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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO...............
COMMISSION FILE NUMBER 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 WINTERSON ROAD, LINTHICUM, MD 21090-2205
(Address of principal executive offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the 286,530,631 shares of Common Stock of the
Registrant issued and outstanding as of October 31, 2000, excluding 6,030,520
shares of Common Stock held by affiliates of the Registrant was
$29,606,786,716. This amount is based on the average bid and asked price of
the Common Stock on the Nasdaq Stock Market of $105.55 per share on October
27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2001 annual meeting of stockholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this report.
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PART I
The information in this Form 10-K contains certain forward-looking
statements, including statements related to markets for the Company's products
and trends in its business that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Risk Factors"
and "Business" as well as those discussed elsewhere in this Form 10-K.
ITEM 1. BUSINESS
COMPANY
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CIENA Corporation (the "Company" or "CIENA") was incorporated in Delaware in
November 1992. The Company completed its initial public offering on February
7, 1997 and a secondary offering on July 2, 1997. CIENA's principal executive
offices are located at 1201 Winterson Road, Linthicum, Maryland 21090. Its
telephone number is (410) 865-8500.
GENERAL
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OVERVIEW
CIENA is a leader in the rapidly growing intelligent optical networking
equipment market. We offer a comprehensive portfolio of products for
communications service providers worldwide. Our customers include
long-distance carriers, competitive and incumbent local exchange carriers,
Internet service providers, wireless and wholesale carriers. CIENA offers
optical transport and intelligent optical switching systems that enable
service providers to provision, manage and deliver high-bandwidth services to
their customers. We have pursued a strategy to develop and leverage the power
of disruptive technologies to change the fundamental economics of building
carrier-class tele- and data-communications networks, thereby providing our
customers with a competitive advantage. CIENA's intelligent optical networking
products are designed to enable carriers to deliver any time, any size, any
priority bandwidth to their customers.
The Company had revenues of $858.8 million for its fiscal year ended
October 31, 2000, an increase of approximately 78% when compared with fiscal
1999 revenues of $482.1 million. Net income for fiscal 2000 was $81.4 million.
This compares with a net loss of $3.9 million for fiscal year 1999.
For the fiscal year ended October 31, 2000, the Company recorded revenue
from sales of intelligent optical networking equipment to a total of
thirty-two service provider customers. This represents an increase of more
than 18% over 1999's customer base of twenty-seven. During fiscal 2000, three
customers each represented more than 10 percent of CIENA's total revenues.
Historically, the significant majority of CIENA's revenues have come from
the sale of products in a single product category: long-distance optical
transport equipment. CIENA believes it is one of the worldwide market leaders
in field deployment of open-architecture long-distance optical transport
equipment utilizing dense wavelength division multiplexing, or DWDM,
technology. The majority of CIENA's fiscal 2000 revenue was derived from sales
of its long distance optical transport products, including MultiWave
CoreStream(TM) and MultiWave Sentry 4000(TM). During the fiscal year 2000,
CIENA also recognized revenue from the sale of seven optical networking
products including sales of its metropolitan optical transport product,
MutliWave(R) Metro and its intelligent optical core switch, MultiWave
CoreDirector(TM).
Our research and development efforts as well as potential future
acquisition and partnership activities are targeted at capitalizing on our
installed base of carrier customers and leveraging our position as a leader in
the rapidly growing optical networking market.
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INDUSTRY BACKGROUND
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The world's tele- and data-communications infrastructure is formed by
fiber optic networks owned and operated by service providers. In recent years,
the combination of several factors, including global deregulation which fueled
competition among service providers and increased bandwidth demand resulting
from the proliferation of the Internet and the emergence of electronic
commerce, gave rise to the increased deployment of communications equipment
utilizing dense wavelength division multiplexing technology ("DWDM").
DWDM replaces the single beam of light that traverses fiberoptic cable in
legacy networks with multiple colors of light, each of which is capable of
carrying tens of thousands of voice conversations or data transmissions. Prior
to the emergence of DWDM, service providers could increase network capacity
either by adding new physical fibers to their network or by increasing the
rate of transmission through the fiber. In many cases DWDM has proven to be
more cost efficient than physically deploying new fibers and it has enabled
the delivery of significantly more traffic by service providers. DWDM adds
"virtual lanes to the information highway" as opposed to simply "raising the
speed limit within the existing lane."
The widespread adoption of DWDM enabled carriers to efficiently and
economically expand network capacity, or bandwidth, while reducing bandwidth
costs. CIENA believes that the application of products using DWDM has led to a
dramatic decline in service providers' capital cost per bit from 1995 to
present, thereby enabling pricing competition between carriers and significant
bandwidth price declines of up to 80% in some US regions.
Network Scalability Challenges
For the past several years DWDM has been implemented by carriers to
increase capacity between discrete points in their long-distance networks. To
construct a network using DWDM equipment as its backbone, a carrier must
interconnect the point-to-point high-capacity links and manage all traffic
flowing through them. An important element enabling this interconnection in
traditional architectures has been the SONET/SDH add/drop multiplexer, or ADM.
In most network architectures, a SONET ADM is used to transmit the
information-carrying signal for each DWDM optical channel. A second ADM then
is used to receive the information-carrying signal from each DWDM optical
channel. As a result, every time an additional optical channel is deployed,
two additional SONET ADMs must be purchased, installed and maintained -- one
for each end of the traffic-carrying route. For example, in order to
transmit/receive the traffic from a DWDM optical transport system with 96
channels of DWDM, a service provider would require a total of 192 SONET ADMs.
Though DWDM gave carriers the ability to solve the bandwidth problem in
the core of their networks, the technology created operational and scalability
challenges for carriers. Historically this method has been the only way
available to service providers to scale their networks. Unfortunately, this
approach creates upwardly spiraling costs. In addition to the capital
equipment costs associated with the equipment, each SONET ADM uses valuable
central office space and power. Furthermore, as the number of DWDM channels
and links increases, the carrier's management of the network grows more
complex, making manual service provisioning and network operation more
difficult and costly.
Escalating Operational Costs
In addition to the problems inherent in scaling traditional network
architectures, carriers are challenged to scale their operating staff as
quickly as they can grow their networks. According to information filed by
carriers with the United States Securities and Exchange Commission, many
service providers are spending more on operating, growing, and managing their
networks than they are on capital expenditures. In some cases, service
providers are spending two to four dollars on network operations and support
expenses for every dollar spent on capital equipment. In addition, in many
cases, network operations and support expenses are increasing at a
significantly faster rate than revenues.
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CIENA'S SOLUTIONS
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CIENA's intelligent optical networking equipment was designed to enable
service providers to transition from inefficient, legacy, voice-centric
networks to more efficient data-optimized, intelligent optical networks.
CIENA's systems address both the network scalability challenges and the
escalating operational costs faced by service providers.
- CIENA leverages its expertise in optics, software, systems and
Application Specific Integrated Circuits, or ASICs, to develop
innovative products designed to dramatically lower the cost of
constructing service provider networks.
- CIENA's intelligent optical networking equipment is designed to replace
multiple legacy network elements with fewer, more intelligent network
elements, thereby simplifying the network and lowering carriers' capital
and operations costs.
- With the bandwidth availability enabled by CIENA's optical transport
equipment, service providers should be able to ramp their network
bandwidth with growing Internet demand.
- CIENA's intelligent optical networking equipment is designed to lower
ongoing network operating costs by enabling carriers that utilize our
equipment to more efficiently manage network traffic.
- CIENA's intelligent optical networking equipment also is designed to
enable carriers to shorten the time it takes to provision services, in
some cases from months to real-time, thereby accelerating the
generation of revenue.
- In addition to capital and operational cost savings, CIENA's
intelligent optical networking equipment and recently introduced
network management software is designed to enable new,
revenue-generating and service-differentiating optical services.
Our optical networking product portfolio is targeted at the critical areas
of service provider networks: long-distance optical transport, short-distance
optical transport and intelligent core switching.
- Optical Transport. CIENA's long-distance optical transport products,
MultiWave CoreStream(TM), MultiWave Sentry(TM) , MultiWave 1600, and
our short distance products, MultiWave Metro(TM), Metro One(TM) and
MultiWave Firefly,(TM) utilize DWDM technology and should enable
carriers to cost effectively add critical network bandwidth when and
where they need it. As a result, service providers should be better
able to scale their networks to meet demand.
- Intelligent Optical Core Switching. Our intelligent optical core
switches, MultiWave CoreDirector(TM), and MultiWave CoreDirector
CI(TM) enable carriers to manage the bandwidth created with optical
transport products. CoreDirector and CoreDirector CI help carriers'
solve both the issues of network scalability and escalating operating
costs by incorporating the functionality of multiple network elements
into single elements with previously unavailable switching
capabilities and management.
- Network Management. ON-Center, CIENA's recently introduced fully
integrated family of software-based tools for comprehensive element,
network and service layer management, is designed to enable
accelerated deployment of new, differentiating optical services.
ON-Center should also reduce network operating and management costs.
CIENA calls the network architecture created by these products "CIENA
LightWorks." The components of CIENA's LightWorks can be sold together as a
complete network solution or separately as best-of-breed solutions. CIENA's
LightWorks architecture is designed to dramatically simplify a carrier's network
by reducing the number of network elements. We believe this network
simplification will lead to lower capital equipment cost and lower operating
cost.
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STRATEGY
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CIENA's strategy is to maintain and build upon its market leadership in
the deployment of intelligent optical networking systems and to leverage the
Company's technologies in order to provide solutions for both voice and data
communications-based network architectures. The Company believes that the
technological, operational and cost benefits of the Company's optical
networking solutions create competitive advantages for service providers
worldwide. We believe our solutions will become increasingly important as
these service providers are being pressed by their customers to deliver
services to address the dramatic growth in Internet and other data
communications traffic. CIENA's strategy includes the following:
- - EXPAND OUR BASE OF CUSTOMERS USING OUR OPTICAL NETWORKING SOLUTIONS. We
believe that achieving early widespread operational deployment of our
systems in a particular carrier's network will provide CIENA significant
competitive advantages with respect to additional optical networking
deployments and will enhance our marketing to other carriers as a
field-proven supplier. While continuing to aggressively serve our existing
customers, we intend to actively pursue additional optical networking
deployment opportunities among fiber optic carriers in domestic and
foreign long distance, interoffice and local exchange markets.
- - EXPAND SALES AND MARKETING EFFORTS. The nature of the target customer base
for all our product lines requires a focused sales effort on a
customer-by-customer basis. We will continue to increase our sales and
marketing efforts aimed at the worldwide market of service providers.
CIENA increased the number of revenue generating optical networking
customers from twenty-seven during 1999 to thirty-two in 2000. In addition,
CIENA has a significant international presence, particularly in Europe.
Market analyst RHK estimates that CIENA holds the leading share of the
European optical networking market at 37%. Revenues from international
customers represented 33.0% of CIENA's total revenues in fiscal 2000. CIENA
plans to continue to strengthen its marketing programs and to increase its
domestic and international presence through both direct sales and
distributor relationships.
- - CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. CIENA
markets technically advanced systems to sophisticated customers. The
nature of CIENA's systems and market require a high level of technical
support and customer service. We believe we have a good reputation for our
technical support and customer service and we intend to emphasize our
global service and support excellence and capabilities as differentiating
factors in our efforts to maintain and enhance our market position. CIENA
offers complete engineering, furnishing and installation services in
addition to full-time customer support from strategic locations worldwide.
- - CONTINUE TO ENHANCE WORLD CLASS MANUFACTURING CAPABILITY. CIENA's optical
networking systems play a critical role in our customers' networks.
Quality assurance and manufacturing excellence are necessary for CIENA to
achieve success. CIENA believes it has developed a world class optical
manufacturing capability and this capability provides CIENA with a
significant competitive advantage. CIENA achieved ISO 9001 certification
in July 1997 in further support of this element of its strategy. CIENA
expects to continue to invest in both the capital and the human resources
necessary to maintain and leverage this advantage. In addition, CIENA
expects to utilize this expertise to leverage our manufacturing capability
with contract manufacturers.
- - LEVERAGE THE COMPANY'S HIGH BANDWIDTH TECHNOLOGIES AND KNOW-HOW. We
believe the overall growth in demand for bandwidth and the need for
intelligent high bandwidth services in telecommunications networks will
lead to transmission bottlenecks in other segments of the networks where
the application of optical technologies and other high bandwidth enabling
technologies may provide solutions, either within existing network
architectures, or as part of the design and development of alternative
data communications-based network architectures. CIENA expects to leverage
the core competencies it has developed in the design, development and
manufacturing of its optical transport and intelligent optical switching
product lines by pursuing new product development efforts, and strategic
alliances or acquisitions, to address these expected opportunities. CIENA
intends to move aggressively to maintain leadership in the design and
development of intelligent optical networking equipment and software which
will both respond to customer needs and help customers move toward newer,
higher capacity, more cost-efficient network designs for the future.
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PRODUCTS
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Our optical networking product portfolio is targeted at the critical areas
of service provider networks: long-distance optical transport, short-distance
optical transport and intelligent optical core switching. CIENA's "open
architecture" design means its products interoperate with most carriers'
existing fiber optic transmission systems, and network elements, including
connecting directly to either traditional SONET equipment, ATM switches or IP
routers.
LONG-DISTANCE OPTICAL TRANSPORT
Product Features
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MultiWave CoreStream - CIENA's fourth generation carrier-class intelligent
optical transport product.
- First commercially deployed 96-channel DWDM system
with commercial shipments beginning in fiscal Q3
1999.
- Utilizes DWDM technology to deliver up to 96
optical channels at 2.5 gigabits per second (240
gigabits) or up to 48 channels at 10 gigabits per
second (480 gigabits).
- Architected for in-service growth; scalable to
handle 2 terabits of traffic in the future.
- With its longer reach feature set, will ultimately
be capable of transporting signals up to 5,000
kilometers without electrical regeneration.
MultiWave Sentry 4000 - CIENA's third generation carrier-class intelligent
optical transport product.
- First commercially deployed 40-channel system with
commercial shipments beginning in fiscal Q2 1998.
- Utilizes DWDM technology to deliver up to 40 channels
at 2.5 gigabits per second (100 gigabits).
MultiWave Sentry 1600 - CIENA's second generation carrier-class intelligent
optical transport product.
- First commercially deployed 16-channel system with
commercial shipments beginning in the second half
of fiscal 1996.
- Utilizes DWDM technology to deliver up to 16 channels
at 2.5 gigabits per second (40 gigabits).
- Incorporated performance monitoring capabilities, not
previously available in DWDM equipment.
MultiWave 1600 - CIENA's first generation carrier-class intelligent
optical transport product.
- First commercially deployed 16-channel system with
commercial shipments beginning in the first half of
fiscal 1996.
- Utilizes DWDM technology to deliver 16 channels at 2.5
gigabits per second (40 gigabits).
SHORT-DISTANCE OPTICAL TRANSPORT
Product Features
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MultiWave Metro - A carrier-class optical transport product designed
specifically to address the performance and economic
requirements of metropolitan markets.
- Provides up to 24 duplex channels over a single
fiber pair, enabling a service provider to transport
up to 60 gigabits per second.
- Supports multiple network topologies, such as rings,
hubs, and stars.
- Offers a wide range of interfaces from 100
megabits per second up to 10 gigabits per second.
MultiWave Metro One - Offers the same carrier-class reliability and
functionality as MultiWave Metro, but for a single
channel in a reduced size and reduced power
consumption package.
MultiWave Firefly - MultiWave Firefly was developed specifically for
use by carriers in short-distance, point-to-point
applications.
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- This system multiplexes up to 24 channels at 2.5
gigabits per second, over a single fiber pair,
allowing a carrier to transport up to 60 gigabits
per second.
INTELLIGENT OPTICAL CORE SWITCHING
Product Features
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MultiWave CoreDirector - Provides traffic management and switching
capability beyond current network solutions of up
to 256 ports of OC-48 or up to 640 gigabits per
second in a single 7 foot bay.
- Designed to reduce capital equipment costs by
displacing multiple legacy network devices.
- CoreDirector's intelligence is designed to
simplify service provisioning, in some cases
reducing provisioning times from months to
real-time.
- CoreDirector offers the ability to switch at the
wavelength level or at levels of granularity
down to an STS-1.
- CoreDirector should enable new revenue
opportunities for service providers through new
optical layer capabilities and services.
CoreDirector CI - CoreDirector CI delivers CoreDirector
functionality in a smaller package and at a
lower entry cost that is ideal for lower
capacity networks or smaller switching sites.
- When available, CoreDirector CI will provide
up to 64 ports of OC-48 or up to 160 gigabits
per second in a half bay.
NETWORK MANAGEMENT
Product Features
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LightWorks ON-Center - A fully integrated family of software-based tools
for comprehensive element, network and service
layer management across service provider networks.
- ON-Center is designed to enable accelerated
deployment of new, differentiating optical
services, reduced network operating and management
costs, and innovative customer service solutions.
- Designed so that service providers can select any
or all components necessary to meet their
particular network's management needs, LightWorks
ON-Center is comprised of:
- an Optical Service Layer Management System
for cross-vendor end-to-end service
management,
- an Optical Network Management System for
integrated management across all of CIENA's
intelligent optical transport, switching
and access systems, and;
- a Modeling and Planning System for network
design.
NEW OPTICAL SERVICES
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In addition to offering significant capital equipment and operational cost
savings, CIENA's intelligent optical networking equipment is designed to
enable its customers to offer new, revenue generating optical layer services.
CIENA's LightWorks Toolkit(TM) is designed to allow carriers to offer dynamic
high-bandwidth services and handle real-time service provisioning and
prioritization. By mixing and matching CIENA's ToolKit tools, carriers will be
able to offer customized services and further differentiate themselves from
their competition.
Tools in the LightWorks ToolKit will ultimately include:
Service Description
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Optical Priority - Optical Priority Provisioning is designed to
Provisioning allow carriers to turn-up optical services in
real time, and to specify priority levels for
further differentiation of optical services.
For instance, a carrier may elect to offer
multiple levels of optical bandwidth, ranging
from "premium" to "best-effort" service, with
each level of service being priced and
delivered differently. Optical Priority
Provisioning is designed to help carriers more
easily meet service level agreements by
assigning and
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adjusting traffic priorities in real time,
potentially allowing carriers to unlock more
revenue from data services.
- Optical Priority Provisioning should simplify
the delivery of differentiated optical services
by providing access to service templates of
predefined restoration priorities,
preemptability, and linear, ring and mesh
protection schemes. Using these simplified
templates, service provisioners should be able
to deliver optical services, at any service
level, in just a few clicks of a mouse.
Flexible Concatenation - In legacy networks, bandwidth demand is
arbitrarily shoehorned into SONET/SDH-sized
transport containers where the size of the
container is fixed. For example, if a customer
requires OC-15 service, the customer must
purchase OC-48 service, even though only a
fraction of the 48 time slots in the transport
container will be filled with bits. In this
scenario, the customer is paying for bandwidth
it is not using and the carrier is losing
valuable network bandwidth. CIENA is using a
combination of silicon and software to
redefine how carriers access and deliver
bandwidth.
- When available, Flexible Concatenation will
allow carriers to access all time slots within
the SONET/SDH frame - even when those frames
are fractionally filled. That means carriers
will be able to create true OC-"N" services in
which "N" can be any number between 1 and 48
and in the future will be 192 and eventually
768 instead of the current restrictions of
SONET which sets fixed sizes on transport
containers. Flexible concatentation is
designed to enable carriers to maximize their
network bandwidth and deliver
customer-specific service.
Rate Adaptive Gigabit - CIENA's Rate-Adaptive Gigabit Ethernet
Ethernet technology uses software and ASICs to enable
service providers to sell "any-size" Gigabit
Ethernet services in increments of 50Mbps
(STS-1) up to 1.25Gbps.
