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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
(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 138,187,356 shares of Common Stock of the
Registrant issued and outstanding as of October 31, 1999, excluding 3,362,959
shares of Common Stock held by affiliates of the Registrant was $4,659,531,160.
This amount is based on the average bid and asked price of the Common Stock on
the Nasdaq Stock Market of $34.56 per share on October 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2000 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.
The Company'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 emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery 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 its customers with a
competitive advantage.
During its fiscal year 1999 CIENA significantly broadened its product
offerings and believes it has increased its addressable market opportunity
through internal developments, and through the acquisitions of Lightera
Networks, Inc. ("Lightera") of Cupertino, California and Omnia Communications,
Inc. ("Omnia") of Marlborough, Massachusetts. CIENA announced the acquisitions
of Omnia and Lightera simultaneously on March 15, 1999, in conjunction with
announcing its "LightWorks(TM) Initiative."
The acquisition of Lightera was completed on March 31, 1999 and was valued
at approximately $459 million. The acquisition of Omnia was completed on July 1,
1999, with a value of approximately $483 million. Since the acquisitions, the
Company has been working to bring Omnia's service delivery product, MultiWave
EdgeDirector(TM) and Lightera's optical core switch, MultiWave CoreDirector(TM),
to market.
The Company's research and development efforts and potential future
acquisition and partnership activities are targeted at capitalizing on its
installed base of carrier customers and leveraging its position as a leader in
the rapidly emerging optical networking market.
Historically, the significant majority of CIENA's revenues have come from
the sale of several 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 optical transport equipment with more than
7 million optical channel kilometers installed. For the fiscal year ended
October 31, 1999, the Company recorded revenue from sales of optical transport
equipment to a total of 27 customers, nearly double 1998's customer base of 14.
Three customers each represented more than 10% of CIENA's revenues for fiscal
1999. The majority of the Company's fiscal 1999 revenue was derived from sales
of its MultiWave Sentry 4000(TM) long-distance optical transport equipment. The
Company also recognized significant revenue from the sale of its next generation
long-distance optical transport system, MultiWave CoreStream(TM).
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The Company's results for fiscal 1999, show total revenues of $482.1
million. Though a slight decrease from 1998's total revenue of $508.1 million,
the Company believes its 1999 results represent a considerable achievement
following the challenges that surrounded the end of its fiscal year 1998. Since
its fourth fiscal quarter 1998, the Company has shown sequential quarterly
improvement in both sales and gross margins. Sales increased from $91.2 million
in fiscal fourth quarter 1998 to the $141.4 million reported in the fiscal
fourth quarter 1999. Gross margins improved from 31.2% of total revenue during
fiscal fourth quarter 1998 to 41.0% of total revenue during fiscal fourth
quarter 1999.
INDUSTRY BACKGROUND
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THE TELECOMMUNICATIONS MARKET
Service providers both domestically and internationally have widely
deployed fiber optic cable forming the backbone of their communication networks.
During the last several years carriers have faced several challenges resulting
from a combination of factors, including:
- Unprecedented traffic growth
- Changing traffic demands
- Growing competition
- Increased demand for reliability
- Network scalability challenges
- Escalating operational costs
Unprecedented Traffic Growth
Service providers have seen dramatic network traffic growth caused by
factors such as:
- the escalating use of the Internet, as well as increased use of
electronic commerce, distributed computing, electronic mail,
facsimile transmission, electronic transaction processing, video
conferencing, remote access telecommuting and local and wide area
networking;
- growing capacity and processing speed of data communications
equipment such as Asynchronous Transfer Mode (ATM) switches and
Internet Protocol (IP) routers; and
- development of high-bandwidth network access technologies, such as
cable modems, hybrid fiber coaxial architectures and digital
subscriber lines, that permit commercial and consumer users to
transmit and receive high volumes of information.
This increased network utilization can create transmission bottlenecks on
heavily used routes that were originally designed to handle significantly less
traffic. Although exact statistics are not available, the Company believes that
this volume increase has caused some telecommunications carriers to handle
traffic over certain long distance routes at or near the maximum capacity of the
existing installed fiber and electronic-based transmission systems currently in
use.
