CIENA CORP
8-K, 2001-01-18
TELEPHONE & TELEGRAPH APPARATUS
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<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934



                                January 18, 2001
                   -------------------------------------------
                Date of Report (Date of earliest event reported)



                                CIENA Corporation
                   -------------------------------------------
             (Exact name of registrant as specified in its charter)



          Delaware                   0-21969                23-2725311
-----------------------------------------------------------------------------
  (State or other jurisdiction      (Commission            (IRS Employer
       of incorporation)             File No.)           Identification No.)



                 1201 Winterson Road, Linthicum, Maryland 21090
                 -----------------------------------------------
               (Address of principal executive offices) (Zip Code)



               Registrant's telephone number, including area code:
                                 (410) 865-8500
                 -----------------------------------------------



                                 Not applicable
                 -----------------------------------------------
          (Former name or former address, if changed since last report)







<PAGE>   2



Item 5. Other Events.


        This current report on Form 8-K provides certain pro forma financial
information of CIENA Corporation (the "Company" or "CIENA") and Cyras Systems,
Inc. ("Cyras"), and certain historical financial information of Cyras in
connection with the proposed acquisition of Cyras by the Company, which was
announced on December 19, 2000. This information can also be found in the
Company's Registration Statement on Form S-4 (Registration No. 333-53146),
which was filed on January 3, 2001.



                                     - 2 -

<PAGE>   3

                  UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     The following unaudited pro forma combined financial data present the
effect of the pending merger between CIENA and Cyras to be accounted for as a
purchase. The unaudited pro forma combined balance sheet presents the combined
financial position of CIENA and Cyras as of October 31, 2000 assuming that the
proposed merger had occurred as of that date. Such pro forma information is
based upon the historical consolidated balance sheet data of CIENA as of October
31, 2000, and the historical balance sheet data of Cyras as of September 30,
2000. The unaudited pro forma combined statement of operations gives effect to
the pending merger of CIENA and Cyras for the year ended October 31, 2000, as if
such acquisition had occurred on November 1, 1999. This includes Cyras's
combined historical results for the three months ended December 31, 1999 and the
nine months ended September 30, 2000 with CIENA's historical consolidated
results for the year ended October 31, 2000.

     The unaudited pro forma combined financial data are based on the estimates
and assumptions set forth in the notes to such statements, which are preliminary
and have been made solely for purposes of developing such pro forma information.
The unaudited pro forma combined financial data are not necessarily an
indication of the results that would have been achieved had the transaction been
consummated as of the dates indicated or that may be achieved in the future.

     These selected unaudited pro forma combined financial data should be read
in conjunction with the unaudited pro forma combined financial data, the
historical consolidated financial statements and notes thereto of CIENA, and
other financial information pertaining to CIENA including "CIENA Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors" and the historical financial statements and notes thereto of
Cyras included in the other reports we file with the SEC.

                                     - 3 -
<PAGE>   4

                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                             AS OF OCTOBER 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   HISTORICAL                                 PRO FORMA
                                            ------------------------                          ----------
                                              CIENA          CYRAS        ADJUSTMENTS          COMBINED
                                            ----------      --------      -----------         ----------
<S>                                         <C>             <C>           <C>                 <C>
ASSETS
Current assets:
  Cash and cash equivalents...............  $  143,187      $162,515      $       --          $  305,702
  Marketable debt securities..............      95,131         6,374              --             101,505
  Accounts receivable, net................     248,950            --              --             248,950
  Inventories, net........................     141,279            --              --             141,279
  Deferred income taxes...................     143,029            --          24,737A            167,766
  Prepaid expenses and other..............      41,438         2,297              --              43,735
                                            ----------      --------      ----------          ----------
     Total current assets.................     813,014       171,186          24,737           1,008,937
Equipment, furniture and fixtures, net....     189,231         6,244              --             195,475
Goodwill and other intangible assets,
  net.....................................       9,049            --       1,638,742A          1,647,791
Deferred debt issuance costs..............          --         8,167              --               8,167
Other assets..............................      15,907           220              --              16,127
                                            ----------      --------      ----------          ----------
  Total assets............................  $1,027,201      $185,817      $1,663,479          $2,876,497
                                            ==========      ========      ==========          ==========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
  STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
  Accounts payable........................  $   70,250      $  5,833      $       --          $   76,083
  Accrued liabilities.....................      84,163         2,807          46,500A            133,470
  Income taxes payable....................       7,483            --              --               7,483
  Deferred revenue........................      10,731            --              --              10,731
  Other current obligations...............         712         1,754              --               2,466
                                            ----------      --------      ----------          ----------
     Total current liabilities............     173,339        10,394          46,500             230,233
  Convertible subordinated notes..........          --       152,131              --             152,131
  Deferred income taxes...................      39,145            --              --              39,145
  Other long-term obligations.............       4,882         2,157              --               7,039
                                            ----------      --------      ----------          ----------
     Total liabilities....................     217,366       164,682          46,500             428,548
                                            ----------      --------      ----------          ----------
Commitments and contingencies.............
Convertible Preferred stock...............          --        66,903         (66,903)A                --
Stockholders' equity:
  Common stock............................       2,865       125,908        (125,656)A             3,117
  Additional paid-in capital..............     557,257            --       1,914,323A          2,471,580
  Deferred stock compensation.............          --       (99,804)       (155,244)A,C        (255,048)
  Notes receivable from stockholders......         (30)       (5,013)             --              (5,043)
  Accumulated other comprehensive
     income...............................        (903)           --              --                (903)
  Retained earnings.......................     250,646       (66,859)         66,859A            234,246
                                                                             (16,400)A,B
                                            ----------      --------      ----------          ----------
     Total stockholders' equity
       (deficit)..........................     809,835       (45,768)      1,683,882           2,447,949
                                            ----------      --------      ----------          ----------
     Total liabilities, convertible
       preferred stock and stockholders'
       equity (deficit)...................  $1,027,201      $185,817      $1,663,479          $2,876,497
                                            ==========      ========      ==========          ==========
</TABLE>