- When available, service providers will be able
to use Rate Adaptive Gigabit Ethernet to
create a wide range of customized optical
service options for end-users and deliver
those services over more efficient access and
core networks that leverage the economies of
Gigabit Ethernet transmission.
VSR Optics - For increased profitability, carriers must
continually drop their cost per bit. However,
to stay competitive, carriers must continue to
increase the value of their services. VSR
(Very Short Reach) Optics are designed to
provide lower-cost, high-capacity connections
between Internet and optical networking
systems within a service provider's central
office. VSR Optics leverage Vertical Cavity
Surface Emitting Laser (VCSEL) technology and
Gigabit Ethernet standards to make
variable-rate optical services possible and
economical - a valuable service for
unpredictable bandwidth demands. When
available, CIENA will apply this data
rate-scalable technology to 10Gbps
network connections.
Transparent Service - As opposed to traditional SONET/SDH
Multiplexing multiplexing, CIENA's "transparent"
multiplexing is designed to enable optical
services to be delivered without compromising
the SONET/SDH overheads of individual
tributaries that make up the aggregate signal.
Enabling multiple signals to be transparently
multiplexed, transported and demultiplexed
means signals are delivered as if they were
connected directly to the destination
equipment by their own unique wavelength,
maintaining the customers' signal security and
integrity. When available, Transparent Service
Multiplexing (TSM) should be ideal for
delivering IP traffic, wavelength services and
other new optical services that CIENA's
Toolkit enables. With TSM, each end device
appears to communicate over its own unique
wavelength while actually being economically
consolidated with other signals.
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Wavelength Binding - With unprecedented traffic growth and changing
traffic demands, Internet-centric carriers are
looking for ways to better match the changes
in IP router traffic demands with the
provisioned bandwidth capacities available
within their networks. To meet this need,
CIENA is developing Wavelength Binding.
- Wavelength Binding will leverage intellectual
property to enable a device of any speed to be
connected to a network operating at a lower
speed by building "virtual channels" of
multiple wavelengths bound together in a
single, very high capacity bitstream. As a
result, when Wavelength binding is available
CIENA's customers will be able to deliver
40 gigabits per second without changing their
transport infrastructure. Wavelength Binding
will also give carriers previously unavailable
network flexibility by enabling them to bundle
and unbundle wavelengths as network capacity
demands change.
PRODUCT DEVELOPMENT
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We believe the overall growth in utilization of fiber optic
telecommunications networks will lead to transmission bottlenecks in other
segments of the networks where the application of optical networking
technologies may provide solutions. We also believe there may be opportunities
for us to develop products and technologies complementary to existing optical
networking technologies which may broaden our ability to provide, facilitate
and/or interconnect with high bandwidth solutions offered throughout fiber
optic networks. CIENA intends to focus its product development efforts and
possibly pursue strategic alliances or acquisitions to address expected
opportunities in these areas.
CUSTOMERS
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CIENA has announced publicly relationships with the following thirty-five
customers:
Domestic International
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1. Alltel Corporation 1. Cable & Wireless Communications Services Limited, UK
2. Bell South Telecommunications, Inc 2. CompleTel SAS, France
3. Broadwing Communications Services, 3. Crosswave Communications, Inc., Japan
Inc. (formerly IXC)
4. Cable & Wireless USA, Inc. 4. Daini Deuden Inc., Japan
5. Digital Teleport, Inc. 5. Dynegy Inc., Austria
6. Enron Communications Inc. 6. ESAT Telecom, Ireland
7. Genuity Solutions Inc. 7. Global Crossing (UK) Telecommunications Limited, UK
8. Intermedia Communications Inc. 8. GTS Network (Ireland) Limited, Belgium
9 WorldCom Inc. 9. HanseNet Telekommunikation GmbH, Germany
10. PSINet, Inc. 10. Interoute Telecommunications (UK) Limited, UK
11. Qwest Communications Corporation 11. Japan Telecom, Co., Ltd., Japan
12. RCN of Pennsylvania, Inc. 12. KDD/Teleway Japan Corporation, Japan
13. Sprint Corporation 13. Korea Telecom, Korea
14. Verizon Communications, 14. MobilCom AG, Germany
Inc.(formerly Bell Atlantic)
15. Williams Communications, Inc. 15. WorldCom, Inc., Europe
16. XO Communications, Inc. (formerly 16. Operadora Protel, S.A. de C.V., Mexico
Nextlink)
17. Fibernet UK Limited (formerly TANet, UK)
18. Telecom Developpement, France
19. Telia AB, Sweden
In addition, CIENA has several unannounced customer relationships.
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CUSTOMERS BY CATEGORY
INTEREXCHANGE CARRIERS (IXCS)
The initial deployments of CIENA's bandwidth enhancing optical transport
equipment occurred in the core of the U.S. long-distance network with the
interexchange carriers or IXCs. IXCs provide connections between local
exchanges in different geographic areas. In recent years, incumbent IXCs such
as Sprint, WorldCom and AT&T have seen increased competition from emerging
long-distance carriers such as Qwest Communications, Global Crossing,
Broadwing Communications Services, Inc., and Level 3 Communications. We expect
that continued competition in long-distance call rates, as well as the
carriers' desire for market and service differentiation, will continue to
drive demand for the increased capacity and features offered by CIENA's
optical networking equipment.
COMPETITIVE LOCAL EXCHANGE CARRIERS (CLECS)
Deregulation has fueled the growth of U.S. competitive local exchange
carriers or CLECs. CIENA believes that in the short-term, CLECs could benefit
from the hesitancy of incumbent local exchange carriers, such as the Regional
Bell Operation Companies ("RBOCs"), to open their local markets to
competitors, and that these CLECs are likely to move aggressively to
capitalize on opportunities in the local area. CIENA recognized revenues from
CLEC customers in fiscal 2000 and expects that tactical CLEC applications for
its long-haul products, as well as the short-distance products, will be
well-suited to CLEC network applications.
INTERNATIONAL COMPETITIVE CARRIERS
New competitive carriers are emerging as a result of deregulation in the
international telecommunications markets as well. CIENA has concentrated its
sales efforts on these emerging carriers as opposed to the traditional carriers
or PTTs. During Fiscal 2000, CIENA increased its announced international
customer base from fourteen to eighteen customers. In many cases, these new
competitive carriers do not have the installed fiber base of the larger carriers
and therefore are in need of the scalable bandwidth CIENA's optical transport
systems offer. In addition, because of the economies and flexibility afforded by
the application of DWDM technology, CIENA's equipment is being used on several
new builds where the service provider is physically constructing the network.
CIENA expects that in the near-term, the majority of its international revenue
will come from these smaller, more aggressive competitive carriers, and will
continue to concentrate its sales efforts accordingly.
NON-TRADITIONAL TELECOMMUNICATION SERVICE PROVIDERS
The growth of the Internet has produced traffic growth substantial enough
to attract new, non-traditional telecommunication service providers to compete
in this market as well. Both domestically and internationally, companies with
rights-of-way, such as utility companies, cable TV providers, and railroads
are capitalizing on their "network" (whether a pipeline, a railroad, or a
highway), and in some cases, are laying optical fiber and constructing
telecommunications networks along those rights-of-way. The transmission
capabilities of CIENA's optical networking equipment enables these new
carriers to provide competitive services while purchasing and laying a minimal
amount of fiber optic cable.
INCUMBENT LOCAL EXCHANGE CARRIERS
Incumbent local exchange carriers, such as the RBOCs, are very active in
interoffice and local exchange markets and, under the Telecommunications Act
of 1996, RBOCs are eligible to enter the long distance market once they have
met certain requirements for opening their local markets to competition. CIENA
believes that over time the RBOCs will continue to gain approval to offer long
distance services, although the timing of that move is uncertain, and the
question of how such a move will be implemented is unclear -- e.g., through
the establishment of owned network facilities, through the purchase of long
distance capacity from other long distance carriers, or through some
combination of the two. Regardless of the timing of any such move, CIENA
believes there are opportunities for in-region deployment of CIENA's long
distance and metropolitan optical transport products at certain RBOCs.
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MARKETING AND DISTRIBUTION
- -------------------------------------------------------------------------------
CIENA's intelligent optical networking systems require substantial
investment, and our target customers in the fiber optic telecommunications
market -- where network capacity and reliability are critical -- are highly
demanding and technically sophisticated. There are only a small number of such
customers in any country or geographic market. Also, every network operator
has unique configuration requirements, which impact the integration of optical
networking systems with existing transmission equipment. The convergence of
these factors leads to a very long sales cycle for optical networking
equipment, often more than a year between initial introduction to the Company
and commitment to purchase, and has further led CIENA to pursue sales efforts
on a focused, customer-by-customer basis. See Item 7. "Management's Discussion
and Analysis of Financial Conditions and Results of Operations - Risk
Factors."
CIENA has organized its resources for the separate but coordinated
approach to United States and international customers. In the United States
market, a sales team, comprised of an account manager, systems engineers and
technical support and training personnel, is assigned responsibility for each
customer account, and for the coordination and pursuit of sales contacts. In
the international market, CIENA pursues prospective customers through direct
sales efforts, as well as through distributors, independent marketing
representatives and independent sales consultants. CIENA established CIENA
Communications, Inc. as a wholly-owned subsidiary to coordinate worldwide
sales, marketing, customer service and installation support functions. CIENA
Communications Japan, Ltd. is a wholly-owned subsidiary established to
coordinate sales, marketing and customer service efforts in Japan, the Pacific
Rim and other Asian areas. CIENA established CIENA Limited as a wholly-owned
subsidiary in the U.K. to coordinate European, and Middle Eastern sales,
marketing, customer service and installation support functions. Through its
subsidiaries, CIENA has established offices in the U.S., Europe and Latin
America, including offices in the U.K., Germany, France, Spain, Mexico and
Brazil. CIENA has distributor or marketing representative arrangements,
including agreements with agents in Italy, the Republic of Korea, Japan,
Venezuela, Columbia and Chile.
In support of its worldwide selling efforts, CIENA conducts marketing
communications programs intended to position and promote its products within
the telecommunications industry. Marketing personnel also coordinate our
participation in trade shows and conduct media relations activities with trade
and general business publications.
MANUFACTURING
- -------------------------------------------------------------------------------
CIENA conducts most of the optical assembly, final assembly and final
component, module and system test functions for its optical transport products
at its manufacturing facilities in Maryland. It also manufactures the in-fiber
Bragg gratings used in its optical transport product lines. We expect the
majority of the manufacturing associated with our MultiWave CoreDirector and
CoreDirector CI products will be performed by third-party manufacturers, with
only final system test and assembly performed by CIENA. We also rely on third
party manufacturers to manufacture some of our components for our products and
continue to evaluate whether additional portions of our manufacturing can be
done on a reliable and cost-effective basis by third party manufacturers.
CIENA believes that portions of its manufacturing technologies and
processes represent a key competitive advantage. Accordingly, we have invested
significantly in automated production capabilities and manufacturing process
improvements and expect to further enhance our manufacturing process with
additional production process control systems. Certain critical manufacturing
functions require a highly skilled work force, and CIENA puts significant
efforts into training and maintaining the quality of its manufacturing
personnel and in maintaining its proprietary information in this area.
CIENA's optical transport product lines utilize hundreds of individual
parts, many of which are customized for the Company. Component suppliers in
the specialized, high technology end of the optical communications industry
are generally not as plentiful or, in some cases, as reliable, as component
suppliers, in more mature industries. CIENA works closely with its strategic
component suppliers to pursue new component technologies that could either
reduce cost or enhance the performance of our products.
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COMPETITION
- -------------------------------------------------------------------------------
Competition in the telecommunications equipment industry is intense,
particularly in that portion of the industry focused to delivering higher
bandwidth and more cost effective services throughout the telecommunications
network. CIENA believes that its position as a leading supplier of open
architecture optical networking equipment and the field-tested design and
performance of its optical transport products give it a competitive advantage
and expects to leverage that advantage in bringing its core switching products
to market. However, competition has been and will continue to be very intense.
See Item 7. "Management's Discussion and Analysis of Financial Conditions and
Results of Operations-Risk Factors."
The competition faced by CIENA is dominated by a small number of very
large, usually multinational, vertically integrated companies, each of which
has substantially greater financial, technical and marketing resources, and
greater manufacturing capacity as well as more established customer
relationships with long distance carriers than CIENA. Included among CIENA's
competitors are Lucent Technologies Inc., ("Lucent"), Northern Telecom Inc.
("Nortel"), Alcatel Alsthom Group ("Alcatel"), NEC Corporation ("NEC"), Cisco,
by virtue of its acquisition of Pirelli SpA, Siemens AG ("Siemens"), Fujitsu
Group ("Fujitsu"), Hitachi Ltd. ("Hitachi") and Telefon AB LM Ericsson
("Ericsson"). CIENA also believes that several new companies, such as ONI
Systems, Sycamore Networks, Corvis Systems, and Tellium, Inc., will attempt to
break into the rapidly emerging optical networking market. Each of CIENA's
major competitors is believed to be in various stages of development,
introduction or deployment of products directly competitive with CIENA's
optical transport, core switching and service delivery systems.
In addition to optical networking equipment suppliers, traditional
TDM-based transmission equipment suppliers compete with CIENA in the market
for transmission capacity. Lucent, Alcatel, Nortel, Fujitsu, Hitachi and NEC
are already providers of a full complement of such transmission equipment.
These and other competitors have introduced or are expected to introduce
equipment that will offer 10 Gb/s transmission capability.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
CIENA has licensed intellectual property from third parties, including
certain key enabling technologies with respect to the production of in-fiber
Bragg gratings, utilized publicly available technology associated with
Erbium-doped fiber amplifiers, and applied its design, engineering and
manufacturing skills to develop its optical transport systems. These licenses
expire when the last of the licensed patents expires or is abandoned. CIENA
also licenses from third parties certain software components for its network
management products. These licenses are perpetual but will generally terminate
after an uncured breach of the agreement by CIENA. We have registered
trademarks for CIENA, WaveWatcher, MODULE SCOPE, CIENA Optical Communications,
Multiwave, and Multiwave Sentry. CIENA also relies on contractual rights,
trade secrets and copyrights to establish and protect its proprietary rights
in its products.
CIENA intends to enforce vigorously its intellectual property rights if
infringement or misappropriation occurs.
CIENA's practice is to require its employees and consultants to execute
non-disclosure and proprietary rights agreements upon commencement of
employment or consulting arrangements with CIENA. These agreements acknowledge
CIENA's exclusive ownership of all intellectual property developed by the
individual during the course of his or her work with CIENA, and require that all
proprietary information disclosed to the individual will remain confidential.
CIENA's employees generally also sign agreements not to compete with CIENA for
a period of twelve months following any termination of employment.
As of November 2000, CIENA had received fifty-eight (58) United States
patents, and had one hundred sixteen (116) pending U.S. patent applications.
We also have a number of foreign patents and patent applications. Of the
United States patents that have been issued to CIENA, the earliest any will
expire is 2012. Pursuant to an agreement between CIENA and General Instrument
Corporation dated March 10, 1997, CIENA is a co-owner with General Instrument
Corporation of a portfolio of 27 United States and foreign patents relating to
optical communications, primarily for video-on-demand applications. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors."
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EMPLOYEES
- --------------------------------------------------------------------------------
As of October 31, 2000, CIENA and its subsidiaries employed 2,775 persons,
of whom 527 were primarily engaged in research and development activities,
1,233 in manufacturing, 412 in installation services, 372 in sales, marketing,
customer support and related activities and 231 in administration. None of
CIENA's employees are currently represented by a labor union. CIENA considers
its relations with its employees to be good.
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the
directors and executive officers of CIENA:
Name Age Position
------------------------ ------ -----------------------------------------
Patrick H. Nettles, Ph.D.(1) 57 Chief Executive Officer, Chairman of the Board of Directors
Gary B. Smith (1) 40 President, Chief Operating Officer and Director
Stephen B. Alexander 41 Senior Vice President, Chief Technology Officer
Steve W. Chaddick 49 Senior Vice President, Systems and Technology
Joseph R. Chinnici 46 Senior Vice President, Finance and Chief Financial Officer
Mark Cummings 49 Senior Vice President, Operations
Larry P. Huang 48 Senior Vice President, Business Development
Jesus Leon 56 Senior Vice President, Transport Products and Technology
Michael O. McCarthy III 35 Senior Vice President, General Counsel and Secretary
Elizabeth S. Perry 37 Senior Vice President, Core Switching and NMS
Rebecca K. Seidman 54 Senior Vice President, Human Resources Development
Chris V. Simpson 53 Senior Vice President, Global Sales
A. Perry Kamel 35 Vice President, Marketing
Andrew C. Petrik 37 Vice President, Controller and Treasurer
Stephen P. Bradley, Ph.D.(1)(3) 59 Director
Harvey B. Cash(1)(2) 62 Director
John R. Dillon(1)(3) 59 Director
Lawton W. Fitt (1)(3) 47 Director
Judith M. O'Brien (1)(2) 50 Director
Gerald H. Taylor(1)(2) 59 Director
------------------------------------------------------------------------------------
(1) The Company's Directors hold staggered terms of office, expiring as
follows: Ms. Fitt and Messrs Dillion and Nettles in 2001; Ms. O'Brien
and Messrs Smith and Cash in 2002; Messrs Bradley and Taylor in 2003
(2) Member of the Human Resources Committee
(3) Member of the Audit Committee
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PATRICK H. NETTLES, PH.D., has served as Chairman of the Board of
Directors and Chief Executive Officer since October 2000 and as President,
Chief Executive Officer and Director of the Company since April 1994, and as
Director, and Chief Executive Officer since February 1994. Dr. Nettles serves
as a Trustee for the California Institute of Technology and also serves on the
Advisory Board to the President at Georgia Institute of Technology. From 1992
until 1994, Dr. Nettles served as Executive Vice President and Chief Operating
Officer of Blyth Holdings Inc., a publicly-held supplier of client/server
software. From late 1990 through 1992, Dr. Nettles was President and Chief
Executive Officer of Protocol Engines Inc., a development stage enterprise,
formed as an outgrowth of Silicon Graphics Inc., and targeted toward very
large scale integration based solutions for high-performance computer
networking. From 1989 to 1990, Dr. Nettles was Chief Financial Officer of
Optilink, a venture start-up that was acquired by DSC Communications. Dr.
Nettles received his B.S. degree from the Georgia Institute of Technology and
his Ph.D. from the California Institute of Technology.
GARY B. SMITH has served as President, Chief Operating Officer and
Director since October 2000 and Senior Vice President, Chief Operating Officer
from August 1999 to October 2000. Mr. Smith served as Senior Vice President
Worldwide Sales from September 1998 to August 1999, and was previously Vice
President of International Sales since joining the Company in November 1997.
From June 1995 to October 1997, Mr. Smith served as Vice President, Sales and
Marketing for Intelsat and from August 1991 to May 1995, Mr. Smith served as
Vice President of Sales and Marketing for Cray Communications, Inc. Mr. Smith
received an M.B.A. from Ashridge Management College, U.K.
STEPHEN B. ALEXANDER has served as Senior Vice President, Chief Technology
Officer since January 2000, Vice President, Chief Technology Officer from
September 1998 to January 2000, and Vice President, Transport Products from
September 1996 to August 1998. He was previously Director of Lightwave Systems
at the Company since joining it in 1994. From 1982 until joining the Company,
he was employed at MIT Lincoln Laboratory, where he last held the position of
Assistant Leader of the Optical Communications Technology Group. Mr. Alexander
is an Associate Editor for the Journal of Lightwave Technology and a General
Chair of the conference on Optical Fiber Communication (OFC) for 1997. Mr.
Alexander received both his B.S. and M.S. degrees in electrical engineering
from the Georgia Institute of Technology.