Changing Traffic Demands
In addition to more traffic, telecommunication carriers are seeing a shift
in the kind of traffic they are handling. Networks today are no longer carrying
purely telephone or voice traffic, but instead are carrying an ever increasing
volume of data traffic - traffic generated by computers that process and send
information far more quickly and in much larger quantities than voice-centric
networks were designed for. Carriers and equipment suppliers both have sought
more efficient ways to handle this traffic, adopting cell and packet based
protocols such as Frame Relay, ATM and IP. These protocols more efficiently
handle data traffic by organizing it either in packets, as is the case with
Frame Relay and IP, or in cells for ATM. Each packet or cell contains a header
with the destination information the network needs to efficiently route or
switch the packet/cell.
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Recently advances by data communications equipment suppliers have made it
possible for ATM switches and IP routers to operate at port speeds of
OC-48/STM-16, or 2.5 gigabits per second ("Gb/s"). Several suppliers have
announced their intention to provide equipment that operates at port speeds of
OC-192/STM-64 or 10 Gb/s, during the year 2000. An industry analyst has
estimated that the volume of data-centric traffic traveling in packets or cells
will reach 99% of all network traffic by 2004. Whether or not the estimate is
precisely accurate, the Company believes the trend of increasing cell and packet
based traffic is unmistakable and, as a result, carriers will increasingly look
for alternatives to the use of traditional voice-based or synchronous optical
network/synchronous digital hierarchy ("SONET/SDH") telecommunications equipment
in their network architecture. The Company expects that carriers will begin to
move toward a simpler, more cost effective network where data traffic from an
ATM switch or an IP router is directly fed to an optical transport device. The
Company believes its ability to connect directly to ATM switches and IP routers
through its DirectConnect(TM) feature positions it to benefit from this shift.
Growing Competition
Widespread deregulation of the United States telecommunications industry
has resulted in increased competition among service providers both in the
long-distance and local markets. In addition to heightened price competition,
carriers are increasingly looking for new ways to differentiate their services
from those offered by their competitors. Several new carriers have attempted to
leverage leading edge, high capacity technology as a market differentiator for
their networks. The Company believes this competition is itself a driver for
broader deployment of high capacity such as that enabled by the Company's
products throughout the network.
Increased Demand for Reliability
End-users are becoming more dependent on around-the-clock network
availability, not only for voice, but also for data traffic. The Company
believes these end-users are becoming less tolerant of service interruptions,
which can be caused by factors such as equipment failure, fiber cuts or high
traffic volume. Consequently, network service providers are faced with a
multi-pronged challenge: additional traffic, a different type of traffic, and a
growing demand for increased network reliability.
In many cases, this demand for greater reliability has led long distance
carriers to adopt a "ring architecture" in which long distance routes are linked
in a ring configuration so that in the event of a fiber optic cable cut or other
equipment failure between two points of the ring, the signal can be immediately
redirected through the reverse "protection path" of the ring. However, ring
architectures typically demand twice as much fiber capacity as non-ring based
architectures due to the need to maintain a redundant alternative path to serve
as a protection path for each fiber in use. Most, if not all, of the major
carriers have either already implemented or announced an intention to implement
ring architecture for their networks, which will place greater bandwidth demand
on their existing fiber optic networks.
Network Scalability Challenges
The bandwidth availability that dense wavelength division multiplexing
("DWDM") brought to the core of the network has created another network
challenge as carriers attempt to scale the rest of their networks at the same
pace at which they can now scale core bandwidth. DWDM replaces the single beam
of light that traverses fiberoptic cable with multiple colors of light, each of
which is capable of carrying tens of thousands of voice conversations or data
transmissions. Conventional network ring architectures can no longer efficiently
scale to match the bandwidth made possible by the application of DWDM.
Several years ago, network capacity - bandwidth - was the main bottleneck
in long-distance networks due to fiber exhaust. The widespread acceptance of
DWDM offered carriers an efficient and economical solution that relieved acute
fiber exhaustion. With the advent of DWDM, carriers could turn up additional
channels of bandwidth and gigabits of capacity as traffic dictated. With the
Company's equipment, this typically involves no more than the insertion of
additional channel cards into the existing MultiWave(R) optical transport
system.