                                     - 4 -
<PAGE>   5

                          UNAUDITED PRO FORMA COMBINED
                            STATEMENT OF OPERATIONS
                          YEAR ENDED OCTOBER 31, 2000
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                     HISTORICAL
                                               ----------------------
                                                CIENA         CYRAS        ADJUSTMENTS       COMBINED
                                               --------      --------      -----------       ---------
<S>                                            <C>           <C>           <C>               <C>
Revenue......................................  $858,750      $     --       $      --        $ 858,750
Cost of goods sold...........................   477,393            --              --          477,393
                                               --------      --------       ---------        ---------
  Gross profit...............................   381,357            --              --          381,357
                                               --------      --------       ---------        ---------
Operating expenses
  Research and development...................   129,069        31,662          41,913C         202,644
  Selling and marketing......................    90,922         4,599          25,286C         120,807
  General and administrative.................    34,000         5,122          17,817C          56,939
  Settlement of accrued contact obligation...    (8,538)           --              --           (8,538)
  Amortization of intangibles................        --            --         236,087B         236,087
  Amortization of deferred stock
     compensation............................        --        17,360         (17,360)C             --
  Provision for doubtful accounts............    28,010            --              --           28,010
                                               --------      --------       ---------        ---------
Total operating expenses.....................   273,463        58,743         303,743          635,949
                                               --------      --------       ---------        ---------
Income (loss) from operations................   107,894       (58,743)       (303,743)        (254,592)
Interest and other income (expense), net.....    13,020         3,542              --           16,562
Interest expense.............................      (340)       (1,738)             --           (2,078)
Interest expense -- accretion of
  redemption.................................        --        (2,131)             --           (2,131)
                                               --------      --------       ---------        ---------
Income (loss) before income taxes............   120,574       (59,070)       (303,743)        (242,239)
Provision (benefit) for income taxes.........    39,187             1         (39,190)D             (2)
                                               --------      --------       ---------        ---------
Net income (loss)............................  $ 81,387      $(59,071)      $(264,553)       $(242,237)
                                               ========      ========       =========        =========
Basic net income (loss) per common share.....  $   0.29      $  (2.85)                       $   (0.80)
                                               ========      ========                        =========
Diluted net income (loss) per common and
  dilutive potential common share............  $   0.27      $  (2.85)                       $   (0.80)
                                               ========      ========                        =========
Weighted average basic common shares
  outstanding................................   281,621        20,719           1,067A         303,407
                                               ========      ========       =========        =========
Weighted average basic common and dilutive
  potential common shares outstanding........   299,662        20,719         (16,974)A        303,407
                                               ========      ========       =========        =========
</TABLE>

                                     - 5 -
<PAGE>   6

                          NOTES TO UNAUDITED PRO FORMA
                            COMBINED FINANCIAL DATA

NOTE 1 -- BASIS OF PRESENTATION

     On December 18, 2000, CIENA Corporation ("CIENA") entered into an agreement
to merge with Cyras Systems, Inc. ("Cyras") in a transaction to be accounted for
as a purchase. Cyras's stockholders, option holders and warrant holders will
receive an aggregate total of 27,564,527 shares of CIENA common stock and shares
subject to options or warrants, as applicable, in the merger. Assuming the
acquisition was consummated on December 27, 2000, the stockholders of Cyras
would have received approximately 25,167,016 shares of CIENA common stock of
which an estimated 3,380,534 are restricted and subject to repurchase.
Additionally, CIENA would have converted approximately 19,047,138 Cyras options
and warrants into approximately 2,397,511 options and warrants to purchase CIENA
common stock. Assuming the acquisition was consummated on December 27, 2000, the
purchase price of the Cyras acquisition would have been approximately $1.9
billion including the estimated value of the CIENA shares and the estimated
value of restricted common stock, vested and unvested options and warrants
issuable upon consummation of the acquisition and estimated transaction costs of
$46.5 million. These estimates are preliminary and the actual number of shares,
stock options and warrants to purchase shares will depend on the actual number
outstanding as of the date of consummation of the merger.

     The estimated value of the CIENA common stock is approximately $78.80 per
share based on the average closing price of CIENA's common stock for the
five-day period including the date of the announcement of the signing of the
merger agreement and the two days preceding and succeeding such date.

     The purchase consideration is estimated as follows (in millions):

<TABLE>
<S>                                                           <C>
Common stock................................................  $1,717.0
Assumption of Cyras options less intrinsic value of unvested
  options and restricted common stock.......................     151.0
Estimated transaction expenses..............................      46.5
                                                              --------
                                                              $1,914.5
                                                              ========
</TABLE>

     The preliminary allocation of the purchase price using balances as of
October 31, 2000 is summarized below (in thousands):

<TABLE>
<S>                                                           <C>
Tangible assets.............................................  $  190,830
Deferred tax asset..........................................      24,737
Developed technology........................................     168,600
In-process research and development.........................      16,400
Workforce...................................................      10,400
Goodwill....................................................   1,459,742
Deferred stock compensation.................................     255,048
Acquisition costs...........................................     (46,500)
Other assumed liabilities...................................     (12,551)
Convertible subordinated notes..............................    (152,131)
                                                              ----------
          Total purchase price..............................  $1,914,575
                                                              ==========
</TABLE>

     The actual purchase price allocation is also dependent upon the fair values
of the acquired assets and assumed liabilities as of the acquisition date and
the finalization of the preliminary valuation report. For pro forma purposes the
convertible subordinated notes have been reflected at Cyras's September 30, 2000
carrying value, pending a determination of their estimated fair value. The $16.4
million amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future

                                     - 6 -
<PAGE>   7
                          NOTES TO UNAUDITED PRO FORMA
                     COMBINED FINANCIAL DATA -- (CONTINUED)

use. Based on preliminary assessments, the value of these projects was
determined by estimating the resulting net cash flows from the sale of the
products resulting from the completion of the projects, reduced by the portion
of the revenue attributable to developed technology and the percentage of
completion of the project. The resulting cash flows were then discounted back to
their present value at appropriate discount rates.

     The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.

     The amounts allocated to in-process research and development will be
charged to the statements of operations in the period the acquisition is
consummated.

NOTE 2 -- PRO FORMA ADJUSTMENTS:

     A     To reflect acquisition of Cyras based on the preliminary purchase
           price allocation described in Note 1.

     B     To reflect amortization of developed technology, goodwill and
           workforce over their estimated useful lives of seven, seven and three
           years respectively, as if the acquisition occurred on November 1,
           1999. The $16.4 million amount allocated to in-process research and
           development has not been included in the unaudited pro forma combined
           statement of operations as it is nonrecurring, but is included in the
           unaudited pro forma combined balance sheet. This amount will be
           expensed in the period the acquisition is consummated.

     C     To eliminate historical deferred stock compensation and related
           amortization charges for Cyras stock option grants and record
           deferred stock compensation in accordance with FIN 44, "Accounting
           for Certain Transactions Involving Stock Compensation -- an
           interpretation of APB 25," related to Cyras unvested stock options
           and restricted common stock assuming a consummation date of December
           27, 2000.

     D     To record the tax effect to pro forma adjustments at a tax rate of
           35% and the recognition of the tax benefits arising from Cyras's
           net operating loss carryforwards as it is more probable than not
           that CIENA will be able to utilize Cyras's net operating loss
           carryforwards in future periods.