STEVE W. CHADDICK has served as Senior Vice President, Systems and
Technology since January 2000, and was previously President, Core Switching
Division from September 1999 to January 2000. Mr. Chaddick served as Senior
Vice President, Strategy and Corporate Development from August 1998 to
September 1999, and from September 1996 to August 1998, he served as Senior
Vice President, Products and Technologies, and was previously Vice President
of Product Development for the Company since joining it in 1994. Prior to
joining the Company, Mr. Chaddick was Vice President of Engineering at AT&T
Tridom, a company he co-founded in 1983 and which was acquired by AT&T in
1988. Mr. Chaddick holds several patents in the area of WDM systems and
techniques, and serves on the Advisory Board of the School of Electrical and
Computer Engineering at Georgia Institute of Technology. Mr. Chaddick received
both his B.S. and M.S. degrees in electrical engineering from the Georgia
Institute of Technology.
JOSEPH R. CHINNICI has served as Senior Vice President, Finance and Chief
Financial Officer since August 1997, and was previously Vice President,
Finance and Chief Financial Officer from May 1995 to August 1997. Mr. Chinnici
served previously as Controller since joining the Company in September 1994.
From 1993 through 1994, Mr. Chinnici served as a financial consultant for
Halston Borghese Inc. From 1977 to 1993, Mr. Chinnici held a variety of
accounting and finance assignments for Playtex Apparel, Inc. (now a division
of Sara Lee Corporation), ending this period as Director of Operations
Accounting and Financial Analysis. Mr. Chinnici currently serves on the board
of directors for Online Technologies Group, Inc. Mr. Chinnici holds a B.S.
degree in accounting from Villanova University and an M.B.A. from Southern
Illinois University.
MARK CUMMINGS has served as Senior Vice President, Manufacturing since
August 1997, and was previously Vice President, Manufacturing since joining
the Company in May 1996. From 1985 to 1996, Mr. Cummings was Vice President,
Operations for Cray Communications, Inc., an international manufacturer of
communications equipment. Mr. Cummings holds a B.S. degree in electronic
technology from the State University of New York at Buffalo, and is currently
in the Masters program in advanced manufacturing systems at the University of
Maryland.
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LAWRENCE P. HUANG has served as Senior Vice President, Corporate
Development since May 2000 and was previously Senior Vice President, Strategic
Account Sales, from September 1998 to May 2000 and Senior Vice President,
Sales and Marketing, from November 1996 to September 1998. From April 1994,
when he joined the company, to September 1998, Mr. Huang served as Vice
President, Sales and Marketing of the Company. Prior to joining CIENA, Mr.
Huang was Vice President/General Manager and Vice President of Sales and
Marketing of AT&T Tridom, which he co-founded in 1983. Mr. Huang holds a B.S.
degree in industrial management from the Georgia Institute of Technology and a
M.B.A. from Georgia State University.
JESUS LEON has served as Senior Vice President, Products and Technology
since September 1998 and Vice President, Access Products since joining the
Company in November 1996. From December 1995 to October 1996, Mr. Leon served
as Vice President, Engineering, for the Access Systems Division of Alcatel
("Alcatel"). Prior to December 1996, Mr. Leon served in various positions with
Alcatel with responsibility for over 1,200 engineers in Europe, Australia and
South Africa. Mr. Leon holds a B.S.E.E. and M.E. degrees from the University
of Florida, an A.B.D. (all but doctoral dissertation) from the Georgia
Institute of Technology and an M.B.A. degree from Georgia State University.
MICHAEL O. MCCARTHY III has served as Senior Vice President, General Counsel
and Secretary since October 2000 and was previously Vice President, General
Counsel and Secretary from July 1999 to October 2000. Mr. McCarthy served as
the Assistant General Counsel since joining the Company in September 1997.
From June 1996 to September 1997, Mr. McCarthy was a Corporate Counsel in MCI
Communications Corporation's mergers and acquisitions group. Prior to joining
MCI, Mr. McCarthy was an attorney with Hogan & Hartson's corporate and
securities group where he served as outside counsel for a variety of emerging
companies. Mr. McCarthy holds a B.A. degree in Mathematical Economics from
Colgate University and a J.D. degree from Vanderbilt University's School of
Law.
ELIZABETH S. PERRY has served as Senior Vice President of the Core
Switching Products and Network Management Systems since January 2000, and was
previously Vice President, Core Switching Products, from August 1999 to
January 2000. Ms. Perry also served as Director of Network Management
strategy since joining the Company in April 1999. From August 1997 to March
1999, Ms. Perry served as Senior Director of SONET Software Development at
Hitachi Telecom. Ms. Perry served from June 1993 to July 1997 as Director,
High Capacity Lightwave Software Development for Alcatel. Ms. Perry received
her M.S.E.E. degree with Telecommunications specialty, as well as her
B.S.E.M./E.E. degrees from Southern Methodist University.
REBECCA K. SEIDMAN has served as Senior Vice President, Human Resources
since August 1999 and was previously Vice President, Human Resources from June
1996 to August 1999. Ms. Seidman also served as Director of Human Resources
Development since joining the Company in April 1996. From 1984 until joining
the Company, Ms. Seidman served consecutively as Director of Marketing, Vice
President, Administration, and Principal of Walpert, Smullian & Blumenthal,
P.A., a regional accounting and consulting firm. Ms. Seidman holds a B.A.
degree in economics and political science from Goucher College and is the
co-author of Total Quality Distribution, a book discussing practical
applications of Total Quality in the wholesale distribution industry.
CHRIS V. SIMPSON has served as Senior Vice President, Global Sales since
joining the Company in April 2000. Prior to joining the Company, Mr. Simpson
served as Vice President of Sales, Marketing and International Operations for
Harris Corporation's RF Communications. From 1988 to 1998, Mr. Simpson held
several senior sales and marketing positions at Qualcomm, Inc., including
Senior Vice President and General Manager Worldwide Sales and Marketing and
Senior Vice president Strategic Marketing. Mr. Simpson received his B.S.
degree in Accounting from Oklahoma State University.
A. PERRY KAMEL has served as Vice President, Marketing since joining the
Company in May 2000. Prior to joining the Company, Mr. Kamel founded
BroadPoint Communications, an e-commerce start-up, where he served as a
Director, President and Chief Executive Officer from October 1997 to March
2000. From August 1996 to October 1997, Mr. Kamel served as Director of
Strategic Planning and Business Development at MCI Communications. From May
1994 to August 1996, Mr. Kamel was employed by McKinsey & Company where he
consulted leading service providers in strategy and operations. Mr. Kamel
received his M.S.E.E. and B.S.E.E. degrees from Cornell University and holds
and M.B.A. degree from the Wharton Business School of the University of
Pennsylvania.
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ANDREW C. PETRIK has served as Vice President, Controller and Treasurer
since August 1997, as Controller and Treasurer from December 1996 to August
1997 and as Controller since joining the Company in July 1996. From 1989 to
1996, Mr. Petrik was employed by Microdyne Corporation where he was the
Assistant Vice President of Marketing and Product Planning from 1994 to 1996
and the Assistant Controller from 1989 to 1994. Mr. Petrik holds a B.S. degree
in Accounting from the University of Maryland and is a Certified Public
Accountant.
STEPHEN P. BRADLEY, PH.D. has served as a Director of the Company since
April 1998. Professor Bradley is a William Ziegler Professor of Business
Administration and the Chairman of the Program for Management Development at
the Harvard Business School. A member of the Harvard faculty since 1968,
Professor Bradley is also Chairman of Harvard's Executive Program in
Competition and Strategy and teaches in Harvard's Delivering Information
Services program. Professor Bradley has written extensively on the
telecommunications industry and the impact of technology on competitive
strategy. Professor Bradley received his B.E. degree in Electrical Engineering
from Yale University in 1963 and his M.S. degree and Ph.D. in Operations
Research from the University of California, Berkeley, in 1965 and 1968
respectively.
HARVEY B. CASH has served as a Director of the Company since April 1994.
Mr. Cash is a general partner of InterWest Partners, a venture capital firm in
Menlo Park, California that he joined in 1985. Mr. Cash serves on the board
of directors of Liberte, Inc., Panja Corporation, and i2 Technologies Inc.. He
is also an advisor to Austin Ventures. Mr. Cash received a B.S. degree in
electrical engineering from Texas A&M University and an M.B.A. degree from
Western Michigan University. Mr. Cash served on the board of directors of
Benchmarq Microelectronics from 1990 to 1999, and on the board of directors of
Aurora Electronics, Inc. from 1991 to 1999.
JOHN R. DILLON has served as a Director of the Company since October 1999.
Mr. Dillon serves on the board of directors of Airgate PCS. Mr. Dillon's
experience includes a variety of positions at such companies as The Coca-Cola
Company, Scientific Atlanta and Fuqua National, where he served as President.
Mr. Dillon was instrumental in taking Cox Communications private in 1985 and
merging it with Cox Newspapers to form Cox Enterprises, at which time he was
elected Senior Vice President, CFO and a member of the board of directors. At
Cox Enterprises, he was responsible for all corporate financial activities as
well as planning and development until his retirement in December 1996. He
continued to serve on the Boards of TCG and Cox Communications for two years
following his retirement from Cox Enterprises. Mr. Dillon holds an MBA degree
from Harvard Business School and a BEE degree from Georgia Institute of
Technology, where he was elected to the Academy of Distinguished Engineering
Alumni in 1997. He was a founding director of the Georgia Center for Advanced
Telecommunications Technology and served on the Georgia Institute of
Technology National Advisory Board.
LAWTON W. FITT became a Director of the Company in November 2000. Ms. Fitt
was elected a partner at Goldman Sachs in 1994 and has been a managing director
since 1996. She has been involved in investment banking and equity underwriting
for high-technology companies, including numerous initial public offerings in
the Internet, software and communications equipment sectors. Ms. Fitt is
currently co-head of Goldman Sachs' European High Technology Investment Banking
Group. In addition to chairing the Corporate Financing Committee of the
National Association of Securities Dealers, Ms. Fitt serves as a director on the
boards of Wink Communications, Inc. and e-Steel Corporation. Ms. Fitt is a
trustee of the Darden School Foundation. Ms. Fitt received an A.B. degree in
European History from Brown University and her M.B.A degree from the Darden
School of the University of Virginia.
JUDITH M. O'BRIEN has served as a Director of the Company since July 2000.
Since 1984, Ms. O'Brien has been a partner with Wilson Sonsini Goodrich &
Rosati, where she specializes in corporate finance, mergers and acquisitions and
general corporate matters. In July 1993, Ms. O'Brien was named as one of the
top 25 lawyers under 45 in California by the California Law Business, and in
1997 she was named one of the top five women attorneys in Northern California by
the California Lawyer as well as one of the leading women securities lawyers by
The Recorder. In April 2000, she was named one of the top twelve Dealmakers of
the Year for 1999 by American Lawyer magazine. Ms. O'Brien received her B.A.
from Smith College and her law degree from UCLA.
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GERALD H. TAYLOR has served as a Director of the Company since January
2000. Mr. Taylor serves as a Managing Member of mortonsgroup and serves on the
board of directors of Lafarge Corporation. Mr. Taylor brings 29 years of
experience from MCI. During his employment with MCI, Mr. Taylor was integrally
involved in establishing MCI as one of the world's largest telecommunications
companies. In addition to his roles as Chief Executive Officer from November
1996 to October 1998, as President from July 1994 to November 1996, and as
Chief Operating Officer from 1993 until 1996, Mr. Taylor held key roles in
operations, sales and marketing. Mr. Taylor received a B.S. degree in physics
from San Francisco State University.
ITEM 2. PROPERTIES
As of October 31, 2000, all of CIENA's properties are leased. CIENA's
principal executive offices, sales, and marketing functions are currently
located in a 68,000 square foot facility in Linthicum, Maryland. CIENA has
leased an additional 19,000 square foot facility in Linthicum, Maryland where it
intends to add additional space for its sales and marketing functions. CIENA's
product development functions are located in a 96,000 square foot facility in
Linthicum, Maryland; and a 27,500 square foot facility in Alpharetta, Georgia.
CIENA has leased an additional 25,000 square foot facility in Linthicum,
Maryland, where it intends to add additional space for its product development
functions. Combined product development and manufacturing functions are also
located in a 43,000 square foot facility in Marlborough, Massachusetts; and a
116,000 square foot facility in Cupertino, California. CIENA also has
manufacturing facilities located in both Savage and Linthicum, Maryland which
consist of 5 facilities with a total of 300,000 square feet that are used for
such functions as manufacturing production, systems integration and test, pilot
production, and customer service and support. CIENA's primary engineering,
furnishment and installation facility is located in a 26,000 square foot
facility located in Duluth, Georgia. CIENA has sales, marketing and customer
support offices located in Overland Park, Kansas; Richardson, Texas; Plano,
Texas; Tulsa, Oklahoma; Middletown, New Jersey; Boca Raton, Florida; Denver,
Colorado; Minneapolis, Minnesota; Portland, Oregon; Bellevue, Washington; Chevy
Chase, MD; South Bury, Connecticut; Clinton, Michigan; Edmonton, Canada; London,
England; Paris, France; Brussels, Belgium; Frankfurt, Germany; Tokyo, Japan; Sao
Paulo, Brazil; Mexico City, Mexico; Lyons, France; Madrid, Spain, and Hong Kong,
China.
ITEM 3. LEGAL PROCEEDINGS
On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned
subsidiary of CIENA, filed a complaint in the United States District Court for
the District of Delaware requesting damages and injunctive relief against
Corvis Corporation. The complaint charges Corvis Corporation with infringing
three patents relating to CIENA's optical networking communication systems and
technology. On September 8, 2000, Corvis filed an Answer and Counterclaim
alleging invalidity, non-infringement and unenforceability of the asserted
patents, and tortuous interference with prospective economic advantage. CIENA
believes that Corvis' counterclaims are without merit, and intends to defend
itself vigorously.
On October 3, 2000, Stanford University and Litton Systems filed a
complaint in U.S. District Court for the Central District of California
alleging that optical fiber amplifiers incorporated into CIENA's products
infringe U.S. Patent No. 4,859,016. We are unable to estimate what impact, if
any, an adverse outcome would have on the Company. We intend to defend this
suit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
CIENA's Common Stock is traded on the NASDAQ National Market under the
symbol CIEN. The following table sets forth for the fiscal periods indicated
the high and low sales prices of the Common Stock, as reported on the NASDAQ
National Market, adjusted to reflect the two-for-one stock split of the Common
Stock, which became effective on September 18, 2000.
Price Range of Common Stock
---------------------------
High Low
---- ---
Fiscal Year 1998
First Quarter ended January 31, 1998 ................. $ 31.78 $ 23.72
Second Quarter ended April 30, 1998 .................. $ 29.13 $ 18.63
Third Quarter ended July 31, 1998 .................... $ 46.19 $ 23.44
Fourth Quarter ended October 31, 1998................. $ 37.94 $ 4.06
Fiscal Year 1999
First Quarter ended January 31, 1999 ................. $ 11.50 $ 6.22
Second Quarter ended April 30, 1999 .................. $ 14.63 $ 8.31
Third Quarter ended July 31, 1999 .................... $ 18.88 $ 11.35
Fourth Quarter ended October 31, 1999................. $ 21.41 $ 14.53
Fiscal Year 2000
First Quarter ended January 31, 2000 ................. $ 39.69 $ 16.75
Second Quarter ended April 30, 2000 .................. $ 94.50 $ 30.03
Third Quarter ended July 31, 2000 .................... $ 90.13 $ 44.94
Fourth Quarter ended October 31, 2000................. $ 151.00 $ 64.19
The closing sale price for the Common Stock on October 27, 2000 was
$104.375.
The market price of CIENA's Common Stock has fluctuated significantly and
may be subject to significant fluctuations in the future. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Overview and Risk Factors."
As of October 31, 2000, there were approximately 1,482 holders of record
of CIENA's Common Stock and 286,530,631 shares of Common Stock outstanding.
CIENA has never paid cash dividends on its capital stock. CIENA currently
intends to retain earnings for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.
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19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto included in Item 8. "Financial Statements and
Supplementary Data". CIENA has a 52 or 53 week fiscal year which ends on the
Saturday nearest to the last day of October in each year. For purposes of
financial statement presentation, each fiscal year is described as having
ended on October 31. Fiscal 1997, 1998, 1999 and 2000 comprised 52 weeks and
fiscal 1996 comprised 53 weeks.
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ---------- ----------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 88,463 $ 413,215 $ 508,087 $ 482,085 $ 858,750
Cost of goods sold........................... 47,315 166,472 256,014 299,769 477,393
----------- ------------ ---------- ----------- ------------
Gross profit............................... 41,148 246,743 252,073 182,316 381,357
----------- ------------ ---------- ----------- ------------
Operating expenses:
Research and development................... 8,922 23,773 73,756 104,641 129,069
Selling and marketing...................... 5,641 22,627 47,343 61,603 90,922
General and administrative................. 6,346 11,476 18,468 22,736 34,000
Settlement of accrued contract obligation.. - - - - (8,538)
Purchased research and development......... - - 9,503 - -
Pirelli litigation......................... - 7,500 30,579 - -
Merger related costs....................... - - 2,548 13,021 -
Provision for doubtful accounts............ 76 489 806 250 28,010
----------- ----------- --------- ---------- -----------
Total operating expenses..................... 20,985 65,865 183,003 202,251 273,463
----------- ----------- --------- ---------- -----------
Income (loss) from operations................ 20,163 180,878 69,070 (19,935) 107,894
Other income (expense),net................... 653 7,178 12,830 13,944 12,680
----------- ----------- --------- ---------- -----------
Income (loss) before income taxes............ 20,816 188,056 81,900 (5,991) 120,574
Provision (benefit) for income taxes......... 3,553 72,488 36,200 (2,067) 39,187
----------- ----------- --------- ---------- -----------
Net income (loss)............................ $ 17,263 $ 115,568 $ 45,700 $ (3,924) $ 81,387
=========== =========== ========= ========== ===========
Basic net income (loss) per common
share...................................... $ 0.62 $ 0.76 $ 0.19 $ (0.01) $ 0.29
=========== =========== ========= ========== ===========
Diluted net income (loss) per common
and dilutive potential common share........ $ 0.09 $ 0.55 $ 0.18 $ (0.01) $ 0.27
=========== =========== ========= ========== ===========
Weighted average basic common shares
outstanding................................ 27,634 151,928 235,980 267,042 281,621
=========== =========== ========= ========== ===========
Weighted average basic common and
dilutive potential common shares
outstanding................................ 184,814 209,686 255,788 267,042 299,662
=========== =========== ========= ========== ===========
OCTOBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ------------ ----------- ------------- ---------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents.................... $ 24,040 $ 273,286 $ 250,714 $ 143,440 $ 143,187
Working capital.............................. 42,240 338,078 391,305 427,471 639,675
Total assets................................. 79,676 468,247 602,809 677,835 1,027,201
Long-term obligations, excluding
current portion............................ 3,465 1,900 3,029 4,881 4,882
Mandatorily redeemable preferred stock 40,404 - - - -
Stockholders' equity......................... $ 10,783 $ 377,278 $ 501,036 $ 530,473 $ 809,835
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's consolidated
financial statements and notes thereto included elsewhere in this report on
Form 10-K.
OVERVIEW
CIENA is a leader in the rapidly growing intelligent optical networking
equipment market. We offer a comprehensive portfolio of products for
communications service providers worldwide. Our customers include
long-distance carriers, competitive and incumbent local exchange carriers,
Internet service providers, wireless and wholesale carriers. CIENA offers
optical transport and intelligent optical switching systems that enable
service providers to provision, manage and deliver high-bandwidth services to
their customers. We have pursued a strategy to develop and leverage the power
of disruptive technologies to change the fundamental economics of building
carrier-class tele- and data-communications networks, thereby providing our
customers with a competitive advantage. CIENA's intelligent optical networking
products are designed to enable carriers to deliver any time, any size, any
priority bandwidth to their customers.
CIENA's LightWorks is an optical networking architecture designed to
change the fundamental economics of building service provider networks.