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For the past several years DWDM has been implemented by carriers as a
point-to-point solution in long-distance networks. To construct a network using
DWDM equipment, a carrier must interconnect the point-to-point high-capacity
links and manage all traffic flowing through them. A critical component enabling
this interconnection in traditional architectures has been the SONET/SDH
add/drop multiplexers ("ADMs").
In most network architectures, a SONET ADM transmits and receives each
DWDM optical channel. This means that as optical channel counts escalate, the
corresponding number of SONET ADMs also grows. For instance, in order to receive
the traffic from an optical transport system running just 20 channels of DWDM, a
network operator would require a total of 40 SONET ADMs, one for each channel at
each end of the route. Every time an additional channel is turned up, two
additional SONET ADMs must be purchased and installed.
Historically this has been the only way to scale a network. Unfortunately,
this approach creates upwardly spiraling costs. In addition to the capital
equipment costs, 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 service provisioning and
network operation more difficult and cumbersome.
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 in United States
Securities and Exchange Commission reports by carriers, 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 growing faster than revenues. In one case, a carrier saw
its network expenses grow 72% since 1996, while its revenue only grew 18%. In
another, network expenses grew 806% since 1996, while revenue increased 126%.
CIENA LIGHTWORKS
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CIENA's LIGHTWORKS(TM) is an optical networking architecture designed to
change the fundamental economics of building service provider networks.
LightWorks focuses on the three critical areas of optical networking: optical
transport, core switching and service delivery. The products in CIENA's
LightWorks combine the functionality of several current network elements into a
single network element, thereby lowering the capital equipment requirements of a
service provider and simplifying the network, in order to reduce a carrier's
network operating costs. The components of CIENA's LightWorks architecture can
be sold together as a complete network solution or separately as best-of-breed
solutions.
OPTICAL TRANSPORT
CIENA's optical transport solutions are designed to alleviate capacity, or
bandwidth, constraints in high traffic, fiber optic routes without requiring the
installation of new fiber. CIENA's MultiWave(R) open architecture optical
transport systems enhance the transmission capacity of a single optical fiber
through systems that utilize DWDM, without requiring significant modification or
upgrade to existing transmission equipment.
All MultiWave optical transport systems are installed along segments of
fiber optic routes; the beginning and end of which are defined by the presence
of the customers' transmission equipment. CIENA's MultiWave optical transport
systems are designed with an open architecture that allows them to interoperate
with carriers' existing fiber optic transmission systems having a broad range of
transmission speeds and signal formats.
LONG-DISTANCE APPLICATIONS
CIENA has introduced four generations of its long-distance
optical transport product. In chronological order of introduction
they are: MULTIWAVE 1600(TM), MULTIWAVE SENTRY 1600(TM), MULTIWAVE
SENTRY 4000(TM) and MULTIWAVE CORESTREAM. Each subsequent generation
builds on the feature sets and capabilities of the previous
generation and previous generations are scalable to the latest
generation's capacity.
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MultiWave CoreStream is an advanced DWDM optical transport
system with a future capacity of up to 2 Terabits per second (2,000
Gb/s) over a single fiber. The first release of the MultiWave
CoreStream system enables simultaneous transmission of up to 96
optical channels on a single fiber at rates of up to 2.5 Gb/s per
channel or up to 48 optical channels at rates of up to 10 Gb/s per
channel, without opto-electronic regeneration.
MultiWave CoreStream's open architecture and DirectConnect
short reach interfaces provide flexible connectivity enabling
carriers to transport all types of traffic including voice, video
and data. MultiWave CoreStream has a modular DWDM architecture which
allows incremental, in-service capacity upgrades. Each optical
channel can be any mix of 622 megabits per second ("Mb/s")
(OC-12/STM-4), 2.5Gb/s (OC-48/STM-16) or 10Gb/s (OC-192/STM-64)
traffic.