                                     - 7 -
<PAGE>   8

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Balance Sheets..............................................  F-3
Statements of Operations....................................  F-4
Statements of Stockholders' Deficit.........................  F-5
Statements of Cash Flows....................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>

                                     - 8 -
<PAGE>   9

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Cyras Systems, Inc.:

     We have audited the accompanying balance sheets of Cyras Systems, Inc. (the
Company), a development stage company, as of December 31, 1998 and 1999, and the
related statements of operations, stockholders' deficit, and cash flows for the
period from July 24, 1998 (inception) to December 31, 1998 and for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998 and 1999, and the results of its operations and its cash flows for the
period from July 24, 1998 (inception) to December 31, 1998 and for the year
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.

DELOITTE & TOUCHE LLP

San Jose, California
August 2, 2000 (December 18, 2000 as to Note 12)

                                     - 9 -
<PAGE>   10

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------   SEPTEMBER 30,
                                                                1998       1999         2000
                                                              --------   --------   -------------
                                                                                     (UNAUDITED)
<S>                                                           <C>        <C>        <C>
                                             ASSETS
Current assets:
  Cash and cash equivalents.................................   $3,877    $ 42,663     $162,515
  Short-term investments....................................    3,976       5,003        6,374
  Prepaid expenses and other current assets.................      371         659        2,297
                                                               ------    --------     --------
         Total current assets...............................    8,224      48,325      171,186
Property and equipment, net.................................      603       2,667        6,244
Deferred debt issuance costs................................       --          --        8,167
Other assets................................................       --         115          220
                                                               ------    --------     --------
         Total assets.......................................   $8,827    $ 51,107     $185,817
                                                               ======    ========     ========
               LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable..........................................   $  411    $  2,410     $  5,833
  Accrued expenses..........................................       83         443        2,807
  Current portion of capital lease obligation...............       --         677          857
  Current portion of term loan..............................       --         810          897
                                                               ------    --------     --------
         Total current liabilities..........................      494       4,340       10,394
Convertible subordinated notes..............................       --          --      152,131
Capital lease obligation, less current portion..............       --       1,238        1,245
Term loan, less current portion.............................       --       1,596          912
                                                               ------    --------     --------
         Total liabilities..................................      494       7,174      164,682
                                                               ------    --------     --------
Commitments (Note 8)
Convertible preferred stock:
  Series A, no par value; 7,200,000 shares authorized,
    issued and outstanding as of December 31, 1998 and 1999,
    and September 30, 2000; aggregate liquidation preference
    of $300.................................................      300         300          300
  Series B, no par value; 73,800,000 shares authorized;
    70,143,996 shares issued and outstanding as of December
    31, 1998 and 1999, and September 30, 2000; aggregate
    liquidation preference of $8,768........................    8,731       9,011        9,011
  Series C, no par value; 57,000,000 shares authorized;
    52,646,118 shares issued and outstanding as of December
    31, 1999 and September 30, 2000; aggregate liquidation
    preference of $32,202...................................       --      32,169       32,169
  Series D, no par value; 13,200,000 shares authorized;
    5,381,436 and 7,594,947 shares issued and outstanding as
    of December 31, 1999 and September 30, 2000,
    respectively; aggregate liquidation preference of
    $14,503 and $20,443 as of December 31, 1999 and
    September 30, 2000, respectively........................       --      14,467       20,433
  Series E, no par value; 1,500,000 shares authorized;
    270,756 shares issued and outstanding as of September
    30, 2000; aggregate liquidation preference of $5,000 as
    of September 30, 2000...................................       --          --        4,990
                                                               ------    --------     --------
         Total convertible preferred stock..................    9,031      55,947       66,903
                                                               ------    --------     --------
Stockholders' deficit:
  Common stock, $0.0001 par value, 847,300,000 shares
    authorized; 21,600,000, 44,535,168 and 61,691,745 shares
    issued and outstanding as of December 31, 1998 and 1999,
    and September 30, 2000, respectively....................       47       1,487      125,908
  Deferred compensation.....................................       --        (949)     (99,804)
  Notes receivable from stockholders........................      (19)        (99)      (5,013)
  Deficit accumulated during the development stage..........     (726)    (12,453)     (66,859)
                                                               ------    --------     --------
         Total stockholders' deficit........................     (698)    (12,014)     (45,768)
                                                               ------    --------     --------
         Total liabilities, convertible preferred stock and
           stockholders' deficit............................   $8,827    $ 51,107     $185,817
                                                               ======    ========     ========
</TABLE>

See accompanying notes to financial statements.

                                     - 10 -
<PAGE>   11

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                             PERIOD FROM                      NINE MONTHS       PERIOD FROM
                                            JULY 24, 1998                        ENDED         JULY 24, 1998
                                            (INCEPTION) TO    YEAR ENDED     SEPTEMBER 30,     (INCEPTION) TO
                                             DECEMBER 31,    DECEMBER 31,   ----------------   SEPTEMBER 30,
                                                 1998            1999        1999     2000          2000
                                            --------------   ------------   ------   -------   --------------
                                                                              (UNAUDITED)       (UNAUDITED)
<S>                                         <C>              <C>            <C>      <C>       <C>
Operating expenses:
     Research and development (exclusive
       of non-cash compensation
       expense)...........................       $526          $ 9,345      $5,602   $27,919      $37,790
     Sales and marketing (exclusive of
       non-cash compensation expense).....         78              493         315     4,421        4,992
     General and administrative (exclusive
       of non-cash compensation
       expense)...........................        190            2,265       1,267     4,124        6,579
     Amortization of deferred stock
       compensation*......................         --               59          --    17,301       17,360
                                                 ----          -------      ------   -------      -------
          Total operating expenses........        794           12,162       7,184    53,765       66,721
Interest income...........................        (69)            (899)       (418)   (3,061)      (4,029)
Interest expense..........................         --              463         296     1,571        2,034
Interest expense -- accretion of
  redemption premium (Note 6).............         --               --          --     2,131        2,131
                                                 ----          -------      ------   -------      -------
Loss before income tax expense............        725           11,726       7,062    54,406       66,857
Income tax expense........................          1                1          --        --            2
                                                 ----          -------      ------   -------      -------
          Net loss........................       $726          $11,727      $7,062   $54,406      $66,859
                                                 ====          =======      ======   =======      =======
*Amortization of deferred stock
  compensation:
     Research and development.............       $ --          $    50      $   --   $ 8,525      $ 8,575
     Sales and marketing..................         --                2          --     5,149        5,151
     General and administrative...........         --                7          --     3,627        3,634
                                                 ----          -------      ------   -------      -------
                                                 $ --          $    59      $   --   $17,301      $17,360
                                                 ====          =======      ======   =======      =======
</TABLE>

See accompanying notes to financial statements.