LightWorks focuses on the three critical areas of optical networking:
long-distance optical transport, short-distance optical transport and
intelligent core switching. The products in CIENA's LightWorks combine the
functionality of several current network elements into a single network
element, thereby lowering the capital equipment requirements of a service
provider and simplifying the network, in order to reduce a carrier's network
operating costs.
The products of CIENA's LightWorks architecture can be sold together as a
complete network solution or separately as best-of-breed solutions. Products
include four generations of long distance optical transport systems: MultiWave
1600, MultiWave Sentry 1600, MultiWave Sentry 4000, and MultiWave CoreStream.
LightWorks also includes CIENA's short distance optical transport products:
MultiWave Firefly, MultiWave Metro, and MultiWave Metro One. CIENA's
LightWorks architecture also includes its MultiWave CoreDirector family of
optical core switching products. The recently introduced MultiWave
CoreDirector is an intelligent optical core switch that allows carriers to
deliver a full range of transport services, without costly SONET/SDH
(synchronous optical networks/synchronous digital hierarchy) multiplexers and
with more flexibility than "wavelength only" devices. The first release of the
MultiWave CoreDirector became available during the third fiscal quarter ended
July 31, 2000.
In November 1999, CIENA announced it was pursuing enhancements to its
MultiWave CoreStream product that will enable the system to offer the optimal
combination of longer reach transport functionality and channel count to
further lower network costs for service providers. Using forward error
correction (FEC), nonlinearity management, and dispersion mapping
technologies, plus embedded system intelligence, MultiWave CoreStream
ultimately will be able to support optical spans of up to 5,000 kilometers
without additional optical-to-electrical signal regeneration. We expect to
begin customer shipments of the longer reach features of this product in the
first quarter of fiscal 2001. See "Risk Factors".
During January 2000, CIENA announced the LightWorks Toolkit for Optical
Services, a series of new optics-, silicon- and software-based service
enablers. CIENA's LightWorks Toolkit is designed to assist carriers with the
transition from static service provisioning to real-time, on demand bandwidth
delivery; from bandwidths limited by traditional SONET/SDH to optical
bandwidth of any size; and from a single wavelength quality of service to a
range of service qualities that can be dynamically configured and monitored.
These service-enabling tools began to be integrated into CIENA's LightWorks
products during the second half of calendar 2000. See "Risk Factors".
During May 2000, CIENA announced the introduction of its newest
intelligent optical core switching product, MultiWave CoreDirector CI, an
entry version of CIENA's market-leading MultiWave CoreDirector switch.
MultiWave CoreDirector CI is designed to offer network operators all the
intelligence, real-time provisioning, dynamic network protection, and
comprehensive network management capabilities of MultiWave CoreDirector, but
optimized for smaller central offices predominant in regional and metropolitan
portions of service provider networks. The initial release of MultiWave
CoreDirector CI is expected in limited availability for customer trials during
the first quarter of calendar 2001. See "Risk Factors".
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21
During May 2000, CIENA also announced the launch of its LightWorks
ON-Center(TM) Management Suite, a new fully integrated family of
software-based tools for comprehensive element, network and service layer
management across service provider networks. ON-Center is designed to enable
accelerated deployment of new, differentiating optical services, reduced
network operating and management costs, and innovative customer service
solutions. The ON-Center management suite is designed to help service
providers use the built-in networking intelligence of CIENA's LightWorks
Toolkit for Optical Services and network architecture to enable real-time
service deployment, dynamic service level agreement (SLA) management,
multi-vendor optical service monitoring, full Fault, Configuration,
Accounting, Performance and Security (FCAPS) management across CIENA systems,
and Web-based customer service awareness tools. The initial release of
ON-Center became available during October 2000.
During August 2000, CIENA announced that it had added Rate-Adaptive
Gigabit Ethernet technology to the LightWorks Toolkit for Optical Services.
CIENA's Rate-Adaptive Gigabit Ethernet technology uses software and ASICs to
enable service providers to sell "any-size" Gigabit Ethernet services in
increments of 50 Mbps(STS-1), up to 1.25 Gbps. The service rate is adaptive to
end-users' needs, allowing service providers to tailor pricing to a finer
granularity of data rates. Additionally, the technology enables providers to
transport fractional Gigabit Ethernet traffic from up to 10 different
customers over a single 2.5 GPS wavelength. As a result, service providers can
create a wide range of customized optical service options for end-users and
deliver those services over more efficient access and core networks that
leverage the economies of Gigabit Ethernet transmission. Rate-Adaptive Gigabit
Ethernet technology is expected to be available for customer trails on CIENA's
MultiWave Metro systems in the first half of calendar 2001.
CIENA has increased the number of revenue generating optical networking
equipment customers from a total of twenty-seven customers during fiscal 1999 to
thirty-two customers for fiscal 2000. We intend to preserve and enhance our
market leadership and eventually build on our installed base with new and
additional products. CIENA believes that its product and service quality,
manufacturing experience, and proven track record of delivery will enable it to
endure competitive pricing pressure while concentrating on efforts to reduce
product costs and maximize production efficiencies. See "Risk Factors".
As of October 31, 2000, the Company and its subsidiaries employed
approximately 2,775 persons, which was an increase of 847 persons over the
approximate 1,928 employed on October 31, 1999.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 2000, 1999 AND 1998
REVENUE. The Company recognized $858.8 million, $482.1 million and $508.1
million in revenue for the fiscal years ended October 31, 2000, 1999 and 1998,
respectively. The approximate $376.7 million or 78.1% increase in revenue from
fiscal 1999 to fiscal 2000 was due primarily to an increase in product
shipments across all product lines. The approximate $26.0 million or 5.1%
decrease in revenue from fiscal 1998 to fiscal 1999 was largely the result of
reduced selling prices.
CIENA recognized revenues from a total of thirty-two, twenty-seven, and
fourteen optical equipment customers during fiscal 2000, 1999, and 1998,
respectively. During fiscal year 2000, Sprint, Qwest Communications and GTS
Network Ltd. each accounted for at least 10% or more of CIENA's revenue and
all three combined accounted for 60.9% of the Company's fiscal 2000 revenue.
During fiscal year 1999 Sprint, WorldCom, and GTS Network Ltd., each accounted
for at least 10% or more of CIENA's revenue and all three combined accounted
for 46.2% of CIENA's fiscal 1999 revenue. This compares to fiscal 1998 in
which Sprint was the only 10% customer and in total accounted for 52.5% of
CIENA's fiscal 1998 revenue. Revenue derived from foreign sales accounted for
approximately 33.0%, 44.3%, and 23.0% of the Company's total revenues during
fiscal 2000, 1999, and 1998, respectively.
For fiscal 2000, CIENA's optical network equipment revenues were derived
from sales of the MultiWave Sentry 4000, MultiWave CoreStream configured for
both 2.5 gigabits per second ("Gbps") and 10.0 Gbps transmission rates,
21
22
MultiWave Sentry 1600, MultiWave Metro, MultiWave 1600, MultiWave
CoreDirector, MultiWave Firefly systems and MultiWave MetroOne. During fiscal
1999, the Company recognized revenues from sales of MultiWave Sentry 4000,
MultiWave Sentry 1600, MultiWave 1600, MultiWave Metro, MultiWave Firefly, and
MultiWave CoreStream systems. During fiscal 1998, the Company recognized
revenues from sales of MultiWave Sentry 1600, MultiWave 1600, MultiWave
Firefly, and MultiWave Sentry 4000 systems. The revenues for fiscal 2000
improved as compared to fiscal 1999 due to increased sales of MultiWave Sentry
4000, MultiWave CoreStream, MultiWave Sentry 1600, MultiWave Metro, and
MultiWave Firefly systems, and also from the introduction of revenues from
MultiWave CoreDirector and MultiWave MetroOne systems. The amount of revenue
recognized from MultiWave Sentry 1600 and MultiWave 1600 declined in fiscal
1999 as compared to fiscal 1998. This decline in MultiWave Sentry 1600 sales
in fiscal 1999 was offset by the introduction of new revenues from the
MultiWave CoreStream, and MultiWave Metro products in fiscal 1999. Fiscal 1999
revenues from MultiWave Sentry 4000 and MultiWave Firefly were comparable to
the revenues recognized for these products in fiscal 1998. Revenues derived
from engineering, furnishing and installation services as a percentage of
total revenue were 8.4%, 12.1%, and 9.2% for the fiscal years 2000, 1999, and
1998, respectively.
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to the
Company's manufacturing and engineering, furnishing and installation
operations. Gross profit was $381.4 million, $182.3 million, and $252.1
million for fiscal years 2000, 1999, and 1998, respectively. Gross margin was
44.4%, 37.8%, and 49.6% for fiscal 2000, 1999, and 1998, respectively. The
increase in gross profit from fiscal 1999 to fiscal 2000 was due primarily to
lower component costs and improved production efficiencies. The decrease in
gross profit from fiscal 1998 to fiscal 1999 was largely attributable to lower
selling prices.
CIENA's gross margins may be affected by a number of factors, including
product mix, continued competitive market pricing, outsourcing of manufacturing,
manufacturing volumes and efficiencies, competition for skilled labor, and
fluctuations in component costs. Downward pressures on our gross margins may be
further impacted by an increased percentage of revenues from EF&I services or
additional service requirements. CIENA will continue to concentrate on efforts
to reduce product costs and maximize production efficiencies and, if successful
in these efforts, may be able to improve gross margins in the future. See "Risk
Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$129.1 million, $104.6 million, and $73.8 million for fiscal 2000, 1999, and
1998, respectively. The approximate $24.4 million or 23.3% increase from
fiscal 1999 to 2000 and the approximate $30.9 million or 41.9% increase from
fiscal 1998 to 1999 in research and development expenses related to increased
staffing levels, purchases of materials used in development of new or enhanced
product prototypes, and outside consulting services in support of certain
developments and design efforts. During fiscal 2000, 1999, and 1998 research
and development expenses were 15.0%, 21.7%, and 14.5% of revenue,
respectively. CIENA expects that its research and development expenditures
will continue to increase in absolute dollars and perhaps as a percentage of
revenue during fiscal 2001 to support the continued development of CIENA's
intelligent optical networking products, the exploration of new or
complementary technologies, and the pursuit of various cost reduction
strategies. CIENA has expensed research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $90.9
million, $61.6 million, and $47.3 million for fiscal 2000, 1999, and 1998,
respectively. The approximate $29.3 million or 47.6% increase from fiscal 1999
to 2000 and the approximate $14.3 million or 30.1% increase from fiscal 1998
to 1999 in selling and marketing expenses was primarily the result of
increased staffing levels in the areas of sales, technical assistance and
field support, and increases in commissions earned, trade show participation
and promotional costs. During fiscal 2000, 1999, and 1998 selling and
marketing expenses were 10.6%, 12.8%, and 9.3% of revenue, respectively. The
Company anticipates that its selling and marketing expenses may increase in
absolute dollars and perhaps as a percentage of revenue during fiscal 2001 as
additional personnel are hired and additional offices are opened to allow the
Company to pursue new customers and market opportunities. The Company also
expects the portion of selling and marketing expenses attributable to
technical assistance and field support, specifically in Europe, Latin America,
and Asia, will increase as the Company's installed base of operational
MultiWave systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $34.0 million, $22.7 million and $18.5 million for fiscal 2000, 1999, and
1998, respectively. The approximate $11.2 million or 49.5% increase from
fiscal year 1999 to 2000 and the approximate $4.3 million or 23.1% increase
from fiscal year 1998 to 1999 in
22
23
general and administrative expenses was primarily the result of increased
staffing levels and outside consulting services. During fiscal 2000, 1999, and
1998 general and administrative expenses were 4.0%, 4.7%, and 3.6% of revenue,
respectively. The Company believes that its general and administrative
expenses will increase in absolute dollars and perhaps as a percentage of
revenue during fiscal 2001 as a result of the expansion of the Company's
administrative staff required to support its expanding operations.
SETTLEMENT OF ACCRUED CONTRACT OBLIGATION. The $8.5 million gain from
settlement of accrued contract obligation relates to the July 2000 termination
of certain accrued contract obligations that CIENA received from iaxis
Limited, one of CIENA's European customers. In September 2000, CIENA was
informed that an administrative order had been issued by a London court
against iaxis Limited. As a result of this order, joint administrators were
appointed to manage the business of iaxis Limited while they marketed the
business for sale and formulated a reorganization of the company. See
"Provision for Doubtful Accounts" below.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the fiscal year 1998. These costs were for the
purchase of technology and related assets associated with the acquisition of
Terabit during the second quarter of fiscal 1998.
PIRELLI LITIGATION. The Pirelli litigation costs of $30.6 million in
fiscal 1998 were attributable to a $30.0 million payment made to Pirelli
during the third quarter of 1998 and to additional other legal and related
costs incurred in connection with the settlement of this litigation.
MERGER RELATED COSTS. The merger costs for fiscal 1999 of approximately
$13.0 million were costs related to CIENA's acquisition of Omnia and Lightera.
These costs include an $8.1 million non-cash charge for the acceleration of
warrants based upon CIENA's common stock price on June 30, 1999 and $4.9
million for fees, legal and accounting services and other costs. The warrants
were issued to one of Omnia's potential customers and became exercisable upon
the consummation of the merger between CIENA and Omnia. The merger related
costs for fiscal 1998 were costs related to the contemplated merger between
CIENA and Tellabs. These costs include approximately $1.2 million in
Securities and Exchange Commission filing fees and approximately $1.3 million
in legal, accounting, and other related expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. CIENA performs ongoing credit evaluations
of its customers and generally does not require collateral from its customers.
CIENA maintains an allowance for potential losses when identified. CIENA's
allowance for doubtful accounts as of October 31, 2000 was $29.6 million.
Approximately $27.8 million relates to provisions made for doubtful accounts
associated with iaxis Limited, one of CIENA's European customers. In September
2000, CIENA was informed that an administrative order had been issued by a
London court against iaxis Limited. As a result of this order, joint
administrators were appointed to manage the business of iaxis Limited while
they marketed the business for sale and formulated a reorganization of the
company. In November 2000, CIENA was notified that Dynegy Inc. and its
subsidiaries had entered into a proposed agreement to acquire the assets and
stock of iaxis Limited from the administrators. As a consequence of the terms
of (a) the proposed agreement between the administrators of iaxis Limited,
Dynegy and its subsidiaries, and of (b) a related sales agreement between
CIENA and Dynegy, CIENA expects to realize approximately $8.9 million of the
gross outstanding accounts receivable balance due from iaxis Limited as of
October 31, 2000. While the proposed purchase agreement between the
administrators of iaxis Limited and Dynegy is subject to certain
administrative and judicial approvals, CIENA believes that such approvals will
be ultimately obtained and that CIENA will be successful in collecting the net
$8.9 million outstanding accounts receivable balance from the customer.
However, should such approvals not occur, additional write-offs might be
required.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on the Company's cash, cash equivalents and marketable
debt securities, net of interest expense associated with the Company's debt
obligations. Other income (expense), net, was $12.7 million, $13.9 million,
and $12.8 million for fiscal 2000, 1999, and 1998, respectively. The decrease
in other income (expense) from fiscal 1999 to fiscal 2000 was due to lower
balances of cash, cash equivalents and marketable debt securities in fiscal
2000 as compared to fiscal 1999. The increase in companies other income
(expense) from fiscal 1998 to fiscal 1999 was primarily the result of the
investment of the net proceeds of the Company's stock offerings and net
earnings.
23
24
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision (benefit) for
income taxes was 32.5%, (34.5%), and 44.2% of pre-tax earnings (loss) for
fiscal 2000, 1999 and 1998, respectively. The income tax provision for 2000
was lower than the expected 35% primarily due to benefits from research and
development tax credits. The benefit for fiscal 1999 was less than the
expected statutory benefit of 35% due to non-deductible merger costs. The
income tax provision for 1998 was higher than the expected statutory rate of
35%, due primarily to charges for purchased research and development and state
tax charges related to the Alta acquisition. Purchased research and
development charges are not deductible for tax purposes. Exclusive of the
effect of these charges, the Company's provision for income taxes was 38.6% of
income before income taxes in fiscal 1998. As of October 31, 2000 CIENA's
deferred tax asset was $143.0 million. The realization of this asset could be
adversely affected if future earnings are lower than anticipated.
24
25
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth the operating results and percentage of revenue
represented by certain items in the Company's statements of operations for
each of the eight quarters in the period ended October 31, 2000. This
information is unaudited, but in the opinion of the Company reflects all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of such information in accordance
with generally accepted accounting principles. The results for any quarter are
not necessarily indicative of results for any future period.
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31, Oct. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- --------- --------- --------- --------- -------- --------- ---------
Revenue................................... $100,417 $ 111,490 $ 128,826 $ 141,352 $ 152,213 $185,679 $ 233,268 $ 287,590
Cost of goods sold........................ 65,778 71,238 79,361 83,392 87,003 104,205 128,172 158,013
-------- --------- --------- --------- --------- -------- --------- ---------
Gross profit............................ 34,639 40,252 49,465 57,960 65,210 81,474 105,096 129,577
-------- --------- --------- --------- --------- -------- --------- ---------
Operating expenses:
Research and development................ 22,218 24,094 28,402 29,927 29,742 29,965 32,697 36,665
Selling and marketing................... 13,608 13,092 16,839 18,064 18,122 20,331 24,375 28,094
General and administrative.............. 5,036 5,849 5,433 6,418 6,621 7,176 9,339 10,864
Settlement of accrued contract
obligation ........................... - - - - - - (8,538) -
Merger related costs.................... - 2,253 10,768 - - - - -
Provision for doubtful accounts ........ - - - 250 250 - 8,538 19,222
-------- --------- --------- --------- --------- -------- --------- ---------
Total operating expenses.................. 40,862 45,288 61,442 54,659 54,735 57,472 66,411 94,845
-------- --------- --------- --------- --------- -------- --------- ---------
Income (loss) from operations............. (6,223) (5,036) (11,977) 3,301 10,475 24,002 38,685 34,732
Other income (expense),net................ 3,301 3,583 3,492 3,568 2,950 3,268 3,026 3,436
-------- --------- --------- --------- --------- -------- --------- ---------
Income (loss) before income taxes......... (2,922) (1,453) (8,485) 6,869 13,425 27,270 41,711 38,168
Provision (benefit) for income
taxes................................... (1,041) (468) (2,928) 2,370 4,363 8,863 13,556 12,405
-------- --------- --------- --------- --------- -------- --------- ---------
Net income (loss)......................... $ (1,881) $ (985) $ (5,557) $ 4,499 $ 9,062 $ 18,407 $ 28,155 $ 25,763
======== ========= ========= ========= ========= ======== ========= =========
Basic net income (loss) per common
share (1) ................................ $ (0.01) $ 0.00 $ (0.02) $ 0.02 $ 0.03 $ 0.07 $ 0.10 $ 0.09
======== ========= ========= ========= ========= ======== ========= =========
Diluted net income (loss) per common
share and dilutive potential common
share (1) .............................. $ (0.01) $ 0.00 $ (0.02) $ 0.02 $ 0.03 $ 0.06 $ 0.09 $ 0.09
======== ========= ========= ========= ========= ======== ========= =========
Weighted average basic common share ...... 262,404 265,060 266,032 267,616 276,182 280,162 282,258 285,177
======== ========= ========= ========= ========= ======== ========= =========
Weighted average basic common and
dilutive potential common share........ 262,404 265,060 266,032 290,604 295,806 299,126 299,790 301,582
======== ========= ========= ========= ========= ======== ========= =========
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul.31, Oct. 31,
1999 1999 1999 1999 2000 2000 2000 2000
------- -------- -------- -------- ------- ------- ------- -------
Revenue.............................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold................... 65.5 63.9 61.6 59.0 57.2 56.1 54.9 54.9
----- ---- ------ ----- ----- ----- ----- -----
Gross profit................... 34.5 36.1 38.4 41.0 42.8 43.9 45.1 45.1
Operating expenses:
Research and development....... 22.1 21.6 22.0 21.2 19.5 16.1 14.0 12.7
Selling and marketing.......... 13.6 11.7 13.1 12.8 11.9 10.9 10.4 9.8
General and administrative..... 5.0 5.2 4.2 4.5 4.3 3.9 4.0 3.8
Settlement of accrued
contract obligation........... - - - - - - (3.7) -
Merger related costs........... - 2.0 8.4 - - - - -
Provision for doubtful accounts - - - 0.2 0.2 - 3.7 6.7
----- ---- ------ ----- ----- ---- ----- -----
Total operating expenses............. 40.7 40.5 47.7 38.7 35.9 30.9 28.4 33.0
----- ---- ------ ----- ----- ---- ----- -----
Income (loss) from operations........ (6.2) (4.4) (9.3) 2.3 6.9 13.0 16.7 12.1
Other income (expense), net.......... 3.3 3.2 2.7 2.5 1.9 1.8 1.3 1.2
----- ---- ------ ----- ----- ---- ----- -----
Income (loss) before income taxes.... (2.9) (1.2) (6.6) 4.8 8.8 14.8 18.0 13.3
Provision (benefit) for income taxes. (1.0) (0.4) (2.3) 1.7 2.9 4.8 5.8 4.3
----- ---- ------ ----- ----- ---- ----- -----
Net income(loss).................... (1.9)% (0.8)% (4.3) % 3.1 % 5.9 % 10.0 % 12.2 % 9.0 %
===== ==== ====== ===== ===== ==== ===== =====
(1) All share and per share information has been retroactively restated to
reflect the two-for-one stock split effective September 18, 2000.