The MultiWave CoreStream product family consists of optical
terminals, amplifiers and add/drop multiplexers. MultiWave
CoreStream incorporates a new generation of broadband optical
amplifiers that enable flexible bandwidth commissioning and
long-distance span designs. MultiWave CoreStream optical add/drop
multiplexers ("OADMs") enable flexible channel access in the middle
of optical transport spans. The OADMs can drop up to eight channels
of OC-12/STM-4, eight channels of OC-48/STM-16 or four channels of
OC-192/STM-64 traffic.
CIENA's SmartSpan(TM) software automates system operations and
ensures carrier-class reliability and performance by embedding
software intelligence within each MultiWave CoreStream element. Each
optical channel in a MultiWave CoreStream system is equipped with
intelligent digital performance monitoring to help carriers
troubleshoot and provide service level agreements. MultiWave
CoreStream is managed by CIENA's WaveWatcher(R) element management
system which has an easy-to-use graphical interface and allows
carriers to monitor and maintain their operations from a single
console.
In November 1999, the Company announced it was pursuing
enhancements to its MultiWave CoreStream product that enable the
system to offer the optimal combination of ultra long-distance
transport functionality and, channel count to further lower network
costs for service providers. Using forward error correction (FEC),
nonlinearity management, and dispersion mapping technologies, plus
embedded software intelligence, MultiWave CoreStream will be able to
support optical spans longer than 5,000 kilometers without
additional optical-to-electrical signal regeneration. The Company
expects to begin beta trails of the ultra long distance feature of
this product in the first half of calendar 2000. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors".
SHORT-DISTANCE APPLICATIONS
CIENA's MULTIWAVE FIREFLY(TM) is an optical transport system
developed specifically for use by carriers in short distance,
point-to-point applications. This system multiplexes up to 24
channels at 2.5 Gb/s, over a single fiber pair, allowing a carrier
to transport up to 60 Gb/s. Multiwave Firefly allows carriers to mix
SONET/SDH, ATM & Fast IP traffic on a common optical network. The
product also enables overbuilds to the network for applications such
as new high speed data services that can be readily implemented on a
separate channel over the current fiber plant. This kind of
application allows the network to be partitioned by type of service
offered, for simpler network management structure. MultiWave Firefly
utilizes a standards-based, open system architecture, enabling it to
interface inexpensively with a wide variety of SONET/SDH, ATM & Fast
IP fiber optic transmission equipment and most embedded networks.
RING-BASED APPLICATIONS
The MULTIWAVE METRO(TM) is an optical transport system
designed for use in metropolitan ring applications. The MultiWave
Metro system consists of optical add/drop multiplexer nodes
connected together on a two fiber ring. It provides up to 24 duplex
channels over a single fiber pair, enabling a service provider to
transport up to 60 Gb/s.
MultiWave Metro is extremely flexible, supporting various
topologies, protocols and protection arrangements on the same fiber
pair and in the same node. MultiWave Metro can simultaneously
support point-to-point, star, ring, or mesh network configurations.
Its standards-based, open architecture allows it to interface easily
with a wide variety of SONET/SDH, ATM, and Fast IP equipment and
most embedded network management systems. MultiWave Metro provides
protection switching on signals where external protection, such as
SONET/SDH protection, is not provided. Furthermore, MultiWave Metro
allows
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various protection types to be supported simultaneously on the same
fiber pair. This flexibility removes uncertainty for incumbent and
emerging carriers by allowing them to rapidly support new services.
MultiWave Metro is specifically designed for short-distance
ring applications. It provides a cost effective alternative to time
division multiplexed (TDM) rings when the total aggregate ring
capacity is OC-12 or greater. Traditionally, carriers designate the
transmission speed for a metropolitan ring, i.e.-OC-48, and
transport all traffic on the ring at the transmission speed. Once
the ring capacity is fully utilized, the carrier is forced to
utilize another ring. As with point-to-point segments, this
significantly increases the complexity, deployment timing and cost
of a carrier's network. MultiWave Metro is an excellent alternative
to new fiber builds in access rings where fiber exhaust is a problem
because it allows carriers to utilize one fiber pair to create
virtual rings of varying capacity. In addition, MultiWave Metro
allows new services such as "virtual private SONET rings" to be
offered using the existing fiber plant. A PC-based network design
tool, which helps automate the design of the DWDM ring, is available
with the system.