                                     - 11 -
<PAGE>   12

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                      STATEMENTS OF STOCKHOLDERS' DEFICIT
          PERIOD FROM JULY 24, 1998 (INCEPTION) TO SEPTEMBER 30, 2000
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                            NOTES
                                      COMMON STOCK                        RECEIVABLE                      TOTAL
                                  ---------------------     DEFERRED         FROM       ACCUMULATED   STOCKHOLDERS'
                                    SHARES      AMOUNT    COMPENSATION   STOCKHOLDERS     DEFICIT        DEFICIT
                                  ----------   --------   ------------   ------------   -----------   -------------
<S>                               <C>          <C>        <C>            <C>            <C>           <C>
Issuance of restricted common
  stock to founders on inception
  of the Company................  22,320,000   $     48    $      --       $   (19)      $     --       $     29
Repurchase of common stock......    (720,000)        (1)          --            --             --             (1)
Net loss........................          --         --           --            --           (726)          (726)
                                  ----------   --------    ---------       -------       --------       --------
Balances as of December 31,
  1998..........................  21,600,000         47           --           (19)          (726)          (698)
Issuance of common stock
  pursuant to exercise of stock
  options.......................  24,717,048        456           --           (80)            --            376
Repurchase of common stock......  (1,781,880)       (24)          --            --             --            (24)
Deferred stock compensation.....          --      1,008       (1,008)           --             --             --
Amortization of deferred
  compensation..................          --         --           59            --             --             59
Net loss........................          --         --           --            --        (11,727)       (11,727)
                                  ----------   --------    ---------       -------       --------       --------
Balances as of December 31,
  1999..........................  44,535,168      1,487         (949)          (99)       (12,453)       (12,014)
Issuance of common stock
  pursuant to exercise of stock
  options (unaudited)...........  23,606,058      9,011           --        (5,639)            --          3,372
Repurchase of common stock
  (unaudited)...................  (6,449,481)      (746)          --           725             --            (21)
Deferred stock compensation
  (unaudited)...................          --    116,156     (116,156)           --             --             --
Amortization of deferred
  compensation (unaudited)......          --         --       17,301            --             --         17,301
Net loss (unaudited)............          --         --           --            --        (54,406)       (54,406)
                                  ----------   --------    ---------       -------       --------       --------
Balances as of September 30,
  2000 (unaudited)..............  61,691,745   $125,908    $ (99,804)      $(5,013)      $(66,859)      $(45,768)
                                  ==========   ========    =========       =======       ========       ========
</TABLE>

See accompanying notes to financial statements.

                                     - 12 -
<PAGE>   13

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                 PERIOD FROM                                           PERIOD FROM
                                                JULY 24, 1998                    NINE MONTHS ENDED    JULY 24, 1998
                                                (INCEPTION) TO    YEAR ENDED       SEPTEMBER 30,      (INCEPTION) TO
                                                 DECEMBER 31,    DECEMBER 31,   -------------------   SEPTEMBER 30,
                                                     1998            1999         1999       2000          2000
                                                --------------   ------------   --------   --------   --------------
                                                                                    (UNAUDITED)        (UNAUDITED)
<S>                                             <C>              <C>            <C>        <C>        <C>
Cash flows from operating activities:
  Net loss....................................     $  (726)        $(11,727)    $ (7,062)  $(54,406)     $(66,859)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization.............          23              683          526      1,379         2,085
    Loss on disposal of property and
      equipment...............................          --               48           --         --            48
    Amortization of deferred stock
      compensation............................          --               59           --     17,301        17,360
    Amortization of deferred debt issuance
      costs...................................          --               --           --        208           208
    Accretion of redemption premium (Note
      6)......................................          --               --           --      2,131         2,131
    Amortization of discounts on term loans...          --               47           35         35            82
    Amortization of discounts on capital
      leases..................................          --               47           35         35            82
    Changes in operating assets and
      liabilities:
      Prepaid expenses and other current
         assets...............................        (371)            (288)        (132)    (1,638)       (2,297)
      Other assets............................          --             (115)          --       (105)         (220)
      Accounts payable........................         411            1,999          791      3,423         5,833
      Accrued expenses........................          83              360          319      2,364         2,807
                                                   -------         --------     --------   --------      --------
         Net cash used in operating
           activities.........................        (580)          (8,887)      (5,488)   (29,273)      (38,740)
                                                   -------         --------     --------   --------      --------
Cash flows from investing activities:
  Purchase of property and equipment..........        (626)            (578)          --     (4,229)       (5,433)
  Proceeds from disposal of property and
    equipment.................................          --               56           --         --            56
  Purchase of short-term investments..........      (3,976)          (1,027)     (32,920)    (1,371)       (6,374)
                                                   -------         --------     --------   --------      --------
         Net cash used in investing
           activities.........................      (4,602)          (1,549)     (32,920)    (5,600)      (11,751)
                                                   -------         --------     --------   --------      --------
Cash flows from financing activities:
  Proceeds from issuance of preferred stock
    Series A..................................         300               --           --         --           300
  Proceeds from issuance of preferred stock
    Series B..................................       8,731               --           --         --         8,731
  Proceeds from issuance of preferred stock
    Series C..................................          --           32,169       31,969         --        32,169
  Proceeds from issuance of preferred stock
    Series D..................................          --           14,467           --      5,966        20,433
  Proceeds from issuance of preferred stock
    Series E..................................          --               --           --      4,990         4,990
  Issuance of common stock....................          29              376          297      3,372         3,777
  Repurchase of common stock..................          (1)             (24)          --        (21)          (46)
  Proceeds from convertible subordinated
    notes.....................................          --               --           --    141,625       141,625
  Proceeds from term loans....................          --            3,000        3,000         --         3,000
  Repayment of term loans.....................          --             (501)        (244)      (632)       (1,133)
  Principal payments of capital leases........          --             (265)         (81)      (575)         (840)
                                                   -------         --------     --------   --------      --------
         Net cash provided by financing
           activities.........................       9,059           49,222       34,941    154,725       213,006
                                                   -------         --------     --------   --------      --------
Net increase (decrease) in cash and cash
  equivalents.................................       3,877           38,786       (3,467)   119,852       162,515
Cash and cash equivalents at beginning of
  year/period.................................          --            3,877        3,877     42,663            --
                                                   -------         --------     --------   --------      --------
Cash and cash equivalents at end of
  year/period.................................     $ 3,877         $ 42,663     $    410   $162,515      $162,515
                                                   =======         ========     ========   ========      ========
Supplemental disclosures of cash flow
  information:
  Cash paid during the year/period:
    Interest..................................     $    --         $    417     $    224   $    449      $    866
                                                   =======         ========     ========   ========      ========
    Income taxes..............................     $     1         $      1     $     --   $     --      $      2
                                                   =======         ========     ========   ========      ========
  Noncash investing and financing activities:
    Equipment purchases under capital lease...     $    --         $  2,273     $  1,735   $    727      $  3,000
                                                   =======         ========     ========   ========      ========
    Deferred stock compensation...............     $    --         $  1,008     $     --   $116,156      $117,164
                                                   =======         ========     ========   ========      ========
    Convertible preferred stock warrant
      issuance................................     $    --         $    280     $    280   $     --      $    280
                                                   =======         ========     ========   ========      ========
    Issuance of common stock for stockholder
      notes receivable........................     $    19         $     80     $     80   $  5,639      $  5,738
                                                   =======         ========     ========   ========      ========
</TABLE>

See accompanying notes to financial statements.

