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE INFRINGE ON INTELLECTUAL PROPERTY
RIGHTS OF OTHERS
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into non-disclosure and proprietary rights agreements with our
employees and consultants, and license agreements with our corporate partners,
and control access to and distribution of our products, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring unauthorized use of our products is difficult
and we cannot be certain that the steps we have taken will prevent unauthorized
use of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. If competitors
are able to use our technology, our ability to compete effectively could be
harmed.
We have received and may receive in the future, notices from holders of
patents in the optical technology field that raise issues to possible
infringement by our products. Questions of infringement in the optical
networking equipment market involve highly technical and subjective analysis.
There can be no assurance that any such patent holders or others will not in
the future initiate legal proceedings against us, or if any such proceedings
were initiated, we would be successful in defending against these actions.
PART OF OUR STRATEGY INVOLVES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE
SUCCESSFUL
As part of our strategy for growth, we will consider acquiring businesses
that are intended to accelerate our product and service development processes
and add complementary products and services. We may issue equity or incur debt
to finance these acquisitions. Acquisitions involve a number of operational
risks, including risks that the acquired business will not be successfully
integrated, may distract management attention and may involve unforeseen costs
and liabilities.
OUR STOCK PRICE MAY BE VOLATILE
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
divergence may result from a variety of factors, including:
- the uncertainties associated with our dependence on a small number
of existing and potential customers;
- the impact of changes in the customer mix;
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- the actions of our 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
our products.
Divergence between our actual results and our anticipated results,
analyst estimates and our public announcements 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 a limited customer base, and particularly when a substantial
majority of their purchases consist of newly-introduced products like the
MultiWave CoreStream, MultiWave EdgeDirector and MultiWave Metro, there is
substantial risk that our quarterly results will vary widely.
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS
On February 3, 2000, some of our shareholders filed an amended complaint
in a class action lawsuit against us. The suit relates to our unsuccessful
merger with Tellabs Inc. The suit alleges that we and certain of our officers
and directors violated provisions of the federal securities laws by making
false statements, failing to disclose material information and taking other
actions intending to artificially inflate and maintain the market price of our
common stock during the period from May 21, 1998 to September 14, 1998. On May
15, 2000, this lawsuit was dismissed with prejudice although the plaintiffs
have a right to appeal. We believe this suit is without merit, however if we do
not prevail, it could harm our financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2000,
the fair value of the portfolio would decline by approximately $2.5 million. The
Company has the ability to hold its fixed income investments until maturity, and
therefore the Company would not expect its operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union began during the Company's fiscal year 1999. The foreign
currency exposure resulting from the introduction of the Euro has been
immaterial to the operating results of the Company. The Company is prepared to
hedge against fluctuations in the Euro if this exposure becomes material. As of
April 30, 2000 the assets and liabilities of the Company related to non-dollar
denominated currencies was not material. Therefore we do not expect an increase
or decrease of 10 percent in the foreign exchange rate would have a material
impact on the Company's financial position.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS(NEED UPDATE)
CLASS ACTION LITIGATION
On May 15, 2000, the U.S. District Court for the District of Maryland
dismissed with prejudice the class action lawsuit entitled Witkin et al. v.
CIENA Corporation et al. (Case No. Y-98-2946).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Registrant was held on March
16, 2000. 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 3 Directors
Stephen P. Bradley, Ph.D 103,650,839 - - 6,555,772
Gerald H. Taylor 103,463,191 - - 6,743,420
The following directors continue to hold office
after that meeting: Patrick H. Nettles, Ph.D.,
Harvey B. Cash, Michael J. Zak and John R. Dillon.
To approve the CIENA Corporation Third Amended and Restated
1994 Stock Option Plan 34,420,776 44,355,351 317,164 -
To amend the Corportaion's Third Restated Certificate of
Incorporation to increase the number of shares of Common
Stock authorized for issuance thereunder from 360 million
shares to 460 million shares 108,317,988 1,754,636 133,987 -
To ratify the selection of PricewaterhouseCoopers LLP as
independent public accounts for the corporation 110,032,754 103,621 70,236 -
</TABLE>
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit Description
------- -----------
<S> <C>
3.5 Certificate of Amendment to Third Restated Certificate of
Incorporation dated March 23, 1998
3.6 Certificate of Amendment to Third Restated Certificate of
Incorporation dated March 16, 2000
27.0 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
Reports on Form 8-K: No reports on Form 8-K were filed during the period.
21
<PAGE> 22
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 18, 2000 By: /s/ Patrick H. Nettles
----------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: May 18, 2000 By: /s/ Joseph R. Chinnici
------------ ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 1
Exhibit 3.5
CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
CIENA CORPORATION
It is hereby certified that:
1. The name of the corporation is CIENA Corporation (hereinafter
called the "Corporation"). The Corporation was originally incorporated under the
name "Hydralite Incorporated", and the date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware is November 2, 1992. A Restated Certificate of
Incorporation was filed thereafter on April 8, 1994 (the "First Restated
Certificate"); a Second Restated Certificate was filed thereafter on December
20, 1994 (the "Second Restated Certificate of Incorporation"); a Third Restated
Certificate of Incorporation was filed thereafter on December 20, 1995 (the
"Third Restated Certificate of Incorporation"); and a Certificate of Amendment
to the Third Restated Certificate of Incorporation was filed thereafter on
December 9, 1996.