25
26
CIENA's quarterly operating results have varied and are expected to vary
in the future. The Company's detailed discussion of risk factors addresses
the many factors that have caused such variation in the past, and may cause
similar variations in the future. See "Risk Factors". CIENA's revenues have
increased in each of the last eight quarters due to strong demand across
existing products and introduction of new products such as MultiWave
CoreStream configured for both 2.5 Gb/s and 10.0 Gb/s transmission rates.
CIENA's gross margin percentage has improved from the first quarter fiscal
1999 to the fourth quarter fiscal 2000 as a result of component cost
reductions, production efficiencies, and relative stable sales pricing.
CIENA's operating expenses have increased in each of the last eight quarters
due to continued investments in research and development, selling and
marketing, and infrastructure activities. Exclusive of provisions for doubtful
accounts and merger related costs, the Company's operating expenses as a
percentage of revenues have generally decreased each of the last eight
quarters. During fiscal 2001, CIENA's operating expenses will continue to
increase in absolute dollars and may increase as percentage of revenue. We
expect to preserve and enhance our market leadership and build on our
installed base with new and additional products in conjunction with increased
investments in selling, marketing, and customer service activities. See "Risk
Factors".
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, CIENA's principal source of liquidity was its cash and
cash equivalents. The Company had $143.2 million in cash and cash equivalents,
and $95.1 million in corporate debt securities and U.S. Government obligations.
The Company's corporate debt securities and U.S. Government obligations have
contractual maturities of six months or less.
The Company's operating activities provided cash of $59.0 million, $28.7
million, and $48.8 million for fiscal 2000, 1999, and 1998, respectively. Cash
provided by operations in fiscal 2000 was primarily attributable to a net gain
adjusted for the non-cash charges of depreciation, amortization, tax benefit
related to exercise of stock options, provisions for doubtful accounts,
inventory obsolescence, and warranty, increases in accounts payable, and accrued
expenses, offset by increases in accounts receivable and inventories.
Cash used in investing activities in fiscal 2000, 1999, and 1998 was $103.2
million, $149.7 million, and $107.0 million, respectively. Included in
investment activities were additions to capital equipment and leasehold
improvements in fiscal 2000, 1999, and 1998 of $123.9 million, $46.8 million,
and $88.9 million, respectively. The capital equipment expenditures were
primarily for test, manufacturing and computer equipment. The Company expects
additional combined capital equipment and leasehold improvement expenditures of
approximately $208 million to be made during fiscal 2001 to support selling and
marketing, manufacturing and product development activities and the construction
of leasehold improvements for its facilities.
We generated $43.9 million, $13.8 million, and $35.6 million in cash from
financing activities in fiscal 2000, 1999, and 1998, respectively. During fiscal
2000, CIENA received $44.0 million from the exercise of stock options and the
sale of stock through our employee stock purchase plan. During fiscal 1999 CIENA
received $11.3 million from the exercise of stock options, the sale of stock
through our employee stock purchase plan, and from the additional capitalization
of Omnia and Lightera. During fiscal 1998, CIENA received approximately $34.3
million from the issuance of stock associated with the capitalization of Omnia
and Lightera, and from the exercise of stock options.
We believe that our existing cash balances and investments, together with
cash flow from operations, will be sufficient to meet our liquidity and capital
spending requirements at least through the end of fiscal 2001. However, possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There can be
no assurance that additional debt or equity financing will be available when
required or, if available, can be secured on terms satisfactory to us.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137 "Accounting
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for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date for SFAS No. 133", will be effective for the Company's fiscal year ending
October 31, 2000. The Company believes the adoption of SFAS No. 133 and SFAS No.
137 will not have a material effect on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the Securities and Exchange Commission's view on revenue
recognition. Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. CIENA is required to be in
conformity with the provisions of SAB 101, as amended, no later than January 31,
2001, with the impact of such adoption being treated on a cumulative basis as of
November 1, 2000. While management will continue to assess SAB 101, CIENA
presently believes its existing revenue recognition policies and procedures are
generally in compliance with SAB 101 and, therefore, SAB 101's adoption will
have no material impact on CIENA's financial condition, results of operations or
cash flows.
In July 2000, the FASB's Emerging Issues Task Force ("EITF") reached a final
consensus that the income tax benefit realized by a company upon the exercise of
a nonqualified stock option or the disqualifying disposition of an incentive
stock option should be classified in the operating section of the statement of
cash flows. The consensus is effective for the Company's quarters ending after
July 20, 2000. All comparative cash flow statements as presented have been
restated to comply with this consensus.
In September 2000, the FASB issued SFAS No. 140, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. The company believes the adoption
of SFAS No. 140 will not have a material effect on the consolidated financial
statements.
RISK FACTORS
Investing in our securities involves a high degree of risk. In addition to
the other information contained in this annual report, including the reports we
incorporate by reference, you should consider the following factors before
investing in our securities.
OUR RESULTS CAN BE UNPREDICTABLE
Our ability to recognize revenue during a quarter from a customer depends
upon our ability to ship product and satisfy other contractual obligations of a
customer sale in that quarter. In general, revenue and operating results in any
reporting period may fluctuate due to factors including:
- loss of a customer;
- the timing and size of orders from customers;
- changes in customers' requirements, including changes to orders
from customers;
- the introduction of new products by us or our competitors;
- changes in the price or availability of components for our
products;
- readiness of customer sites for installation;
- satisfaction of contractual customer acceptance criteria and
related revenue recognition issues;
- manufacturing and shipment delays and deferrals;
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- increased service, warranty or repair costs;
- the timing and amount of employer payroll tax to be paid on employee
gains on stock options exercised; and
- changes in general economic conditions as well as those specific to
the telecommunications and intelligent optical networking industries.
Our intelligent optical networking products require a relatively large
investment and our target customers are highly demanding and technically
sophisticated. There are only a limited number of potential customers in each
geographic market and each customer has unique needs. As a result, the sales
cycles for our products are long, often more than a year between our initial
contact with the customer and their commitment to purchase.
We budget expense levels on our expectations of long-term future revenue.
These budgets reflect our substantial investment in the financial, engineering,
manufacturing and logistics support resources we think we may need for large
potential customers, even though we do not know the volume, duration or timing
of any purchases from them. In addition, we make a substantial investment in
financial, manufacturing and engineering resources for the development of new
and enhanced products. As a result, we may continue to experience high inventory
levels, operating expenses and general overhead.
We have experienced rapid expansion in all areas of our operations,
particularly in the manufacturing of our products. Our future operating results
will depend on our ability to continue to expand our manufacturing facilities in
a timely manner so that we can satisfy our delivery commitments to our
customers. Our failure to expand these facilities in a timely manner and meet
our customer delivery commitments would harm our business, financial condition
and results of operations.
Our product development efforts will require us to incur ongoing development
and operating expenses and any delay in the contributions from new products,
such as the MultiWave CoreDirector product line and enhancements to our existing
optical transport products, could harm our business.
CHANGES IN TECHNOLOGY OR THE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT
OUR NEAR TERM PROSPECTS
The market for optical networking equipment is changing at a rapid pace. The
accelerated pace of deregulation and the adoption of new technology in the
telecommunications industry likely will intensify the competition for improved
optical networking products. Our ability to develop, introduce and manufacture
new and enhanced products will depend upon our ability to anticipate changes in
technology, industry standards and customer requirements. Our failure to
introduce new and enhanced products in a timely manner could harm our
competitive position and financial condition. Several of our new products,
including the MultiWave CoreDirector and the enhancements to the MultiWave
CoreStream products, are based on complex technology which could result in
unanticipated delays in the development, manufacture or deployment of these
products. In addition, our ability to recognize revenue from these products
could be adversely affected by the extensive testing required for these products
by our customers. The complexity of technology associated with support equipment
for these products could also result in unanticipated delays in their
deployment. These delays could harm our competitive and financial condition.
Competition from competitive products, the introduction of new products
embodying new technologies, a change in the requirements of our customers, or
the emergence of new industry standards could delay or hinder the purchase and
deployment of our products and could render our existing products obsolete,
unmarketable or uncompetitive from a pricing standpoint. The long certification
process for new telecommunications equipment used in the networks of the
regional Bell operating companies, referred to as RBOCs, has in the past
resulted in and may continue to result in unanticipated delays which may affect
the deployment of our products for the RBOC market.
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WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
The market for optical networking equipment is extremely competitive.
Competition in the optical networking installation and test services market is
based on varying combinations of price, functionality, software functionality,
manufacturing capability, installation, services, scalability and the ability of
the system solution to meet customers' immediate and future network
requirements. A small number of very large companies, including Alcatel, Cisco
Systems, Fujitsu Group, Hitachi, Lucent Technologies, NEC Corporation, Nortel
Networks, Siemens AG and Telefon AB LM Ericsson, have historically dominated the
telecommunications equipment industry. These companies have substantial
financial, marketing, manufacturing and intellectual property resources. In
addition, these companies have substantially greater resources to develop or
acquire new technologies than we do and often have existing relationships with
our potential customers. We sell systems that compete directly with product
offerings of these companies and in some cases displace or replace equipment
they have traditionally supplied for telecommunications networks. As such, we
represent a specific threat to these companies. The continued expansion of our
product offerings with the MultiWave CoreDirector product line and enhancements
to our MultiWave CoreStream product line likely will increase this perceived
threat. We expect continued aggressive tactics from many of these competitors,
including:
- price discounting;
- early announcements of competing products and other marketing
efforts;
- "one-stop shopping" appeals;
- customer financing assistance;
- marketing and advertising assistance; and
- intellectual property disputes.
These tactics can be particularly effective in a highly concentrated
customer base such as ours. Our customers are under increasing competitive
pressure to deliver their services at the lowest possible cost. This pressure
may result in pricing for optical networking systems becoming a more important
factor in customer decisions, which may favor larger competitors that can spread
the effect of price discounts in their optical networking products across a
larger array of products and services and across a larger customer base than
ours. If we are unable to offset any reductions in the average sales price for
our products by a reduction in the cost of our products, our gross profit
margins will be adversely affected. Our inability to compete successfully
against our competitors and maintain our gross profit margins would harm our
business, financial condition and results of operations.
Many of our customers have indicated that they intend to establish a
relationship with at least two vendors for optical networking products. With
respect to customers for whom we are the only supplier, we do not know when or
if these customers will select a second vendor or what impact the selection
might have on purchases from us. If a second optical networking supplier is
chosen, these customers could reduce their purchases from us, which could in
turn have a material adverse effect on us.
New competitors are emerging to compete with our existing products as well
as our future products. There has been an increase in funding for new companies
focused on the development of new products for the optical networking market. We
expect new competitors to continue to emerge as the optical networking market
continues to expand. These companies may achieve commercial availability of
their products more quickly due to the narrow and exclusive focus of their
efforts. Several of these competitors have raised significantly more cash and
they have in some cases offered stock in their companies, positions on technical
advisory boards, or have provided significant vendor financing to attract new
customers. In particular, a number of companies, including several start-up
companies and recently public companies that have raised substantial equity
capital, have announced products that compete with our MultiWave CoreStream,
MultiWave Metro, and MultiWave CoreDirector products. Our inability to compete
successfully against these companies would harm our business, financial
condition and results of operations.
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WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF NEW PRODUCTS
During the third quarter of fiscal 2000, the first version of our MultiWave
CoreDirector became available. Our MultiWave CoreDirector CI product and
enhancements to the MultiWave CoreDirector and MultiWave CoreStream product
lines are in the development phase and are not yet ready for commercial
manufacturing or deployment. We expect to offer additional releases of the
MultiWave CoreDirector product over the life of the product and continue to
enhance features of our MultiWave CoreStream product, including the longer reach
and higher channel count functionality of our product line. The initial release
of MultiWave CoreDirector CI is expected in limited availability for customer
trials during the first quarter of calendar 2001. The maturing process from
laboratory prototype to customer trials, and subsequently to general
availability involves a number of steps, including:
- completion of product development;
- the qualification and multiple sourcing of critical components,
including application-specific integrated circuits, referred to
as ASICs;
- validation of manufacturing methods and processes;
- extensive quality assurance and reliability testing, and staffing
of testing infrastructure;
- validation of embedded software validation;
- establishment of systems integration and systems test validation
requirements; and
- identification and qualification of component suppliers.
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could decrease the speed and scope of product
introduction and marketplace acceptance of the product. Specialized ASICs and
intensive software testing and validation, in particular, are key to the timely
introduction of enhancements to the MultiWave CoreDirector product line, and
schedule delays are common in the final validation phase, as well as in the
manufacture of specialized ASICs. In addition, unexpected intellectual property
disputes, failure of critical design elements, and a host of other execution
risks may delay or even prevent the introduction of these products. If we do not
develop and successfully introduce these products in a timely manner, our
business, financial condition and results of operations would be harmed.
The markets for our MultiWave CoreDirector product line are relatively new.
We have not established commercial acceptance of these products, and we cannot
assure you that the substantial sales and marketing efforts necessary to achieve
commercial acceptance in traditionally long sales cycles will be successful. If
the markets for these products do not develop or the products are not accepted
by the market, our business, financial condition and results of operations would
suffer.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE A
SUBSTITUTE SUPPLIER
We depend on a limited number of suppliers for components of our products,
as well as for equipment used to manufacture and test our products. Our products
include several higher performance components for which reliable, high volume
suppliers are particularly limited. Furthermore, certain key optical and
electronic components we use in our optical transport systems are currently
available only from sole sources, and in some cases, that sole source is also a
competitor. A worldwide shortage of some electrical components has caused an
increase in the price of components. Any delay in component availability for any
of our products could result in delays in deployment of these products and in
our ability to recognize revenues. These delays could harm our customer
relationships.
Failures of components can affect customer confidence in our products and
could adversely affect our financial
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performance and the reliability and performance of our products. On occasion, we
have experienced delays in receipt of components and have received components
that do not perform according to their specifications. Any future difficulty in
obtaining sufficient and timely delivery of components could result in delays or
reductions in product shipments which, in turn, could harm our business. A
recent wave of consolidation among suppliers of these components, such as the
recent purchases of E-TEK and SDL by JDS Uniphase, could adversely impact the
availability of components on which we depend. Delayed deliveries of key
components from these sources could adversely effect our business.
Any delays in component availability for any of our products or test
equipment could result in delays in deployment of these products and in our
ability to recognize revenue from them. These delays could harm our customer
relationships and our results of operations.
WE RELY ON CONTRACT MANUFACTURERS FOR OUR PRODUCTS
We rely on a small number of contract manufacturers to manufacture our
CoreDirector product line and some of the components for our other products. The
qualification of these manufacturers is an expensive and time consuming process
and these contract manufacturers build modules for other companies, including
for our competitors. In addition, we do not have contracts in place with each of
these manufacturers. We may not be able to effectively manage our relationships
with our manufacturers and we cannot be certain that they will be able to fill
our orders in a timely manner. If we cannot effectively manage these
manufacturers or they fail to deliver components in a timely manner it may have
an adverse affect on our business and results of operations.
SOME OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Some of our component suppliers are both primary sources for components and
major competitors in the market for system equipment. For example, we buy
components from:
- Alcatel;
- Lucent Technologies;
- NEC Corporation;
- Nortel Networks; and
- Siemens AG.
Each of these companies offers optical communications systems and equipment,
which are competitive with our products. Also, Lucent is the sole source of two
components and is one of two suppliers of two others. Recently, Lucent has
announced that it intends to spin off a portion of its components business. Our
supply of components from Lucent may be adversely effected by this
restructuring. Alcatel and Nortel are suppliers of lasers used in our products
and NEC is a supplier of an important piece of testing equipment. A decline in
reliability or other adverse change in these supply relationships could harm our
business.
SALES TO EMERGING CARRIERS MAY INCREASE THE UNPREDICTABILITY OF OUR RESULTS
As we continue to address emerging carriers, timing and volume of purchasing
from these carriers can also be more unpredictable due to factors such as their
need to build a customer base, acquire rights of way and interconnections
necessary to sell network service, and build out new capacity, all while working
within their capital budget constraints. Sales to these carriers may increase
the unpredictability of our financial results because even these emerging
carriers purchase our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. A portion of our anticipated revenue over the
next several quarters is comprised of orders of less than $25 million each from
several customers, some of which may involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
emerging carriers will depend on the relative financial condition of the
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specific customer, among other factors. Further, we will need to evaluate the
collectibility of receivables from these customers if their financial conditions
deteriorate in the future. Purchasing delays and changes in the financial
condition or the amount of purchases by any of these customers, could have a
material adverse effect on us. In the past we have had to make provisions for
the accounts receivables from customers that experienced financial difficulty.
If additional customers face similar financial difficulties, our receivables
from these customers may become uncollectible, we would have to write off the
asset or decrease the value of the asset to the extent the receivable could not
be collected. These write-downs or write-offs would adversely affect our
financial performance.
OUR ABILITY TO COMPETE COULD BE HARMED IF WE ARE UNABLE TO PROTECT AND ENFORCE
OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE INFRINGE ON INTELLECTUAL PROPERTY
RIGHTS OF OTHERS
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into non-disclosure and proprietary rights agreements with our
employees and consultants, and license agreements with our corporate partners,
and control access to and distribution of our products, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring unauthorized use of our products is difficult
and we cannot be certain that the steps we have taken will prevent unauthorized
use of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. If competitors
are able to use our technology, our ability to compete effectively could be
harmed. We are involved in an intellectual property dispute regarding the use of
our technology and may become involved with additional disputes in the future.
Such lawsuits can be costly and may significantly divert time and attention from
some members of our personnel.
We have received and may receive in the future, notices from holders of
patents in the optical technology field that raise issues of possible
infringement by our products. Questions of infringement in the optical
networking equipment market often involve highly technical and subjective
analysis. There can be no assurance that any of these patent holders or others
will not in the future initiate legal proceedings against us, or that we will be
successful in defending against these actions. We are involved in an
intellectual property dispute regarding the possible infringement of our
products. In the past, we have been forced to take a license from the owner of
the infringed intellectual property, or to redesign or stop selling the product
that includes the challenged intellectual property. If we are sued for
infringement and are unsuccessful in defending the suit, we could be subject to
significant damages and our business and customer relationships could be
adversely affected.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new optical networking products and systems with high
technology content involves occasional problems as the technology and
manufacturing methods mature. If significant reliability, quality or network
monitoring problems develop, including those due to faulty components, a number
of negative effects on our business could result, including:
- costs associated with reworking our manufacturing processes;
- high service and warranty expenses;
- high inventory obsolescence expense:
- high levels of product returns;
- delays in collecting accounts receivable;
- reduced orders from existing customers; and
- declining interest from potential customers.