                                     - 13 -
<PAGE>   14

                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(1) THE COMPANY

     The Company designs, develops and markets next generation optical
networking solutions for telecommunications carriers. The Company was
incorporated on July 24, 1998, under the laws of the state of California and
commenced operations on that date. From July 24, 1998 through September 30,
2000, the Company was considered to be in the development stage, principally
engaged in research and development, raising capital and building its management
team.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     The Company considers all highly liquid investments with a purchased
maturity of 90 days or less to be cash equivalents.

     The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale,"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company has classified its investment securities as
available-for-sale. Available-for-sale securities are carried at fair value,
which approximates amortized cost for debt securities. Gains and losses on the
sale of short-term investments are determined using the specific identification
method.

(b) PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment, generally three years. Equipment
recorded under capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the respective lease term or the
estimated useful life of the asset, generally one and a half years to three
years.

(c) LONG-LIVED ASSETS

     The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

(d) INCOME TAXES

     The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A

                                     - 14 -
<PAGE>   15
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
valuation allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.

(e) STOCK-BASED COMPENSATION

     The Company uses the intrinsic value-based method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, to account for employee stock-based compensation. Accordingly,
compensation cost is recorded on the date of grant to the extent the fair value
of the underlying share of common stock exceeds the exercise price for a stock
option or the purchase price for a share of common stock. The compensation cost
is being amortized on an accelerated basis over the vesting period of the
individual award consistent with the method described in Financial Accounting
Standards Board (FASB) Interpretation No. 28. Pursuant to SFAS No. 123, the
Company discloses the pro forma effect of using the fair value method of
accounting for employee stock-based compensation arrangements.

     Stock based awards granted to nonemployees are accounted for pursuant to
the fair value method in SFAS No. 123 and EITF No. 96-18. The associated expense
is recognized by the Company over the period the services are performed by the
nonemployee.

(f) STOCK SPLIT

     In February 2000, the Company's stockholders approved a two-for-one common
and convertible preferred stock split effective March 16, 2000. All share
amounts in these financial statements have been adjusted to give effect to the
stock split.

(g) RESEARCH AND DEVELOPMENT COSTS

     Development costs incurred in the research and development of new products
and enhancements to existing products are expensed as incurred until the product
has been completed, tested, and is ready for commercial manufacturing. Hardware
development projects are generally completed concurrent with the establishment
of commercial manufacturing and, accordingly, to date no costs have been
capitalized. Software development projects are generally completed concurrent
with the establishment of technological feasibility in the form of a working
model and, accordingly, to date no costs have been capitalized.

(h) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

     The carrying value of the Company's financial instruments, consisting of
cash and cash equivalents, short-term investments and long-term debt
approximates fair market value. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents and short-term investments. The Company maintains the management of
the majority of its cash and cash equivalents and short-term investments with
three financial institutions. Investment of the funds by these institutions is
governed by the Company's corporate investment policy, which aims to reduce
credit risk by restricting investment to readily convertible high-grade U.S.
dollar denominated investments and spreading it amongst a number of
institutions.

                                     - 15 -
<PAGE>   16
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
(i) CONCENTRATION OF COMPONENTS

     Certain key components used in the Company's products, including
transponders and application specific integrated circuits, are purchased from
single or limited sources. This concentration exposes the Company to risk of
manufacturing delays and the possibility of lost sales.

(j) COMPREHENSIVE LOSS

     The Company has no significant components of other comprehensive loss, and,
accordingly, comprehensive loss is the same as the net loss for the periods
presented.

(k) UNAUDITED FINANCIAL INFORMATION

     The unaudited interim financial information as of September 30, 2000 and
for the nine months ended September 30, 1999 and 2000, and for the period from
July 24, 1998 (inception) to September 30, 2000 have been prepared in accordance
with accounting principles generally accepted in the United States of America.
In the opinion of management, such information contains all adjustments,
consisting of only normal recurring adjustments, considered necessary for a fair
presentation. The operating results for any interim period are not necessarily
indicative of the results for the entire year or for any future periods.

(l) USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported results of
operations during the reporting period. Actual results could differ from those
estimates.

(m) RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, Deferral of the Effective
Date of FASB Statement No. 133, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption of this statement is not
expected to have a material effect on the Company's financial position or
results of operations.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The adoption of SAB No. 101
did not have a material impact on the Company's financial position and results
of operations as the Company has not had any revenue to date.

                                     - 16 -
<PAGE>   17
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
     In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. FIN No. 44 clarifies (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of certain of
the conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material effect on the
Company's financial position and results of operations. The adoption of this
statement is not expected to have a material effect on the Company's financial
position or results of operations.

(n) Reclassifications

     Pursuant to recent guidance from the staff of the Securities and Exchange
Commission, the Company has reclassified its convertible preferred stock to a
separate classification outside of stockholders' deficit.

(3) SHORT-TERM INVESTMENTS

     The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                 -------------------   SEPTEMBER 30,
                                                   1998       1999         2000
                                                 --------   --------   -------------
<S>                                              <C>        <C>        <C>
Money market funds.............................   $3,925    $37,586      $159,355
Commercial paper...............................       --      4,985         4,362
Municipal obligations..........................       --      3,000         3,000
Corporate bonds................................       --      2,003         2,999
Government bonds...............................    3,975         --            --
                                                  ------    -------      --------
                                                   7,900     47,574       169,716
  Less amounts classified as cash
     equivalents...............................    3,924     42,571       163,342
                                                  ------    -------      --------
     Securities available-for-sale.............   $3,976    $ 5,003      $  6,374
                                                  ======    =======      ========
</TABLE>

     As of December 31, 1998 and 1999, and September 30, 2000, the aggregate
amortized cost of all available-for-sale debt securities approximates the
estimated fair value.