WAVEWATCHER NETWORK MANAGEMENT SYSTEM
WAVEWATCHER(R) is the MultiWave system's integrated network management
software package. The Company's commitment to providing standards-compliant
network management interfaces at all levels, from individual network elements to
the element management system, affords rapid integration into existing
telecommunication management operations.
WaveWatcher operates on a UNIX platform and has been designed to adhere to
both existing and evolving open system network management standards such as
SNMP, TCP/IP and the ITU TMN standards.
WaveWatcher's network element manager uses a separate out-of-band optical
service channel to communicate network management information and provides a
single view of multiple CIENA systems through graphical user interfaces and
supported operating system interfaces. It provides customers with early warnings
of network problems and allows them to manage and monitor network performance.
WaveWatcher provides fault, performance, security and configuration management
of optical networking systems. When used with MultiWave Sentry systems,
WaveWatcher provides additional monitoring capabilities for channel
identification and transmission quality throughout a customer's MultiWave
network.
The Company believes its software development effort provides an important
differentiator for its optical networking systems.
CORE SWITCHING
MULTIWAVE COREDIRECTOR(TM) is an intelligent optical core switch, designed
to deliver a wide range of optical capacities with a variety of protection
options. MultiWave CoreDirector features the networking intelligence of CIENA's
LightWorks OS(TM), which enables network-wide optical provisioning and
management. With its scalability, flexibility, and advanced networking
capabilities, MultiWave CoreDirector dramatically reduces the cost of deploying,
operating, and scaling optical networks. MultiWave CoreDirector is currently in
the customer trial phase of development. CIENA expects field deployable units
will be available at the end of the first calendar quarter of 2000, with general
availability to follow. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors".
MultiWave CoreDirector provides up to 640 Gb/s of full duplex switching in
a single 7 foot bay. It supports up to 256 OC-48/STM-16 or 64 OC-192/STM-64
interfaces, with the ability to support OC-768/STM-256 in the future. MultiWave
CoreDirector also supports OC-12/STM-4 and OC-3/STM-1 optical interfaces to
accommodate legacy switches and routers without requiring standalone SONET/SDH
multiplexers. Any optical interface may be software-configured as concatenated
for "wavelength" switching or channelized down to STS-1 granularity. Because of
its scalability, range of optical interfaces, and software-definable switching
granularity, MultiWave CoreDirector eliminates the need for SONET/SDH Add/Drop
Multiplexers, Digital Cross-Connects, and Optical Cross Connects.
LightWorks OS is CIENA's feature-rich operating system engineered
specifically for intelligent optical networking. With LightWorks OS, carriers
can automatically provision circuits with a wide range of capacities, flexible
protection options, and rapid restoration from a single management console as
opposed to individually configuring each network element as was necessary in
legacy architectures. At the heart of LightWorks OS is Optical Signaling and
Routing Protocol (OSRP(TM)), which enables distributed, dynamic information
exchange between MultiWave CoreDirectors, allowing carriers to provision new
services automatically and in real-time.
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LightWorks OS allows carriers to decouple the growth of operations tasks from
the growth of network traffic.
To get the most from their diverse service offerings and varied physical
plant, carriers are looking beyond "one-size-fits-all" transport protection
options. Some applications call for ring protection, others for linear line
protection, while some broadband data applications are best served by path-level
fast mesh protection. MultiWave CoreDirector supports all these applications,
allowing multiple concurrent protection mechanisms. These include
software-defined rings (VLSR(TM)), standards-compliant linear APS protection,
and FastMesh(TM) path-level restoration.
SERVICE DELIVERY
The MULTIWAVE EDGEDIRECTOR 500(TM) is a multi-service transport platform
designed for the high capacity requirements of public carrier networks. The
MultiWave EdgeDirector 500 enables public carriers to efficiently transport
voice and data services such as Transparent LAN ("local area network"), Router
IP, VPN ("Virtual Private Networks"), Voice, and Private Line Services over a
single integrated fiber optic access and interoffice network. Previously, in
order to offer its customers ATM, IP and voice services a carrier would have to
purchase and deploy service-specific network elements such as ATM switches, IP
routers and SONET ADMs. MultiWave EdgeDirector is designed to lower network
equipment costs by enabling a carrier deliver ATM, IP and voice services from a
single network element. The initial release of MultiWave EdgeDirector is
commercially available. We expect to release additional versions of the
MultiWave EdgeDirector over the next year to expand upon the functionality
of the initial release to address specific customer and market requirements.