2. The board of directors of the Corporation, in a meeting of the
Board of Directors held on December 9, 1997, adopted a resolution declaring it
advisable that the Third Restated Certificate of Incorporation of the
Corporation be amended by striking out the first paragraph of Article Fourth
thereof and substituting in lieu thereof the following new paragraph:
"FOURTH: The Corporation shall have the authority to issue two (2)
classes of shares to be designated respectively "Preferred Stock"
and "Common Stock." The total number of shares of stock that the
Corporation shall have the authority to issue is Three Hundred
Eighty Million (380,000,000) shares of capital stock, par value
$0.01 per share. The total number of shares of Preferred Stock
that the Corporation shall have authority to issue is Twenty
Million (20,000,000), par value $0.01 per share. The total number
of shares of Common Stock which the Corporation shall have the
authority to issue is Three Hundred Sixty Million (360,000,000),
par value $0.01 per share."
3. The board of directors of the Corporation, in a meeting of the
Board of Directors held on December 9, 1997, has adopted a resolution directing
that the aforesaid amendment to the Third Restated Certificate of Incorporation
of the Corporation be presented to the stockholders of the Corporation at their
next annual meeting for their consideration.
4. Holders of the majority of the outstanding stock of the
Corporation entitled to vote thereon at the Annual Meeting of Stockholders held
on March 11, 1998 at 3:00 p.m. have approved and adopted the aforesaid amendment
to the Third Restated Certificate of Incorporation.
5. The aforesaid amendment to the certificate of Third Restated
Certificate of Incorporation was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, CIENA Corporation has caused this certificate to be
signed by Patrick H. Nettles, its President and Chief Executive Officer, this
13th day of March, 1998.
CIENA Corporation
By: /s/ PATRICK H. NETTLES
------------------------------------
Patrick H. Nettles
President and Chief Executive Officer
23
<PAGE> 1
Exhibit 3.6
CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
CIENA CORPORATION
It is hereby certified that:
1. The name of the corporation is CIENA Corporation (hereinafter
called the "Corporation"). The Corporation was originally incorporated under the
name "Hydralite Incorporated", and the date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware is November 2, 1992. A Restated Certificate of
Incorporation was filed thereafter on April 8, 1994 (the "First Restated
Certificate"); a Second Restated Certificate was filed thereafter on December
20, 1994 (the "Second Restated Certificate of Incorporation"); a Third Restated
Certificate of Incorporation was filed thereafter on December 20, 1995 (the
"Third Restated Certificate of Incorporation"); a Certificate of Amendment to
the Third Restated Certificate of Incorporation was filed thereafter on December
9, 1996; a Certificate of Designation was filed thereafter on January 12, 1998,
and a Certificate of Amendment to the Third Restated Certificate of
Incorporation was filed thereafter on March 13, 1998.
2. The board of directors of the Corporation, in a meeting of the
Board of Directors held on January 13, 2000, adopted a resolution declaring it
advisable that the Third Restated Certificate of Incorporation of the
Corporation be amended by striking out the first paragraph of Article Fourth
thereof and substituting in lieu thereof the following new paragraph:
"FOURTH: The Corporation shall have the authority to issue two (2)
classes of shares to be designated respectively "Preferred Stock"
and "Common Stock." The total number of shares of stock that the
Corporation shall have the authority to issue is Four Hundred
Eighty Million (480,000,000) shares of capital stock, par value
$0.01 per share. The total number of shares of Preferred Stock
that the Corporation shall have authority to issue is Twenty
Million (20,000,000), par value $0.01 per share. The total number
of shares of Common Stock which the Corporation shall have the
authority to issue is Four Hundred Sixty Million (460,000,000),
par value $0.01 per share."
3. The board of directors of the Corporation, in a meeting of the
Board of Directors held on January 13, 2000, has adopted a resolution directing
that the aforesaid amendment to the Third Restated Certificate of Incorporation
of the Corporation be presented to the stockholders of the Corporation at their
next annual meeting for their consideration.
4. Holders of the majority of the outstanding stock of the
Corporation entitled to vote thereon at the Annual Meeting of Stockholders held
on March 16, 2000 at 3:00 p.m. have approved and adopted the aforesaid amendment
to the Third Restated Certificate of Incorporation.
5. The aforesaid amendment to the certificate of Third Restated
Certificate of Incorporation was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, CIENA Corporation has caused this certificate to be
signed by Patrick H. Nettles, its President and Chief Executive Officer, this
______ th day of March, 2000.
CIENA Corporation
By: /s/ PATRICK H. NETTLES
------------------------------------
Patrick H. Nettles
President and Chief Executive Officer
24
<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, 2000, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> FEB-01-2000
<PERIOD-END> APR-30-2000
<CASH> 90,004
<SECURITIES> 147,137
<RECEIVABLES> 199,724
<ALLOWANCES> 1,953
<INVENTORY> 107,566
<CURRENT-ASSETS> 616,320
<PP&E> 260,843
<DEPRECIATION> 114,734
<TOTAL-ASSETS> 780,834
<CURRENT-LIABILITIES> 123,091
<BONDS> 0
0
0
<COMMON> 1,412
<OTHER-SE> 614,376
<TOTAL-LIABILITY-AND-EQUITY> 780,834
<SALES> 337,892
<TOTAL-REVENUES> 337,892
<CGS> 191,208
<TOTAL-COSTS> 191,208
<OTHER-EXPENSES> 112,207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> 40,695
<INCOME-TAX> 13,226
<INCOME-CONTINUING> 27,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,469
<EPS-BASIC> .20
<EPS-DILUTED> .18
</TABLE>