     The contractual maturities of available-for-sale debt securities included
in short-term investments is as follows:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                  ---------------   SEPTEMBER 30,
                                                   1998     1999        2000
                                                  ------   ------   -------------
<S>                                               <C>      <C>      <C>
Due within one year.............................  $3,976   $3,003      $3,374
Due in 2020 through 2033........................      --    2,000       3,000
                                                  ------   ------      ------
                                                  $3,976   $5,003      $6,374
                                                  ======   ======      ======
</TABLE>

                                     - 17 -
<PAGE>   18
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(4) PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                   -------------   SEPTEMBER 30,
                                                   1998    1999        2000
                                                   ----   ------   -------------
<S>                                                <C>    <C>      <C>
Computer equipment...............................  $229   $1,523      $4,313
Software.........................................   378    1,413       3,038
Furniture and fixtures...........................     9      298         633
Leasehold improvements...........................    10       22         228
                                                   ----   ------      ------
                                                    626    3,256       8,212
Less accumulated depreciation and amortization...    23      589       1,968
                                                   ----   ------      ------
                                                   $603   $2,667      $6,244
                                                   ====   ======      ======
</TABLE>

     Certain property and equipment are recorded under capital leases that
aggregated $1,745 as of December 31, 1999, net of accumulated amortization of
$528.

(5) INCOME TAXES

     The differences between the income tax expense computed at the federal
statutory rate and the Company's tax provision for all periods presented
primarily related to net operating losses for which no benefit has been taken.
Income tax expense for the period from July 24, 1998 (inception) to December 31,
1998 and for the year ended December 31, 1999, relates to state taxes. The types
of temporary differences that give rise to significant portions of the Company's
deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                             ---------------
                                                             1998     1999
                                                             -----   -------
<S>                                                          <C>     <C>
Deferred tax assets:
  Accruals and reserves not deductible for tax purposes....  $  10   $   143
  Property and equipment...................................     --        14
  Capitalized startup expenditures.........................     98     1,234
  Net operating loss carryforward..........................    205     3,936
  Research and development credit carryforward.............     39       535
                                                             -----   -------
                                                               352     5,862
  Valuation allowance......................................   (349)   (5,862)
                                                             -----   -------
                                                                 3        --
Deferred tax liabilities -- property and equipment.........     (3)       --
                                                             -----   -------
                                                             $  --   $    --
                                                             =====   =======
</TABLE>

     In light of the Company's history of operating losses, the Company has
provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized.

                                     - 18 -
<PAGE>   19
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(5) INCOME TAXES -- CONTINUED
     The Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $479 and $9,200 as of December 31, 1998 and
1999, respectively. In addition, the Company had federal and state research and
development credit carryforwards as of December 31, 1999 of approximately $291
and $244, respectively. The Company's federal net operating loss and research
and development credit carryforwards will expire in the years 2018 and 2019,
respectively, if not utilized. The Company's state net operating loss
carryforwards will expire in the year 2006. The state research and development
credit can be carried forward indefinitely.

     Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Internal Revenue Code Section 382. If the
Company has an ownership change, the Company's ability to utilize the above
mentioned carryforwards could be significantly reduced. The Company has not yet
determined whether an ownership change has occurred.

(6) SUBORDINATED CONVERTIBLE NOTES

     In August 2000, the Company issued $150 million of 4 1/2% convertible
subordinated notes due August 15, 2005. Interest is payable on February 15 and
August 15 of each year, beginning February 15, 2001. The notes will be
convertible to common stock upon certain qualifying events, including the
initial public offering (IPO) of our common stock. In the event of an IPO, the
notes are convertible to common stock at a premium to the IPO price. If an IPO
has not occurred on or before March 31, 2002, the Company will be obligated to
make an offer to repurchase the notes at 118.9% of the principal balance thereof
on April 30, 2002. The Company is accreting the redemption premium over the
period to April 30, 2002, such that the carrying value of the notes equals the
redemption price at the date of the redemption obligation. Accretion of the
redemption premium was $2.1 million during the nine months ended September 30,
2000.

(7) LONG-TERM DEBT

     On January 11, 1999, the Company entered into a loan facility agreement
with a financial institution. The agreement allows for term loans in the
aggregate principal amount of $3,000 and equipment loans in the aggregate
principal amount of $3,000. Borrowings under the agreement are repayable in 36
equal installments of principal plus interest commencing on the individual loan
inception dates, and each month thereafter, with a final balloon payment. The
loan facilities bear interest at an effective rate of approximately 14% per
annum, with the term loans secured by the assets of the Company and the
equipment loans secured by the equipment leased. As of December 31, 1999 and
September 30, 2000, the balances of the term loans are $2,499 and $1,868,
respectively. As of December 31, 1999, principal payments due under the term
loans in 2000, 2001, and 2002, are $856, $976 and $667, respectively.

     In conjunction with the loan facility agreement, the Company issued
warrants to purchase 3,600,000 shares of Series B convertible preferred stock at
a price of $0.13 per share. As of September 30, 2000, the lender had not
exercised the warrants. The fair value of the warrants was estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: no dividends; risk-free rate of 4.65%; volatility of 65% and
contractual life of seven years. The fair value of the warrants at the date of
grant was $280 and has been recorded as a discount on the term loans and capital
leases. The
                                     - 19 -
<PAGE>   20
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(7) LONG-TERM DEBT -- CONTINUED
discount is being amortized as interest expense over the life of the loans and
capital leases. As of December 31, 1999, the current and long-term portion of
the unamortized discount on term loans was $47 and $47, respectively.

(8) COMMITMENTS

     The Company leases certain equipment and its facilities under various
noncancelable operating leases. In addition, the Company has certain capital
leases for computers and equipment per the loan facility agreement referred to
in Note 7. The leases expire between 2000 and 2006. As of December 31, 1999,
future minimum lease payments required under capital and operating leases are as
follows:

<TABLE>
<CAPTION>
                                                             CAPITAL   OPERATING
                 YEAR ENDING DECEMBER 31,                    LEASES     LEASES
                 ------------------------                    -------   ---------
<S>                                                          <C>       <C>
2000.......................................................  $  859     $  850
2001.......................................................     859      1,033
2002.......................................................     694      1,139
2003.......................................................      --      1,195
2004.......................................................      --      1,255
Thereafter.................................................      --      2,702
                                                             ------     ------
Total future minimum lease payments........................   2,412     $8,174
                                                                        ======
Less amounts representing interest.........................     404
Less discount on capital leases due to warrants............      93
                                                             ------
                                                              1,915
Less current portion of capital lease obligations..........     677
                                                             ------
Capital lease obligation, less current portion.............  $1,238
                                                             ======
</TABLE>

     Rent expense was $12, $307, $221 and $1,046 for the period from July 24,
1998 (inception) to December 31, 1998, the year ended December 31, 1999, and the
nine months ended September 30, 1999 and 2000, respectively.