MultiWave EdgeDirector is designed to integrate support of a wide range
of traditional and new services onto a single platform. It also integrates the
functions of DLCs, SONET/SDH ADMs, DCSs, access concentrators and access
routers into one network element, including the TDM 3/1/0 grooming functions.
In addition, the MultiWave EdgeDirector supports up to 280 DS1s, 20 DS3s or
10/100Base-T interfaces.
When deployed, the MultiWave EdgeDirector 500:
- Frees up bandwidth wasted by SONET/SDH transport;
- Leverages the existing switching, routing, and fiber access
infrastructure;
- Accelerates service turn-up;
- Reduces operational expenses and net management overhead; and
- Reduces space, power, and cabling requirements.
PRODUCT DEVELOPMENT
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The Company believes 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. The Company also believes there may be
opportunities for it to develop products and technologies complementary to
existing optical networking technologies which may broaden the Company's ability
to provide, facilitate and/or interconnect with high bandwidth solutions offered
throughout fiber optic networks. The Company intends to focus its product
development efforts and possibly pursue strategic alliances or acquisitions to
address expected opportunities in these areas.
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CUSTOMERS
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CIENA has announced relationships with the following 26 customers:
DOMESTICALLY:
Alltell, Bell Atlantic, Bell South, Cable & Wireless USA, Digital
Teleport, Incorporated, Enron Communications, Inc., GST
Telecommunications, Inc., Intermedia Communications, Inc., IXC
Communications, Inc., MCI WorldCom, Inc., RCN Corporation, Sprint
Corporation, Williams Communications, Inc.
INTERNATIONALLY:
Cable & Wireless Communications, UK; Completel, France; Crosswave
Communications, Inc., Japan; Daini Deuden Inc., Japan; GTS Network
(Ireland) Ltd. (formerly Hermes Europe Railtel), UK; iaxis, Ltd.,
UK; Japan Telecom Co., Ltd., Japan; KDD/Teleway Japan Corporation,
Japan; Racal Telecom, UK; TANet, UK; Telecom Developpement, France;
Telia AB, Sweden, MobilCom AG, Germany.
In addition CIENA has several unannounced customer relationships.
PROSPECTIVE 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,
MCI WorldCom and AT&T have seen increased competition from emerging
long-distance carriers such as Qwest Communications ("Qwest"), Global Crossing,
IXC Communications Inc. ("IXC") and Level 3 Communications ("Level 3").
Consolidation in this space is happening at a rapid pace. Most recently MCI
WorldCom and Sprint have announced their intention to merge. 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. The Company 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 1999 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 1999, CIENA increased its international customer base
from nine to fourteen 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. The Company 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,
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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. The Company
anticipates that one or more of the RBOCs will move aggressively 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, the Company believes there may
be limited opportunities for in-region deployment of the Company's long distance
optical transport products in certain RBOCs. RBOC mergers currently under
consideration could greatly expand the geographic reach of the combined
companies, such that opportunities for in-region deployment of the Company's
products could be enhanced.
MARKETING AND DISTRIBUTION
- --------------------------------------------------------------------------------
The Company's systems require a relatively large investment, and the
Company's 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."
The Company 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, the Company currently pursues prospective customers
through direct sales efforts, as well as through distributors, independent
marketing representatives and independent sales consultants. The Company has
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. The Company has established CIENA
Limited as a wholly-owned subsidiary in the U.K. to facilitate European, and
Middle Eastern sales. Through its subsidiaries, the Company has established
offices in the U.S., Europe and Latin America, including offices in the U.K.,
Germany, France, Spain, Mexico and Brazil. The Company 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, the Company conducts
marketing communications programs intended to position and promote its products
within the telecommunications industry. Marketing personnel also coordinate the
Company's participation in trade shows and conduct media relations activities
with trade and general business publications.