Although we maintain accruals for product warranties, actual costs could
exceed these amounts. From time to time, there will be interruptions or delays
in the activation of our products at a customer's site. These interruptions or
delays may result from product performance problems or from aspects of the
installation and activation activities,
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some of which are outside our control. If we experience significant
interruptions or delays that we can not promptly resolve, confidence in our
products could be undermined, which could harm our business.
OUR PROSPECTS DEPEND ON DEMAND WHICH WE CANNOT RELIABLY PREDICT OR CONTROL
We may not anticipate changes in direction or magnitude of demand for our
products. The product offerings of our competitors could adversely affect the
demand for our products. In addition, unanticipated reductions in demand for our
products could adversely affect us.
Our products enable long distance optical transport, metropolitan optical
transport, intelligent core switching and network management. Demand for our
product depends on our customers' requirements. These requirements may vary
significantly from quarter to quarter due to factors such as:
- the type and quantity of optical equipment needed by our customers;
- the timing of the deployment of optical equipment by our customers;
- the rate at which our current customers fund their network build-
outs; and
- the equipment configurations and network architectures our customers
want.
Customer determinations are subject to abrupt changes in response to their
own competitive pressures, capital requirements and financial performance
expectations. These changes could harm our business.
Recently we have experienced an increased level of sales activity that could
lead to an upsurge in demand that is reflected in the overall increase in demand
for optical networking and similar products in the telecommunications industry.
Our results may suffer if we are unable to address this demand adequately by
successfully scaling up our manufacturing capacity and hiring additional
qualified personnel. To date we have largely depended on our own manufacturing
and assembly facilities to meet customer expectations, but we cannot be sure
that we can satisfy our customers' expectations in all cases by internal
capabilities. In that case, we face the challenge of adequately managing
customer expectations and finding alternative means of meeting them. If we fail
to manage these expectations we could lose customers or receive smaller orders
from customers.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract and
retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. Our key founders and employees, together with the key founders and
employees of acquired companies have received a substantial number of our shares
and vested options that can be sold at substantial gains. In many cases, these
individuals could become financially independent through these sales, before our
future products have matured into commercially deliverable products. These
circumstances may make it difficult to retain and motivate these key personnel.
As we have grown and matured, competitors' efforts to hire our employees
have intensified, particularly among competitive start-up companies and other
early stage companies. We have agreements in place with most of our employees
that limit their ability to work for a competitor and prohibit them from
soliciting our other employees and our customers following termination of their
employment. Our employees and our competitors may not respect these agreements.
We have in the past been required to enforce, and are currently in the process
of enforcing, some of these agreements. We expect in the future to continue to
be required to resort to legal actions to enforce these agreements and could
incur substantial costs in doing so. We may not be successful in these legal
actions, and we may not be able to retain all of our key employees or attract
new personnel to add to or replace them. The loss of key personnel would likely
harm our business.
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PART OF OUR STRATEGY INVOLVES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE
SUCCESSFUL
As part of our strategy for growth, we will consider acquiring businesses
that are intended to accelerate our product and service development processes
and add complementary products and services. We may issue equity or incur debt
to finance these acquisitions. Acquisitions involve a number of operational
risks, including risks that the acquired business will not be successfully
integrated, may distract management attention and may involve unforeseen costs
and liabilities.
OUR STOCK PRICE MAY EXHIBIT VOLATILITY
Our common stock price has experienced substantial volatility in the past,
and is likely to remain volatile in the future. Volatility can arise as a result
of the activities of short sellers and risk arbitrageurs, and may have little
relationship to our financial results or prospects. Volatility can also result
from any divergence between our actual or anticipated financial results and
published expectations of analysts, and announcements that we, our competitors,
or our customers may make.
Divergence between our actual results and our anticipated results, analyst
estimates and public announcements by us, our competitors, or by customers will
likely occur from time to time in the future, with resulting stock price
volatility, irrespective of our overall year-to-year performance or long-term
prospects. As long as we continue to depend on a limited customer base, and
particularly when a substantial majority of their purchases consist of
newly-introduced products like the MultiWave CoreStream, MultiWave CoreDirector
and MultiWave Metro, there is substantial risk that our quarterly results will
vary widely.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency discount notes with an average maturity of less than six months. These
held-to-maturity securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at October 31,
2000, the fair value of the portfolio would decline by approximately $2.6
million. The Company has the ability to hold its fixed income investments until
maturity, and therefore the Company would not expect its operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union began during the Company's fiscal year 2000. The foreign
currency exposure resulting from the introduction of the Euro has been
immaterial to the operating results of the Company. The Company is prepared to
hedge against fluctuations in the Euro if this exposure becomes material. As of
October 31, 2000, the assets and liabilities of the Company related to
non-dollar denominated currencies was not material. Therefore an increase or
decrease of 10 percent in the foreign exchange rate would not have a material
impact on the Company's financial position.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following is an index to the consolidated financial statements and
supplementary data:
PAGE
NUMBER
------
Report of Independent Accountants............................. 36
Consolidated Balance Sheets................................... 37
Consolidated Statements of Operations......................... 38
Consolidated Statements of Changes in Stockholders' Equity.... 39
Consolidated Statements of Cash Flows......................... 40
Notes to Consolidated Financial Statements.................... 41
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CIENA Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of CIENA Corporation and its subsidiaries at October 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
McLean, VA
December 6, 2000
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31,
---------------------------
1999 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 143,440 $ 143,187
Marketable debt securities ........................................................... 118,956 95,131
Accounts receivable (net of allowance of $1,703 and $29,581) ......................... 144,348 248,950
Inventories, net ..................................................................... 79,608 141,279
Deferred income taxes ................................................................ 25,385 143,029
Prepaid expenses and other ........................................................... 21,262 41,438
----------- -----------
Total current assets ............................................................... 532,999 813,014
Equipment, furniture and fixtures, net .................................................. 125,252 189,231
Goodwill and other intangible assets, net ............................................... 12,635 9,049
Other assets ............................................................................ 6,949 15,907
----------- -----------
Total assets ........................................................................ $ 677,835 $ 1,027,201
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................................... $ 34,399 $ 70,250
Accrued liabilities .................................................................. 58,486 84,163
Income taxes payable ................................................................. 8,697 7,483
Deferred revenue ..................................................................... 2,954 10,731
Other current obligations ............................................................ 992 712
----------- -----------
Total current liabilities .......................................................... 105,528 173,339
Deferred income taxes ................................................................ 36,953 39,145
Other long-term obligations .......................................................... 4,881 4,882
----------- -----------
Total liabilities .................................................................. 147,362 217,366
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $0.01; 20,000,000 shares authorized; zero shares
issued and outstanding............................................................. - -
Common stock - par value $0.01; 360,000,000 and 460,000,000 shares
authorized; 276,374,712 and 286,530,631 shares issued and outstanding .............. 2,764 2,865
Additional paid-in capital ........................................................... 358,700 557,257
Notes receivable from stockholders ................................................... (210) (30)
Accumulated other comprehensive income ............................................... (40) (903)
Retained earnings .................................................................... 169,259 250,646
----------- -----------
Total stockholders' equity ......................................................... 530,473 809,835
----------- -----------
Total liabilities and stockholders' equity ........................................... $ 677,835 $ 1,027,201
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
----------------------
1998 1999 2000
---- ---- ----
Revenue ........................................... $ 508,087 $ 482,085 $ 858,750
Cost of goods sold ................................ 256,014 299,769 477,393
--------- --------- ---------
Gross profit ............................... 252,073 182,316 381,357
--------- --------- ---------
Operating expenses:
Research and development ................... 73,756 104,641 129,069
Selling and marketing ...................... 47,343 61,603 90,922
General and administrative ................. 18,468 22,736 34,000
Settlement of accrued contract obligation... -- -- (8,538)
Purchased research and development ......... 9,503 -- --
Pirelli litigation ......................... 30,579 -- --
Merger related costs ....................... 2,548 13,021 --
Provision for doubtful accounts ............ 806 250 28,010
--------- --------- ---------
Total operating expenses ............ 183,003 202,251 273,463
--------- --------- ---------
Income (loss) from operations ..................... 69,070 (19,935) 107,894
Interest and other income (expense), net .......... 13,143 14,448 13,020
Interest expense .................................. (313) (504) (340)
--------- --------- ---------
Income (loss) before income taxes ................. 81,900 (5,991) 120,574
Provision (benefit) for income taxes .............. 36,200 (2,067) 39,187
--------- --------- ---------
Net income (loss) ................................. $ 45,700 $ (3,924) $ 81,387
========= ========= =========
Basic net income (loss) per common share .......... $ 0.19 $ (0.01) $ 0.29
========= ========= =========
Diluted net income (loss) per common share and
dilutive potential common share ............ $ 0.18 $ (0.01) $ 0.27
========= ========= =========
Weighted average basic common shares outstanding... 235,980 267,042 281,621
========= ========= =========
Weighted average basic common and dilutive
potential common shares outstanding ........ 255,788 267,042 299,662
========= ========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Notes Accumulated
Additional Receivable Other Total
Common Stock Paid-in- From Comprehensive Retained Stockholders'
Shares Amount Capital Stockholders Income Earnings Equity
------------ --------- ----------- ------------ ------------- ----------- -------------
Balance at October 31, 1997 ........ 219,398,540 $ 2,194 $ 249,295 $ (68) $ (5) $ 125,862 $ 377,278
Net income ......................... -- -- -- -- -- 45,700 45,700
Translation adjustment ............. -- -- -- -- (102) -- (102)
----------
Comprehensive income $ 45,598
Exercise of stock options .......... 5,295,814 52 6,189 (392) -- -- 5,849
Compensation cost of stock options . -- -- 54 -- -- -- 54
Issuance of common stock, net of
issuance costs ................... 43,908,340 440 28,254 (225) -- -- 28,469
Tax benefit from the exercise of ... --
stock options .................... -- -- 22,634 -- -- -- 22,634
Repayment of receivables from
stockholders ..................... -- -- -- 99 -- -- 99
Purchase of Terabit and Astracom
net of issuance costs ............ 608,288 6 20,814 -- -- -- 20,820
Issuance of warrants for technology
rights ........................... -- -- 235 -- -- -- 235
------------- --------- ---------- -------- ------- ---------- ----------
Balance at October 31, 1998 ........ 269,210,982 $ 2,692 $ 327,475 $ (586) $ (107) $ 171,562 $ 501,036
Net loss ........................... -- -- -- -- -- (3,924) (3,924)
Translation adjustment ............. -- -- -- -- 67 -- 67
----------
Comprehensive loss $ (3,857)
Exercise of warrants ............... 807,902 8 -- -- -- -- 8
Exercise of stock options .......... 3,442,768 34 8,198 -- -- -- 8,232
Compensation cost of stock options
and warrants ..................... -- -- 8,521 -- -- -- 8,521
Issuance of common stock, net of
issuance costs ................... 2,913,060 30 3,502 (481) -- -- 3,051
Tax benefit from the exercise of
stock options .................... -- -- 11,004 -- -- -- 11,004
Repayment of receivables from
stockholders ..................... -- -- -- 857 -- -- 857
Adjustment to conform fiscal year
ends of pooled acquisition ....... -- -- -- -- -- 1,621 1,621
------------- --------- ---------- -------- ------- ---------- ----------
Balance at October 31, 1999 ........ 276,374,712 $ 2,764 $ 358,700 $ (210) $ (40) $ 169,259 $ 530,473
Net income ......................... -- -- -- -- -- 81,387 81,387
Translation adjustment ............. -- -- -- -- (863) -- (863)
----------
Comprehensive income $ 80,524
Exercise of warrants ............... 286,084 3 -- -- -- -- 3
Exercise of stock options .......... 9,166,133 91 38,144 -- -- -- 38,235
Compensation cost of stock options
and warrants ..................... -- -- 40 -- -- -- 40
Issuance of common stock, net
of issuance costs ................ 703,702 7 5,732 -- -- -- 5,739
Tax benefit from the exercise of
stock options .................... -- -- 154,641 -- -- -- 154,641
Repayment of receivables from
stockholders ..................... -- -- -- 180 -- -- 180
------------- --------- ---------- -------- ------- ---------- ----------
Balance at October 31, 2000 286,530,631 $ 2,865 $ 557,257 $ (30) $ (903) $ 250,646 $ 809,835
============= ========= ========== ======== ======= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ......................................................... $ 45,700 $ (3,924) $ 81,387
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to conform fiscal year ends of pooled acquisitions ......... -- 1,621 --
Tax benefit related to exercise of stock options and warrants ......... 22,634 11,004 154,641
Non-cash charges from equity transactions ............................. 289 8,521 40
Amortization of premiums on marketable debt securities ................ 464 1,776 1,016
Effect of translation adjustment ...................................... (102) 67 (863)
Purchased research and development .................................... 9,503 -- --
Write down of leasehold improvements and equipment .................... 1,605 -- --
Depreciation and amortization ......................................... 33,623 50,418 63,604
Provision for doubtful accounts ....................................... 806 250 28,010
Provision for inventory excess and obsolescence ....................... 9,617 6,534 15,022
Provision for warranty ................................................ 10,523 8,396 15,804
Settlement of accrued contract obligation ............................. -- -- (8,538)
Changes in assets and liabilities:
Increase in accounts receivable ..................................... (7,026) (65,807) (132,612)
Increase in prepaid expenses and other assets ....................... (18,528) (13,222) (27,153)
(Increase) decrease in prepaid income taxes ......................... (11,688) 11,688 --
Increase in inventories ............................................. (39,416) (15,234) (76,693)
Increase in deferred income tax assets .............................. (7,282) (8,964) (117,644)
Increase (decrease) in accounts payable and accrued expenses ........ (6,288) 22,159 54,262
Increase (decrease) in income taxes payable ......................... (46) 8,697 (1,214)
Increase in deferred income tax liabilities ......................... 5,958 2,828 2,192
Increase (decrease) in deferred revenue and other obligations ....... (1,507) 1,870 7,777
--------- --------- ---------
Net cash provided by operating activities ............................... 48,839 28,678 59,038
--------- --------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures .......................... (88,913) (46,776) (123,947)
Purchase of marketable debt securities .................................. (93,869) (274,897) (269,149)
Maturities of marketable debt securities ................................ 77,876 171,934 289,927
Net cash paid for business combinations ................................. (2,070) -- --
--------- --------- ---------
Net cash used in investing activities ............................... (106,976) (149,739) (103,169)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations ...................... 1,148 1,639 (279)
Net proceeds from issuance of common stock .............................. 34,318 11,291 43,977
Repayment of notes receivable from stockholders ......................... 99 857 180
--------- --------- ---------
Net cash provided by financing activities ........................... 35,565 13,787 43,878
--------- --------- ---------
Net decrease in cash and cash equivalents ........................... (22,572) (107,274) (253)
Cash and cash equivalents at beginning of period ............................ 273,286 250,714 143,440
--------- --------- ---------
Cash and cash equivalents at end of period .................................. $ 250,714 $ 143,440 $ 143,187
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 265 $ 504 $ 340
========= ========= =========
Income taxes ......................................................... $ 30,203 $ 313 $ 1,231
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from stockholders .......... $ 617 $ 481 $ --
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CIENA is a leader in the rapidly growing intelligent optical networking
equipment market. CIENA offers a comprehensive portfolio of products for
communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive and incumbent local exchange carriers,
Internet service providers and wholesale carriers. CIENA offers optical
transport and intelligent optical switching systems that enable service
providers to provision, manage and deliver high-bandwidth services to their
customers. The Company has pursued a strategy to develop and leverage the power
of disruptive technologies to change the fundamental economics of building
carrier-class tele- and data-communications networks, thereby providing our
customers with a competitive advantage. CIENA's intelligent optical networking
products are designed to enable carriers to deliver any time, any size, any
priority bandwidth to their customers.
Principles of Consolidation
The Company has fifteen wholly owned U.S. and international subsidiaries
which have been consolidated in the accompanying financial statements. The
Company completed a merger with Omnia Communications, Inc. ("Omnia"), a Delaware
company headquartered in Marlborough, Massachusetts, on July 1, 1999. On March
31, 1999 the Company completed a merger with Lightera Networks, Inc.
("Lightera"), a Delaware company headquartered in Cupertino, California. On
February 19, 1998, the Company completed a merger with ATI Telecom International
Ltd. ("Alta"). Each of these transactions constituted a tax-free reorganization
and have been accounted for as pooling of interests under Accounting Principles
Board Opinion No. 16. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of each of the companies as though
they had been a part of CIENA.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company has a 52 or 53 week fiscal year, which ends on the Saturday
nearest to the last day of October in each year (October 28, 2000, October 30,
1999 and October 31, 1998). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 2000, 1999,
and 1998 were comprised of 52 weeks. Prior to the merger, Omnia's fiscal year
ended on December 31.
Since the fiscal years for CIENA and Omnia differed prior to the merger, the
periods combined for the purposes of the consolidated financial statements are
as follows:
CIENA Omnia
Fiscal year ended October 31, 1997 June 3, 1997 (date of inception) to December 31, 1997
Fiscal year ended October 31, 1998 January 1, 1998 to December 31, 1998
The fiscal year ended October 31, 1999 contains two months of Omnia's
financial results, which are also recorded in the fiscal year ending October 31,
1998. The net loss for these two months, November and December 1998, was
$1,621,000.
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Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates,
judgements and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, together with amounts disclosed in the
related notes to the financial statements. Actual results could differ from the
recorded estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Marketable Debt Securities
The Company has classified its investments in marketable debt securities as
held-to-maturity securities as defined by Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Such investments are recorded at their amortized cost in the
accompanying consolidated balance sheets. All of the marketable debt securities
are corporate debt securities with contractual maturities of six months or less
and such instruments have $11,000 and $70,255 of unrealized gains and $108,000
and $32,000 of unrealized loss, as of October 31, 1999 and 2000, respectively.
See Note 3.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. The Company records a provision for excess and
obsolete inventory whenever such an impairment has been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are computed using the straight-line method over useful lives of
2-5 years for equipment, furniture and fixtures and 2-10 years for leasehold
improvements.
Goodwill
The Company has recorded goodwill from three purchase transactions. See Note
2. It is the Company's policy to periodically assess the carrying amount of its
goodwill to determine if there has been an impairment to its carrying value. The
Company would record any such impairment when identified.
Concentrations
Substantially all of the Company's cash and cash equivalents are custodied
at four major U.S. financial institutions. The majority of the Company's cash
equivalents include U.S. Government Federal Agency Securities, short-term
marketable securities, and overnight repurchase agreements. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally
these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenue. During fiscal year 2000, Sprint, Qwest
Communications and GTS Network Ltd. each accounted for at least 10% or more of
CIENA's revenue and all three combined accounted for 60.9% of the Company's
fiscal 2000 revenue. During fiscal year 1999 Sprint, MCI WorldCom, and GTS
Network Ltd. each accounted for at least 10% or more of CIENA's revenue and all
three combined accounted for 46.2% of the Company's fiscal 1999 revenue. During
fiscal 1998 Sprint was the only 10% customer and in total accounted for 52.5 %
of the Company's fiscal 1998 revenue. The Company expects that a significant
portion of its future revenue will continue to be generated by a limited number
of customers. The loss of any one of these customers or any substantial
reduction in orders by any one of these customers could materially adversely
affect the Company's financial condition or operating results. Additionally, the
Company's
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access to certain raw materials is dependent upon single and sole source
suppliers. The inability of any supplier to fulfill supply requirements of the
Company could impact future results.