(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT

(a) COMMON STOCK

     In connection with the formation of the Company in July 1998, the Company
issued 18,000,000 shares of restricted common stock to the four founders of the
Company at $0.002 per share. In August 1998, the Company repurchased 720,000
shares of common stock at the original purchase price. The founders purchased
the shares in part by issuing 10-year promissory notes to the Company amounting
to $19 which bear interest at 7% per annum. The notes are due and payable at the
earlier of August 2009 or upon leaving the Company, and are secured by the
common stock. In August 1998, the Company issued an additional 4,320,000 shares
of common stock to a director at $0.004 per share. The shares vest in 48 equal
monthly installments commencing on April 15, 1998 (predated prior to inception),
or on the occurrence of a change of control event. Upon termination of
employment, the Company may repurchase

                                     - 20 -
<PAGE>   21
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
all unvested shares at $0.002 and $0.004 per share, respectively. As of December
31, 1999 and September 30, 2000, 12,600,000 and 8,550,000 shares were subject to
repurchase, respectively.

     The Company maintains a right of first refusal with respect to restricted
common stock. A restricted common stockholder must notify the Company prior to
selling these restricted shares to a third party. Upon notification, the Company
may purchase the restricted shares from the restricted common stockholder at the
price offered by the third party.

     During the year ended December 31, 1999 and the nine months ended September
30, 2000, the Company received $80 and $5,639, respectively, in promissory notes
from certain officers and employees in exchange for common stock. The notes are
repayable over a period of five years and bear interest at 7% per annum. The
notes are full recourse and are secured by the underlying common stock.

(b) CONVERTIBLE PREFERRED STOCK

     In September 1998, the Company issued 7,200,000 shares of Series A
convertible preferred stock at a price of $0.04 per share for cash proceeds of
$300.

     In October 1998, the Company issued 70,143,996 shares of Series B
convertible preferred stock at a price of $0.13 per share for cash proceeds of
$8,731, net of issuance costs of $37.

     In August and October 1999, the Company issued 52,646,118 shares of Series
C convertible preferred stock at a price of $0.61 per share for cash proceeds of
$32,169, net of issuance costs of $33.

     In December 1999, the Company issued 5,381,436 shares of Series D
convertible preferred stock at a price of $2.70 for cash proceeds of $14,467,
net of issuance costs of $35.

     In January, March and April 2000, the Company issued 2,213,511 shares of
Series D Convertible Preferred Stock at a price of $2.70 for cash proceeds of
$5,966, net of issuance costs of $35.

     The rights, preferences, and privileges of the holders of Series A, B, C
and D convertible preferred stock are as follows:

     - Each share of preferred stock is convertible into one share of common
       stock, subject to certain antidilutive adjustments.

     - Shares of preferred stock automatically convert to common stock on the
       earlier of consummation of an underwritten initial public offering in
       which the aggregate proceeds are at least $20,000, or the date specified
       by written consent or agreement of at least two-thirds of the respective
       series shareholders.

     - Holders of preferred stock are entitled to dividends in preference to
       common shareholders at a rate of 8% of the original issue price per share
       per annum, if and when declared by the Company's Board of Directors.

     - Preferred stock votes equally with the shares of common stock on an
       "as-if-converted" basis, but also has class voting rights as provided by
       law and in the Articles of Incorporation.

                                     - 21 -
<PAGE>   22
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
     - Holders of preferred stock have a liquidation preference of the original
       purchase price per share, plus all declared but unpaid dividends.

(c) STOCK OPTION PLAN

     The 1998 Stock Plan permits the Company to grant employees, outside
directors, and consultants qualified stock options, nonstatutory stock options
or stock purchase rights to purchase shares of the Company's common stock.
Options generally vest 25% with respect to the number granted upon the first
anniversary date of the option grant and the remainder vest in equal monthly
installments over the 36 months thereafter. Options are exercisable immediately.
Shares issued upon exercise of non-vested stock options are subject to the
Company's right to repurchase at the original exercise price. The Company's
repurchase right lapses in accordance with the vesting schedule for the stock
options. As of December 31, 1999 and September 30, 2000, 19,969,005 and
28,566,330 shares were subject to repurchase at a weighted-average exercise
price of $0.02 and $0.28, respectively. Subsequent to December 31, 1999, the
Company increased the authorized shares of common stock for issuance under the
1998 Stock Plan to 65,400,000. As of December 31, 1999 and September 30, 2000,
20,407,578 and 10,748,214 shares were available for future option grants.

     A summary of the activity under the Company's option plan is as follows:

<TABLE>
<CAPTION>
                                  JULY 24, 1998
                               (INCEPTION) THROUGH                  YEAR ENDED                    NINE MONTHS ENDED
                                DECEMBER 31, 1998                DECEMBER 31, 1999                SEPTEMBER 30, 2000
                           ----------------------------   -------------------------------   ------------------------------
                                       WEIGHTED-AVERAGE                  WEIGHTED-AVERAGE                 WEIGHTED-AVERAGE
                            SHARES      EXERCISE PRICE       SHARES       EXERCISE PRICE      SHARES       EXERCISE PRICE
                           ---------   ----------------   ------------   ----------------   -----------   ----------------
<S>                        <C>         <C>                <C>            <C>                <C>           <C>
Outstanding at beginning
  of period..............         --        $  --            5,845,002        $0.01           7,057,254        $0.05
Granted..................  5,845,002         0.01           26,955,300         0.03          34,110,700         1.13
Exercised................         --           --          (24,717,048)        0.02         (23,606,058)        0.40
Forfeited................         --           --           (1,026,000)        0.02          (3,001,855)        0.37
                           ---------                      ------------                      -----------
Outstanding at end of
  period.................  5,845,002        $0.01            7,057,254        $0.05          14,560,041        $1.96
                           =========                      ============                      ===========
Weighted-average fair
  value of options
  granted during the
  period with exercise
  prices equal to fair
  value at date of
  grant..................  5,845,002         0.01           22,455,300         0.01
Weighted-average fair
  value of options
  granted during the
  period with exercise
  prices less than fair
  value at date of
  grant..................         --           --            4,500,000         0.17
</TABLE>