CIENA performs ongoing credit evaluations of its customers and generally
does not require collateral from its customers. CIENA maintains an allowance for
potential losses when identified. CIENA's allowance for doubtful accounts as of
October 31, 2000 was $29.6 million. Approximately $27.8 million relates to
provisions made for doubtful accounts associated with iaxis Limited, one of
CIENA's European customers. In September 2000, CIENA was informed that an
administrative order had been issued by a London court against iaxis Limited. As
a result of this order, joint administrators were appointed to manage the
business of iaxis Limited while they marketed the business for sale and
formulated a reorganization of the company. In November 2000, CIENA was notified
that Dynegy Inc. and its subsidiaries had entered into a proposed agreement to
acquire the assets and stock of iaxis Limited from the administrators. As a
consequence of the terms of (a) the proposed agreement between the
administrators of iaxis Limited and Dynegy, and of (b) a related sales agreement
between CIENA and Dynegy, CIENA expects to realize approximately $8.9 million of
the gross outstanding accounts receivable balance due from iaxis Limited as of
October 31, 2000. While the proposed purchase agreement between the
administrators of iaxis Limited and Dynegy is subject to certain administrative
and judicial approvals, CIENA believes that such approvals will be ultimately
obtained and that CIENA will be successful in collecting the net $8.9 million
outstanding accounts receivable balance from the customer. However, should such
approvals not occur, additional write-offs might be required.
As of October 31, 2000, the trade accounts receivable included three
customers who each accounted for 28%, 16%, and 13% of the trade accounts
receivable, respectively. As of October 31, 1999, the trade accounts receivable
included three customers who each accounted for 30%, 14%, and 12% of the trade
accounts receivable, respectively.
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is probable. For transactions where CIENA has yet
to obtain customer acceptance, revenue is deferred until the terms of acceptance
are satisfied. Revenue for installation services is recognized as the services
are performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying balance sheets. For transactions involving the sale
of software, revenue is recognized in accordance with Statement of Position No.
97-2 (SOP 97-2), "Software Revenue Recognition", including deferral of revenue
recognition in instances where vendor specific objective evidence for
undelivered elements is not determinable. For distributor sales where risks of
ownership have not transferred, CIENA recognizes revenue when the product is
shipped through to the end user.
Revenue-Related Accruals
The Company provides for the estimated costs to fulfill customer warranty
and other contractual obligations upon the recognition of the related revenue.
Such reserves are determined based upon actual warranty cost experience,
estimates of component failure rates, and management's industry experience. The
Company's contractual sales arrangements generally do not permit the right of
return of product by the customer after the product has been accepted.
Research and Development
The Company charges all research and development costs to expense as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences attributable to differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their respective tax bases,
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and for operating loss and tax credit carryforwards. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than the enactment of changes in tax laws or rates. Valuation allowances are
provided if, based upon the weight of the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. Tax
savings resulting from deductions associated with stock options and certain
stock warrants are credited directly to additional paid in capital when
realization of such benefit is fully assured and to deferred tax liabilities
prior to such point. See Note 9.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
marketable debt securities, accounts receivable, accounts payable, and other
accrued expenses, approximate their fair values due to their short maturities.
Foreign Currency Translation
The majority of the Company's foreign branches and subsidiaries use the U.S.
dollar as their functional currency, as the U.S. parent exclusively funds the
branches and subsidiaries' operations with U.S. dollars. For those subsidiaries
using the local currency as their functional currency, assets and liabilities
are translated at exchange rates in effect at the balance sheet date. Resulting
translation adjustments are recorded directly to a separate component of
stockholders' equity. Where the U.S. dollar is the functional currency,
translation adjustments are recorded in other income. The net gain (loss) on
foreign currency re-measurement and exchange rate changes for fiscal 1998, 1999
and 2000 was immaterial for separate financial statement presentation .
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income
(Loss) per Common and Dilutive Potential Common Share
The Company calculates earnings per share in accordance with the Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 simplifies the earnings per share (EPS) computation and replaces
the presentation of primary EPS with a presentation of basic EPS. This statement
also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with a complex capital structure and requires a
reconciliation of the numerator and denominator used for the basic and diluted
EPS computations. See Note 7.
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires
the capitalization of certain software development costs incurred subsequent to
the date technological feasibility is established and prior to the date the
product is generally available for sale. The capitalized cost is then amortized
over the estimated product life. The Company defines technological feasibility
as being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation", which is effective for the Company's consolidated
financial statements for fiscal years 1998, 1999, and 2000. SFAS No. 123 allows
companies to either account for stock-based compensation under the new
provisions of SFAS No. 123 or using the intrinsic value method provided by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees", but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. The Company has elected to continue to account for its stock based
compensation in accordance with the provisions of APB No. 25 as interpreted by
FASB Interprettion No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25", ("FIN 44") and present
the pro forma disclosures required by SFAS No. 123. See Note 10.
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Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information". The Statement is effective
for the Company's fiscal year 1999. SFAS No. 131 establishes annual and interim
reporting standards for operating segments of a company. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Company is not organized by multiple operating segments for the
purpose of making operating decisions or assessing performance. Accordingly, the
Company operates in one operating segment and reports only certain
enterprise-wide disclosures.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date for SFAS No. 133", will be effective for the
Company's fiscal year ending October 31, 2001. The Company believes the adoption
of SFAS No. 133 and SFAS No. 137 will not have a material effect on the
consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the Securities and Exchange Commission's view on revenue
recognition. Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. The Company is required to be in
conformity with the provisions of SAB 101, as amended, no later than January 31,
2001, with the impact of such adoption being treated on a cumulative basis as of
November 1, 2000. While management will continue to assess SAB 101, CIENA
presently believes its existing revenue recognition policies and procedures are
generally in compliance with SAB 101 and, therefore, SAB 101's adoption will
have no material impact on CIENA's financial condition, results of operations or
cash flows.
In July 2000, the FASB's Emerging Issues Task Force ("EITF") reached a final
consensus that the income tax benefit realized by a company upon the exercise of
a nonqualified stock option or the disqualifying disposition of an incentive
stock option should be classified in the operating section of the statement of
cash flows. The consensus is effective for the Company's quarters ending after
July 20, 2000. All comparative cash flow statements as presented have been
restated to comply with this consensus.
In September 2000, the FASB issued SFAS No. 140, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. The company is reviewing the
provisions of SFAS No. 140.
Reclassification
Certain prior year amounts have been reclassified to conform to current year
consolidated financial statement presentation.
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(2) BUSINESS COMBINATIONS
Omnia
On July 1, 1999, the Company completed a merger with Omnia in a transaction
valued at approximately $483 million. Omnia is a telecommunications equipment
supplier which focuses on developing solutions to allow public telephone network
operators to offer services cost effectively over integrated metropolitan
fiberoptic access and transport networks. Under the terms of the merger
agreement, the Company acquired all of the outstanding shares and assumed the
stock options of Omnia in exchange for approximately 30.4 million shares of
CIENA common stock and 1.6 million CIENA shares issuable upon exercise of stock
options. The transaction constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Omnia as though it had been a part of
CIENA.
The following table shows the separate historical results of CIENA and Omnia
for the periods prior to the consummation of the merger of the two entities. No
financial information has been presented for the fiscal year ended 1996 as Omnia
did not commence operations until June 1997. Omnia's fiscal year end was
December 31. CIENA's results for the years ended October 31, 1997 and 1998
include Omnia's financial results from June 3, 1997 (date of inception) to
December 31, 1997 and January 1, 1998 to December 31, 1998, respectively (in
thousands).
Nine Months
Year Ended October 31, Ended July 31,
------------------------------ --------------
1997 1998 1999
--------------- -------------- --------------
Revenues:
CIENA $ 413,215 $ 508,087 $ 340,733
Omnia - - -
Intercompany
elimination's - - -
-------------- -------------- --------------
Consolidated revenues $ 413,215 $ 508,087 $ 340,733
============== ============== ==============
Net income (loss):
CIENA $ 115,967 $ 51,113 $ (1,020)
Omnia (399) (5,413) (7,403)
-------------- -------------- --------------
Consolidated net income
(loss) $ 115,568 $ 45,700 $ (8,423)
============== ============== ==============
Lightera
On March 31, 1999 the Company completed a merger with Lightera in a
transaction valued at approximately $459 million. Lightera is a developer of
carrier class optical core switches for fiberoptic communications networks.
Under the terms of the merger agreement, the Company acquired all of the
outstanding shares and assumed outstanding stock options and warrants of
Lightera in exchange for approximately 35.0 million shares of CIENA common stock
and 5.8 million CIENA shares issuable upon exercise of stock options and
warrants. The transaction constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Lightera as though it had been a part of
CIENA.
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The following table shows the separate historical results of CIENA and
Lightera for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal year ended
1997 as Lightera did not commence operations until April 1998 (in thousands).
Year Ended Six Months Ended
October 31, April 30,
--------------- --------------------
1998 1999
--------------- --------------------
Revenues:
CIENA $ 508,087 $ 211,907
Lightera - -
Intercompany eliminations - -
--------------- --------------------
Consolidated revenues $ 508,087 $ 211,907
=============== ====================
Net income (loss):
CIENA $ 53,194 $ 8,046
Lightera (2,081) (6,169)
--------------- --------------------
Consolidated net income $ 51,113 $ 1,877
=============== ====================
Terabit
During April 1998, the Company completed an Agreement and Plan of
Reorganization with Terabit Technology, Inc. ("Terabit"), a developer of optical
components known as photodetectors or optical receivers. Terabit is located in
Santa Barbara, California. The purchase price was approximately $11.5 million
and consisted of the issuance of 268,780 shares of CIENA common stock, the
payment of $1.1 million in cash, and the assumption of certain stock options.
The transaction was recorded using the purchase accounting method with the
purchase price representing approximately $9.5 million in purchased research and
development, $1.8 million in goodwill and other intangibles, and approximately
$0.2 million in net assets assumed. The amortization period for the intangibles,
based on management's estimate of the useful life of the acquired technology, is
five years. The operations of Terabit are not material to the consolidated
financial statements of the Company and, accordingly, separate pro forma
financial information has not been presented.
In connection with the Terabit acquisition, the Company recorded a $9.5
million charge in the year ended October 31, 1998 for purchased research and
development. This generally represents the estimated value of purchased
in-process technology related to Terabit's avalanche photodiodes (APD) that had
not yet reached technological feasibility and had no alternative future use at
the time of the acquisition.
The amount of purchase price allocated to in-process research and
development was determined using the discounted cash flow method. This method
consisted of estimating future net cash flows attributable in-process APD
technology for a discrete projection period and discounting the net cash flows
back to their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the purchased
in-process technology. The estimated revenue associated with the APD technology
future net cash flows assumed a five year compound annual growth rate of between
5% to 43%. The revenue growth rates were developed considering, among other
things, the current and expected industry trends and acceptance of the
technologies in historical growth rates for similar industry products.
Management's estimates or projections were based upon an estimated period of ten
years with revenues reaching a peak in 2002 and declining through 2008. The
estimated net cash flows were discounted to present value at a rate of return,
which considers the relative risk of achieving the net cash flows and the time
value of money. A 30% discount rate was used to effect the risk associated with
Terabit's APD technology. This rate is higher than the Company's normal discount
rate due to inherent uncertainties surrounding the successful development of
purchase in-process technology, the useful life of the technology, and the
profitability levels of such technology.
The resulting net cash flows from the APD project was based on management's
estimates of revenues, cost of sales, research and development costs, selling
general and administrative costs, and income taxes associated with the project.
Alta
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On February 19, 1998, the Company completed a merger with ATI Telecom
International Ltd., ("Alta"), a Canadian corporation headquartered near Atlanta,
Georgia, in a transaction valued at approximately $52.5 million. Alta provides a
range of engineering, furnishing and installation services for
telecommunications service providers in the areas of transport, switching and
wireless communications. Under the terms of the merger agreement, the Company
exchanged 2 million shares of its common stock for all the common stock of Alta.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Alta as though it had been a part of CIENA.
Prior to the merger, Alta's year ended on December 31. In recording the
business combination, Alta's prior period financial statements have been
restated to conform to CIENA's fiscal year end.
All intercompany transactions between CIENA and Alta have been eliminated in
consolidation. Certain reclassifications were made to Alta financial statements
to conform to CIENA's presentation. No material adjustments were made to conform
to CIENA's accounting policies.
The following table shows the separate historical results of CIENA and Alta
for the periods prior to the consummation of the merger of the two entities (in
thousands):
Year Ended October 31,
---------------------------------------
1996 1997
------------------- -------------------
Revenues:
CIENA $ 54,838 $ 373,827
Alta 33,625 39,531
Intercompany eliminations - (143)
------------------- -------------------
Consolidated revenues $ 88,463 $ 413,215
=================== ===================
Net income (loss):
CIENA $ 14,718 $ 112,945
Alta 2,545 3,022
------------------- -------------------
Consolidated net income $ 17,263 $ 115,967
=================== ===================
Astracom
During December 1997, the Company completed an Agreement and Plan of Merger
with Astracom, Inc. ("Astracom"), an early stage telecommunications company
located in Atlanta, Georgia. The purchase price was approximately $13.1 million
and consisted of the issuance of 339,508 shares of CIENA common stock, the
payment of $2.4 million in cash, and the assumption of certain stock options.
The transaction was recorded using the purchase accounting method with the
purchase price representing approximately $11.4 million in goodwill and other
intangibles, and approximately $1.7 million in net assets assumed. The
amortization period for the intangibles, based on management's estimate of the
useful life of the acquired technology, is five years. The operations of
Astracom are not material to the consolidated financial statements of the
Company and, accordingly, separate pro forma financial information has not been
presented.
(3) MARKETABLE DEBT SECURITIES
Marketable debt securities are comprised of the following (in thousands):
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October 31,
------------------
1999 2000
-------- --------
Commercial paper ............. $105,215 $ 90,745
U.S. Government obligations... 13,741 4,386
-------- --------
$118,956 $ 95,131
======== ========
(4) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31,
----------------------------
1999 2000
------------- ------------
Raw materials.................................. $ 49,298 $ 52,576
Work-in-process................................ 16,386 48,300
Finished goods................................. 26,369 58,641
------------- ------------
92,053 159,517
Reserve for excess and obsolescence............ (12,445) (18,238)
------------- ------------
$ 79,608 $ 141,279
============= ============
(5) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
October 31,
----------------------
1999 2000
--------- ----------
Equipment, furniture and fixtures ........... $ 182,794 $ 290,726
Leasehold improvements ...................... 30,231 43,394
--------- ---------
213,025 334,120
Accumulated depreciation and amortization.... (88,716) (147,638)
Construction-in-progress .................... 943 2,749
--------- ---------
$ 125,252 $ 189,231
========= =========
(6) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
October 31,
-----------------
1999 2000
------- --------
Warranty and other contractual obligations .... $28,582 $27,605
Accrued compensation and payroll related tax... 15,471 34,163
Other ......................................... 14,433 22,395
------- -------
$58,486 $84,163
======= =======
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(7) EARNINGS (LOSS) PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of the
basic net income (loss) per common share ("basic EPS") and diluted net income
(loss) per common and dilutive potential common share ("diluted EPS"). Basic EPS
is computed using the weighted average number of common shares outstanding.
Diluted EPS is computed using the weighted average number of common shares
outstanding, stock options and warrants using the treasury stock method (in
thousands except per share amounts).
October 31,
-------------------------------
1998 1999 2000
-------- -------- --------
Net income (loss) ....................... $ 45,700 $ (3,924) $ 81,387
======== ======== ========
Weighted average shares-basic ........... 235,980 267,042 281,621
-------- -------- --------
Effect of dilutive securities:
Employee stock options and warrants 19,808 -- 18,041
-------- -------- --------
Weighted average shares-diluted ......... 255,788 267,042 299,662
======== ======== ========
Basic EPS ............................... $ 0.19 $ (0.01) $ 0.29
======== ======== ========
Diluted EPS ............................. $ 0.18 $ (0.01) $ 0.27
======== ======== ========
Approximately 1,538,000, 23,772,000 and 1,203,123 options and restricted
stock were outstanding during fiscal 1998, 1999 and 2000 respectively, but were
not included in the computation of the Diluted EPS as the effect would be
anti-dilutive.
(8) STOCKHOLDERS' EQUITY
Authorized Shares
On March 16, 2000, the shareholders of the Company approved an increase to
the authorized number of shares of common stock from 360 million to 460 million
shares.
Stock Split
The Board of Directors authorized the splitting of the Company's common
stock on a two-for-one basis for shareholders of record on August 28, 2000 and
the resulting shares from the split were distributed on September 18, 2000. All
references to share and per-share data for all periods presented have been
adjusted to give effect to this two-for-one stock split.
Stockholder Rights Plan
In December 1997, the Company's Board of Directors adopted a Stockholder
Rights Plan. This plan is designed to deter any potential coercive or unfair
takeover tactics in the event of an unsolicited takeover attempt. It is not
intended to prevent a takeover of the Company on terms that are favorable and
fair to all shareholders and will not interfere with a merger approved by the
Board of Directors. Each right entitles shareholders to buy a "unit" equal to
one one-thousandth of a share of Preferred Stock of the Company. The rights will
be exercisable only if a person or a group acquires or announces a tender or
exchange offer to acquire 15% or more of the Company's common stock or if the
Company enters into certain other business combination transactions not approved
by the Board of Directors.
In the event the rights become exercisable, the rights plan allows for CIENA
shareholders to acquire stock of the surviving corporation, whether or not CIENA
is the surviving corporation, having a value twice that of the exercise price of
the rights. The rights were distributed to shareholders of record in January
1998. The rights will expire December 2007 and are redeemable for $0.001 per
right at the approval of the Company's Board of Directors.
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Other Offerings
During 1998 and 1999 Omnia issued 10,753,330 and 368,990 shares of common
stock in exchange for approximately $12,801,000 and $66,000, respectively.
During 1998, Lightera issued a total of 33,155,010 shares of common stock in
exchange for certain technology rights, notes receivable totaling $211,000 and
proceeds of approximately $15,893,000. In 1999, Lightera issued 1,937,022 shares
of common stock in exchange for approximately $104,000.
Accumulated Comprehensive Income
The components of accumulated comprehensive income (loss) are as follows (in
thousands):
October 31,
-------------------
1999 2000
------- --------
Net income (loss) .............................. $(3,924) $ 81,387
Change in accumulated translation adjustments... 67 (863)
------- --------
Total comprehensive income (loss) .............. $(3,857) $ 80,524
======= ========
(9) INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income taxes
consists of the following (in thousands):
Octoberber 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Income (loss) before income taxes .............................................. $ 81,900 $(5,991) $ 120,574
======== ======= =========
Provision (benefit) for income taxes:
Current:
Federal ...................................................................... 36,865 5,175 44,914
State ........................................................................ 4,444 235 4,640
Foreign ...................................................................... 40 75 250
------- --------- ---------
Total current ......................................................... 41,349 5,485 49,804
-------- ------- ---------
Deferred:
Federal ...................................................................... (4,496) (7,477) (10,013)
State ........................................................................ (653) (75) (604)
Foreign ...................................................................... -- -- --
-------- ------- ---------
Total deferred ........................................................ (5,149) (7,552) (10,617)
-------- ------- ---------
Provision (benefit) for income taxes ......................................... $ 36,200 $(2,067) $ 39,187
======== ======= =========
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The tax provision (benefit) reconciles to the amount computed by multiplying
income before income taxes by the U.S. federal statutory rate of 35% as follows:
October 31,
--------------------------
1998 1999 2000
------ ------ ----
Provision at statutory rate ....................................... 35.0 % 35.0 % 35.0 %
Non-deductible purchased research and development ................. 4.3 -- --
State taxes, net of federal benefit ............................... 4.3 (2.6) 2.2
Research and development credit ................................... (4.0) 48.9 (5.5)
Foreign sales corporation benefit ................................. (1.6) 28.7 (0.7)
Non-deductible merger costs and other ............................. 6.2 (75.5) 1.5
------ ------ ----
44.2 % (34.5) % 32.5 %
====== ====== ====
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
October 31,
---------------------
1999 2000
-------- ----------
Deferred tax assets:
Reserves and accrued liabilities .......... $ 14,931 $ 33,846
Other ..................................... 637 1,178
Net operating loss and credit carry forward 11,244 109,410
-------- ---------
Gross deferred tax assets ................. 26,812 144,434
Valuation allowance ....................... (1,427) (1,405)
-------- ---------
Net current deferred tax asset ....... $ 25,385 $ 143,029
======== =========
Deferred tax liabilities:
Equipment leases .......................... $ 8,738 $ 8,885
Services .................................. 23,916 24,319
Depreciation and other .................... 4,299 5,941
-------- ---------
Deferred long-term tax liabilities .... $ 36,953 $ 39,145
======== =========
As of October 31, 2000, the Company has a $249.2 million net operating loss
carry forward and an $18.1 million income tax credit which begin to expire in
fiscal 2016 and 2014, respectively. Management believes that, after considering
the anticipated future operating results of the Company, the net deferred tax
assets will be realized. However, there cannot be complete assurance that this
will occur.