                                     - 22 -
<PAGE>   23
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
     The following table summarizes information about such stock options
outstanding as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                 OPTIONS OUTSTANDING
                                                            ------------------------------
                                                                          WEIGHTED-AVERAGE
                                                                             REMAINING
                                                              NUMBER      CONTRACTUAL LIFE
                      EXERCISE PRICE                        OUTSTANDING       (YEARS)
                      --------------                        -----------   ----------------
<S>                                                         <C>           <C>
$0.01.....................................................   1,585,500          8.07
 0.07.....................................................   5,471,754          9.64
                                                             ---------         -----
                                                             7,057,254          9.23
                                                             =========         =====
</TABLE>

     The Company uses the intrinsic-value method in accounting for its
stock-based compensation arrangements for employees, whereby compensation cost
is recognized to the extent the fair value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. Deferred
stock compensation of $515 and $101,780 has been recorded during the year ended
December 31, 1999 and the nine months ended September 30, 2000, respectively,
for the excess of the fair value of the common stock underlying the options at
the grant date over the exercise price of the options. These amounts are being
amortized on an accelerated basis over the vesting period, generally four years,
consistent with the method described in FASB Interpretation No. 28. Amortization
of deferred compensation related to employee grants was $20 and $12,892 during
the year ended December 31, 1999 and the nine months ended September 30, 2000,
respectively.

     Had compensation cost been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss would have been
changed to the amounts indicated below for the period from July 24, 1998
(inception) to December 31, 1998 and for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                              1998      1999
                                                              -----   --------
<S>                                                           <C>     <C>
Net loss:
  As reported...............................................  $(726)  $(11,727)
  Pro forma.................................................  $(728)  $(11,785)
</TABLE>

     The fair value of options granted to employees are estimated on the date of
grant using the minimum value method with the following weighted-average
assumptions: no dividend yield; risk-free interest rate of 4.82%, 5.69% and
6.31% in 1998, 1999 and 2000, respectively; and an expected life of three years.

     Under the 1998 Stock Plan, the Company issued 445,002, 136,800 and 240,201
stock options to nonemployees in 1998, 1999 and 2000, respectively, in exchange
for consulting services rendered. These stock options were fully vested at the
date of grant. The aggregate estimated fair value of these shares and the
resulting expense based on the Black-Scholes option pricing model was not
material in 1998 and 1999, and $1,666 in 2000. In addition, the Company granted
960,000 and 517,500 options in 1999 and 2000, respectively, to nonemployees,
which vest ratably over 24 months as services are performed. Deferred stock
compensation of $493 and $12,709 has been recorded in 1999 and 2000,
respectively, for the fair value of these options. Amortization of deferred
stock compensation related to these nonemployee grants was $39 in 1999 and
$2,743 in 2000. The fair value of the options granted to nonemployees are
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions: no dividend yield;

                                     - 23 -
<PAGE>   24
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
volatility of 65%; risk-free interest rate of 5.69% and 6.31% in 1999 and 2000,
respectively; and a contractual life of 10 years. The fair value of the unvested
portion of these options is subject to adjustment based upon the future value of
the Company's common stock.

(d) WARRANTS

     In addition to the warrants issued in connection with a borrowing
arrangement discussed in Note 7, the Company issued to a third party, in
consideration for product promotion, evaluation and feedback services to be
performed, warrants to purchase 60,000 shares of common stock at an exercise
price equal to the fair market value on the effective date. The Company expects
that the warrants will become vested on or before December 31, 2000 and the fair
value of the warrants will be charged to sales and marketing expense.

(10) EMPLOYEE BENEFIT PLAN

     During the year ended December 31, 1999, the Company adopted a 401(k) Plan.
The 401(k) Plan allows eligible employees to contribute up to 15% of their
compensation, subject to a statutory prescribed annual limit. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) Plan, none have been made as of
December 31, 1999.

(11) SEGMENT INFORMATION

     SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes standards for the manner in which public companies
report information about operating segments, products and services, geographic
areas and major customers in annual and interim financial statements. The method
of determining what information to report is based on the way that management
organizes the operating segments within the enterprise for making operating
decisions and assessing financial performance.

     The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). From inception of the Company through
September 30, 2000, the Company has had one product line. The CEO reviews
financial information on an entity level basis for purposes of making operating
decisions and assessing financial performance. The entity level financial
information is the same as the information presented in the accompanying
statements of operations. Accordingly, the Company has determined that it is
engaged in a single operating segment.

(12) SUBSEQUENT EVENTS

     On December 18, 2000, the Company entered into an agreement to merge with
CIENA Corporation (CIENA) in a transaction to be accounted for as a purchase by
CIENA, as the acquiror. If approved, the Company's stockholders, option holders
and warrant holders will receive an aggregate total of approximately 27,565,000
shares of CIENA common stock and shares subject to options or warrants, as
applicable, in the merger.

     In November 2000, the Company reincorporated in the State of Delaware. In
connection with the reincorporation the Company split its common and convertible
preferred stock three-for-one. Accordingly,

                                     - 24 -
<PAGE>   25
                              CYRAS SYSTEMS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED
                           DECEMBER 31, 1998 AND 1999
                   (INFORMATION AS OF SEPTEMBER 30, 2000 AND
      FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(12) SUBSEQUENT EVENTS -- CONTINUED
the accompanying financial statements have been adjusted to give effect to the
reincorporation and the November 2000 stock split.

     In September 2000, the Company issued 270,756 shares of Series E
convertible preferred stock at a price of $18.47 for cash proceeds of $4,990,
net of issuance costs of $10. The rights, preferences, and privileges of the
holders of Series E convertible preferred stock are similar to the rights of the
other series of convertible preferred stocks except that Series E is convertible
at the lower of the issue price or 90% of a qualifying future initial public
offering price.

     In October 2000, the Company entered into a 12-year lease for a new
commercial building, commencing on March 1, 2001. The base rent is $159 per
month and will be increased by 4% each year over the 12-year term. In connection
with the lease agreement, the Company issued warrants to purchase 25,000 shares
of Series E convertible preferred stock at an exercise price of $18.47 per
share. The fair value of the warrants at the date of grant was $200 and will be
recorded as rent expense over the term of the lease. Additionally, the Company
issued warrants to purchase 25,896 shares of common stock as consideration for
the first three monthly lease payments. The fair value of the warrants at the
date of grant was $367 and has been recorded as prepaid rent.

                                     - 25 -
<PAGE>   26

ITEM 7.   FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

EXHIBITS

<TABLE>
<CAPTION>
Number                   Description
------                   -----------
<S>                      <C>
23.1                     Consent of Deloitte & Touche LLP
</TABLE>


<PAGE>   27


                                   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:  January 18, 2001           By: /s/ Michael O. McCarthy, III
                                     -----------------------------------
                                      Michael O. McCarthy, III
                                      Senior Vice-President, General
                                      Counsel and Secretary




                                     - 26 -


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