The income tax provision does not reflect the tax savings resulting from
deductions associated with the Company's stock option plans. Tax benefits from
exercises of stock options of approximately $11.0 million and $154.6 million in
fiscal 1999 and fiscal 2000, respectively, were credited directly to additional
paid-in-capital.
The IRS is currently examining the Company's federal income tax returns for
fiscal 1997 and fiscal 1998. Management does not expect the outcome of these
examinations to have a material adverse affect on the Company's consolidated
financial position, results of operations or cash flows.
(10) EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
In August of 1999, the Company approved the 1999 Non-Officer Incentive Stock
Plan (the "1999 Plan"). Under the 1999 Plan, 24,000,000 shares of the Company's
authorized but unissued Common Stock are reserved for options issuable to
employees who are not executive officers of the Company. These options vest to
the employee over four years and are exercisable once vested. Options under the
1999 Plan are categorized as non-qualified, and the exercise
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53
price for each option shall be established by the Board of Directors provided
the price is not less than 85% of fair market value.
The Company has an Amended and Restated 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, 40,100,000 shares of the Company's authorized but
unissued Common Stock are reserved for options issuable to employees. Certain of
these options are immediately exercisable upon grant, and both the options and
the shares issuable upon exercise of the options generally vest to the employee
over a four year period. The Company has the right to repurchase any exercised
and non-vested shares at the original purchase price from the employees upon
termination of employment. In June 1996, the Company approved the 1996 Outside
Directors Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, 1,500,000
shares of the Company's authorized but unissued Common Stock are reserved for
options issuable to outside members of the Company's Board of Directors. These
options vest to the director over periods from one to three years, depending on
the type of option granted, and are exercisable once vested. Under the 1994 Plan
and the 1996 Plan, options may be incentive stock options or non-qualified
options, and the exercise price for each option shall be established by the
Board of Directors provided, however, that the exercise price per share shall
not be not less than the fair market value for incentive stock options and not
less than 85% of fair market value for non-qualified stock options.
As a result of the Company's merger with Omnia, the Company assumed the
Omnia 1997 Stock Plan Option Plan ("the 1997 Plan"). The 1997 Plan provided for
the granting of stock options to employees and consultants of Omnia. Options
granted under the 1997 Plan were either incentive stock options or nonstatutory
stock options. Incentive stock options ("ISO"), could be granted only to Omnia
employees (including officers and directors who were also employees).
Nonstatutory stock options ("NSO") could be granted to Omnia employees and
consultants. The Company has reserved 1,519,778 shares of Common Stock for
outstanding options under the plan. Options exercised are immediately subject to
a repurchase right held by the Company which lapse over a maximum period of four
years at such times and under such conditions as determined by the Board of
Directors. To date, options granted generally vest over four years.
As a result of the Company's merger with Lightera, the Company assumed the
Lightera 1998 Stock Option Plan ("the 1998 Plan"). The 1998 Plan provided for
the granting of stock options to employees and consultants of Lightera. Options
granted under the 1998 Plan were either incentive stock options or nonstatutory
stock options. Incentive stock options ("ISO"), could be granted only to
Lightera employees (including officers and directors who were also employees).
Nonstatutory stock options ("NSO") could be granted to Lightera employees and
consultants. The Company has reserved 5,058,322 shares of Common Stock for
outstanding options under the plan. Options exercised are immediately subject to
a repurchase right held by the Company which lapse over a maximum period of five
years at such times and under such conditions as determined by the Board of
Directors. To date, options granted generally vest over four years.
Following is a summary of the Company's stock option activity (shares in
thousands):
Shares Weighted Average
Exercise Price
-----------------------------
Balance at October 31, 1997 ................... 18,220 $ 3.67
Granted........................................ 12,828 9.50
Exercised...................................... (5,296) 1.20
Canceled....................................... (6,680) 20.06
------
Balance at October 31, 1998 .................. 19,072 2.41
Granted........................................ 16,262 11.73
Exercised...................................... (3,456) 2.33
Canceled....................................... (1,756) 6.65
------
Balance at October 31, 1999 ................... 30,122 7.22
Granted........................................ 12,529 98.85
Exercised...................................... (9,383) 4.10
Canceled....................................... (2,547) 17.13
------
Balance at October 31,2000 .................... 30,721 $ 44.72
======
During September 1998, the Company canceled and re-issued outstanding
employee stock options with exercise prices in excess of the fair market value,
except those options held by outside directors and officers of the Company.
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A total of 5.8 million options with an average exercise price of $21.44 were
cancelled and reissued at $6.19 per share. At October 31, 2000, approximately
0.4 million shares of Common Stock subject to repurchase by the Company had been
issued upon the exercise of options and restricted stock purchase agreements,
7.0 million of the total outstanding options were vested and not subject to
repurchase by the Company upon exercise. As of October 31, 2000, approximately
14.5 million shares are available for issuance under these plans.
The following table summarizes information with respect to stock options
outstanding at October 31, 2000 (shares in thousands):
Options Not Subject to
Options Outstanding Repurchase Upon Exercise
------------------------------------------------ -------------------------------
Weighted
Average
Number Remaining Weighted Weighted
Range of Outstanding Contractual Average Number Average
Exercise at Oct. 31, Life Exercise At Oct. 31, Exercise
Price 2000 (Years) Price 2000 Price
------------------------ ------------ ------------ ---------------------- ------------- --------------
$ 0.01 - $ 1.13 3,279 7.10 $ 0.12 1,392 $ 0.17
$ 1.15 - $ 6.19 5,202 6.23 3.15 4,127 2.39
$ 6.28 - $ 14.83 3,519 8.20 9.65 878 9.40
$ 14.91 - $ 15.78 3,879 8.96 14.93 64 15.20
$ 16.13 - $ 57.66 4,566 8.97 24.25 541 16.89
$ 58.25 - $ 127.88 4,028 9.67 84.05 -- --
$ 130.00 - $ 149.50 6,248 9.97 130.96 -- --
------ ------
$ 0.01 - $ 149.50 30,721 8.51 $ 44.72 7,002 $ 26.01
====== ======
Employee Stock Purchase Plan
In March 1998, the shareholders approved the Corporation's 1998 Stock
Purchase Plan ("the Purchase Plan") under which 5.0 million shares of common
stock have been reserved for issuance. Eligible employees may purchase a limited
number of shares of the Company's stock at 85% of the market value at certain
plan-defined dates. Approximately 693,000 and 607,000 shares of common stock
have been issued for $5.8 million and $3.3 million during fiscal 2000 and fiscal
1999, respectively. As of October 31, 2000 approximately 3.7 million shares are
available for issuance under this plan.
Pro forma Stock-Based Compensation
Had compensation cost for the Company's stock option plans and the Purchase
Plan been determined based on the fair value at the grant date for awards in
fiscal years 1998, 1999 and 2000 consistent with the provisions of SFAS No. 123,
the Company's net income and net income per share for fiscal 1998 and 1999 would
have been decreased and the net loss per share for fiscal 1999 would have been
increased to the pro forma amounts indicated below (in thousands, except per
share):
October 31,
----------------------------------
1998 1999 2000
-------- --------- ----------
Net income (loss) applicable to common stockholders -
as reported...................................... $ 45,700 $ (3,924) $ 81,387
======== ========= ==========
Net income (loss) applicable to common stockholders -
pro forma....................................... $ 20,816 $ (40,067) $ (26,244)
======== ========= ==========
Basic net income (loss) per share - as reported....... $ 0.19 $ (0.01) $ 0.29
======== ========= ==========
Basic net income (loss) per share - pro forma......... $ 0.09 $ (0.15) $ (0.09)
======== ========= ==========
Diluted net income (loss) per share - as reported..... $ 0.18 $ (0.01) $ 0.27
======== ========= ==========
Diluted net income (loss) per share - pro forma....... $ 0.08 $ (0.15) $ (0.09)
======== ========= ==========
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The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
The weighted average fair value of each option granted under the various
stock option plans for 1998, 1999 and 2000 is $7.59, $9.45 and $64.99
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes Option Pricing Model with the following weighted
average assumptions for fiscal years 1998, 1999, and 2000:
Employee Stock Option Plans Employee Stock
Purchase Plan
October 31, October 31,
--------------------------- ----------------
1998 1999 2000 1999 2000
---- ---- ----- ----- ----
Expected volatility 109% 88% 106% 88% 106%
Risk-free interest rate 4.4% 5.5% 6.1% 5.5% 6.1%
Expected life (years) 3.0 2.8 2.7 0.5 0.5
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company uses projected volatility rates, which are based upon historical
volatility rates trended into future years. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's options.
Employee 401(k) Plan
The Company has a 401(k) defined contribution profit sharing plan. The plan
covers all full-time employees who have completed three months of service and
are not covered by a collective bargaining agreement where retirement benefits
are subject to good faith bargaining. Participants may contribute up to 15% of
pre-tax compensation, subject to certain limitations. The Company may make
discretionary annual profit sharing contributions of up to the lesser of $30,000
or 25% of each participant's compensation. The plan includes an employer
matching contribution equal to 100% of the first 3% of participating employee
contributions, with a five year vesting plan applicable to the Company's
contribution with the exception that participants vest immediately upon turning
age fifty-five. The Company has made no profit sharing contributions to date.
During fiscal 1998 1999 and 2000 the Company made matching contributions of
approximately $1.1 million, $1.7 million and $2.3 million, respectively.
(11) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has certain minimum obligations under non-cancelable operating
leases expiring on various dates through 2006 for equipment and facilities.
Future annual minimum rental commitments under non-cancelable operating leases
at October 31, 2000 are as follows (in thousands):
Fiscal year ending October 31,
2001.................................... $ 14,102
2002.................................... 12,293
2003.................................... 10,731
2004.................................... 10,706
2005.................................... 10,111
Thereafter.............................. 22,668
--------------
$ 80,611
==============
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Rental expense for fiscal 1998, 1999 and 2000 was approximately $6.1
million, $9.5 million and $13.7 million, respectively.
Litigation
On October 3, 2000, Stanford University and Litton Systems filed a complaint
in U.S. District Court for the Central District of California alleging that
optical fiber amplifiers incorporated into CIENA's products infringe U.S. Patent
No. 4,859,016. Due to the early stage of this litigation, CIENA is unable to
determine whether the litigation will have an adverse effect on the Company. The
Company intends to defend this suit vigorously.
On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned
subsidiary of CIENA, filed a complaint in the United States District Court for
the District of Delaware requesting damages and injunctive relief against Corvis
Corporation. The complaint charges Corvis Corporation with infringing three
patents relating to CIENA's optical networking communication systems and
technology. On September 8, 2000, Corvis filed an Answer and Counterclaim
alleging invalidity, non-infringement and unenforceability of the asserted
patents, and tortious interference with prospective economic advantage. CIENA
believes that Corvis' counterclaims are without merit, and intends to defend
itself vigorously.
On June 1, 1998, the Company resolved the long-standing litigation with
Pirelli S.p.A. The terms of the settlement involve dismissal of Pirelli's three
lawsuits against CIENA previously pending in Delaware, dismissal of CIENA's
legal proceedings against Pirelli in the United States International Trade
Commission, a worldwide, non-exclusive cross-license to each party's patent
portfolios, and a five-year moratorium on future litigation between the parties.
As a result of the settlement, CIENA recorded a charge for the fiscal year ended
October 31, 1998 of $30.6 million relating to the Pirelli settlement and
associated legal fees.
(12) FOREIGN SALES
The Company has sales and marketing operations outside the United States in
Canada, the United Kingdom, Belgium, France, Germany, Japan, Mexico and Brazil.
The Company has distributor or marketing representative arrangements covering
Italy, the Republic of Korea, Japan, Venezuela, Columbia and Chile. Included in
revenues are export sales of approximately $117.1 million, and $213.6 million
and $283.1 in fiscal years 1998, 1999 and 2000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is set forth in Part I of this report under the caption Item 1. Business-
"Directors, and Executive Officers" and is incorporated by reference herein.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Larry Huang and Perry Kamel each filed one late Form 4 reporting a single
transaction. Steve Chaddick filed one late Form 4 reporting a single transaction
and one late Form 5 reporting a single transaction.
ITEM 11. EXECUTIVE COMPENSATION
The information is incorporated herein by reference to the Company's
definitive 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is incorporated herein by reference to the Company's
definitive 2001 Proxy Statement.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is incorporated herein by reference to the Company's
definitive 2001 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The information required by this item is included in Item 8
of Part II of this From 10-K
2. Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at
beginning of Balance at end
period Provisions Deductions of period
------------ ---------- ------------- ---------------
Year ended October 31, 1998
Allowance for doubtful accounts $ 722 $ 806 $ -- $ 1,528
Allowance for excess and obsolete inventory $ 7,466 $ 9,617 $5,929 $11,154
Year ended October 31, 1999
Allowance for doubtful accounts $ 1,528 $ 250 $ 75 $ 1,703
Allowance for excess and obsolete inventory $11,154 $ 6,534 $5,243 $12,445
Year ended October 31, 2000
Allowance for doubtful accounts $ 1,703 $28,010 $ 132 $29,581
Allowance for excess and obsolete inventory $12,445 $15,021 $9,228 $18,238
3. Exhibits: See Index to Exhibits on page 59. The Exhibits
listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
(e) Reports on Form 8-K: Form 8-K (items 5 and 7 reported) filed on
September 5, 2000.
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58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Linthicum, County of Anne Arundel, State of Maryland, on the 7th day of December
2000.
CIENA CORPORATION
By: /s/ Patrick H. Nettles, Ph.D
-----------------------------------
Patrick H. Nettles, Ph.D
Chief Executive Officer
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
Signatures Title Date
/s/ Patrick H. Nettles, Ph.D. Chief Executive Officer, Chairman of the December 7, 2000
---------------------------------------- Board of Directors
Patrick H. Nettles, Ph.D.
(Principal Executive Officer)
/s/ Joseph R. Chinnici Sr. Vice President, Finance and December 7, 2000
---------------------------------- Chief Financial Officer
Joseph R. Chinnici
(Principal Financial Officer)
/s/ Andrew C. Petrik Vice President, Controller December 7, 2000
--------------------------------- and Treasurer
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Stephen P. Bradley Director December 7, 2000
----------------------------------
Stephen P. Bradley
/s/ Harvey B. Cash Director December 7, 2000
---------------------------------
Harvey B. Cash
/s/ John R. Dillon Director December 7, 2000
- -------------------------------------
John R. Dillon
/s/ Lawton W. Fitt Director December 7, 2000
-----------------------------------
Lawton W. Fitt
/s/ Gary B. Smith President, Chief Operating Officer December 7, 2000
--------------------------------- and Director
Gary B. Smith
/s/ Judith M. O'Brien Director December 7, 2000
---------------------------------
Judith M. O'Brien
/s/ Gerald H. Taylor Director December 7, 2000
-----------------------------------
Gerald H. Taylor
58
59
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 (1) Certificate of Amendment to Third Restated Certificate of Incorporation
3.2 (1) Third Restated Certificate of Incorporation
3.3 (1) Amended and Restated Bylaws
3.5 (10) Certificate of Amendment to Third Restated Certificate of Incorporation dated March 23, 1998
3.6 (10) Certificate of Amendment to Third Restated Certificate of Incorporation dated March 16, 2000
4.1 (1) Specimen Stock Certificate
4.2 (3) Rights Agreement dated December 29, 1997
4.3 (4) Amendment to Rights Agreement
4.4 (11) Amendment No. 2 to Rights Agreement dated September 13, 1998
4.5 (4) Amendment No. 3 to Rights Agreement dated October 19, 1998
10.1 (1) Form of Indemnification Agreement for Directors and Officers
10.2 (1) Amended and Restated 1994 Stock Option Plan
10.3 (1) Form of Employee Stock Option Agreements
10.4 (1) 1996 Outside Directors Stock Option Plan
10.5 (1) Forms of 1996 Outside Directors Stock Option Agreement
10.6 (1) Series C Preferred Stock Purchase Agreement dated December 20, 1995
10.7 (1) Lease Agreement dated October 5, 1995 between the Company and CS Corridor-32 Limited Partnership
10.8 (1)(8) Purchase Agreement Between Sprint/United Management Company and the Company dated December 14, 1995
10.9 (1)(8) Basic Purchase Agreement between WorldCom Network Services, Inc. and the Company
dated September 19, 1996
10.10 (1) Settlement Agreement and Mutual Release, between the Company and William K.
Woodruff & Company, dated August 26, 1996
10.13 (1) Employment Agreement dated April 9, 1994 between the Company and Patrick Nettles
10.14 (1) Lease Agreement dated November 1, 1996 by and between the Company and Aetna Life Insurance Company
10.15 (1) Revolving Note and Business Loan Agreement dated November 25, 1996 between the Company and
Mercantile-Safe Deposit & Trust Company
10.16 (1)(8) First Addendum to Procurement Agreement between the Registrant and Sprint/United
Management Company dated December 19, 1996
10.17 (5) Third Addendum to Procurement Agreement between the Registrant and Sprint/United Management Company
10.18 (5) Form of Transfer of Control/Severance Agreement
10.19 (6) Lightera 1998 Stock Option Plan and Form of Stock Option Agreement
10.20 (7) Omnia Communications, Inc. 1997 stock plan and form of agreements
10.21 (9) Employment Agreement dated August 18, 1999 between the Company and Gary B. Smith
10.22 (9) 1999 Non-Officer Stock Option Plan and Form of Stock Option Agreement
10.23 (9) Lease Agreement dated June 1, 1999 between the Company and Ridgeview Court Associates,
L.L.C.
21 (2) Subsidiaries of registrant
23.1 Consent of Independent Accountants (filed herewith)
27.1 Financial Data Schedule (filed herewith)
(1) Incorporated by reference from the Company's Registration Statement on Form S-1 (333-17729).
(2) Incorporated by reference from the Company's Registration Statement on Form S-1 (333-28525).
(3) Incorporated by reference from the Company's Form 8-K dated December 29, 1997.
(4) Incorporated by reference from the Company's Form 8-K dated October 14, 1998.
(5) Incorporated by reference from the Company's Form 10-K dated December 10, 1998.
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60
(6) Incorporated by reference from the Company's Form 10-Q dated May 21, 1999.
(7) Incorporated by reference from the Company's Form 10-Q dated August 19, 1999.
(8) Confidential treatment has been granted by the Securities and Exchange Commission with respect to certain portions
of these exhibits.
(9) Incorporated by reference from the Company's Form 10-K dated December 10, 1999.
(10) Incorporated by reference from the Company's Form 10-Q dated May 18, 2000.
(11) Incorporated by reference from the Company's Form 8-K dated September 14, 1998.
60