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MANUFACTURING
- --------------------------------------------------------------------------------
The Company 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 and Erbium-doped fiber amplifiers used in its optical
transport product lines. The Company expects the majority of the manufacturing
associated with its MultiWave CoreDirector and MultiWave EdgeDirector products
will be performed by third-party manufacturers, with only final system test and
assembly performed at its offices in Cupertino, California and Marlborough,
Massachusetts. However, the Company continues to evaluate whether a portion of
the manufacturing of modules for its optical transport products can be done on a
reliable and cost-effective basis by third party manufacturers.
The Company believes that portions of its manufacturing technologies and
processes represent a key competitive advantage and has accordingly invested
significantly in automated production capabilities and manufacturing process
improvements and expects to further enhance its manufacturing process with
additional production process control systems. Certain critical manufacturing
functions require a highly skilled work force, and the Company puts significant
efforts into training and maintaining the quality of its manufacturing
personnel.
The Company's optical transport product lines utilize in excess of 1,400
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. The Company regularly turns to component
suppliers that may not have had an opportunity to demonstrate the ability to
increase their production to keep pace with the Company's needs. Certain key
optical and electronic components used in the Company's optical transport
systems are currently available only from sole sources. The Company has from
time to time experienced minor delays in the receipt of these components,
variations in the quality of the components, and a lengthening of the lead times
for some components. Any future difficulty in obtaining sufficient and timely
delivery of components could result in delays or reductions in product shipments
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations. While alternative suppliers have
been identified for certain other key optical and electronic components, those
alternative sources have not been qualified. The time and expense involved in
qualifying each additional source are significant. Accordingly, the Company will
for the near term continue to be dependent on sole and single source suppliers
of certain key components. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Risk Factors."
COMPETITION
- --------------------------------------------------------------------------------
Competition in the telecommunications equipment industry is intense,
particularly in that portion of the industry devoted to delivering higher
bandwidth and more cost effective services throughout the telecommunications
network. The Company 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 current competitive
advantage and expects to leverage that advantage in bringing its core switching
and service delivery products to market. However, intensifying competition is a
material risk factor facing the Company in fiscal 2000. See Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Risk Factors."
The competition faced by the Company 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 the Company. Included among the Company's
competitors are Lucent Technologies Inc., ("Lucent"), Northern Telecom Inc.
("Nortel"), Alcatel Alsthom Group ("Alcatel"), NEC Corporation ("NEC"), Pirelli
SpA, Siemens AG ("Siemens"), Fujitsu Group ("Fujitsu"), Hitachi Ltd. ("Hitachi")
and Telefon AB LM Ericsson ("Ericsson"). The Company also believes that several
new companies will attempt to break into the rapidly emerging optical networking
market. Each of the Company's major competitors is believed to be in various
stages of development, introduction or deployment of products directly
competitive with the Company's optical transport, core switching and service
delivery systems.
In addition to optical networking equipment suppliers, traditional
TDM-based transmission equipment suppliers compete with the Company in the
market for transmission capacity. Lucent, Alcatel, Nortel, Fujitsu, Hitachi and
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NEC are already providers of a full complement of such equipment. These and
other competitors have introduced or are expected to introduce equipment which
will offer 10 Gb/s transmission capability.
Competition in the optical networking market is broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate network needs and
foreseeable scalability requirements. The Company's customers are under
increasing competitive pressure to deliver their services at the lowest possible
cost. This pressure may result in pricing for optical networking systems
becoming a more important factor in customer decisions, which may favor larger
competitors that can spread the effect of price discounts in their optical
networking product lines across an array of products and services, and across a
customer base which are larger than the Company's.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding of new
companies intending to develop new products for the optical networking market.
These companies have time to market advantages due to the narrow and exclusive
focus of their efforts. In particular, a number of companies, including several
start-ups, have announced products that compete with our MultiWave CoreStream,
Multiwave Metro, MultiWave CoreDirector and MultiWave EdgeDirector products.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company has licensed 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. The Company also licenses from third parties certain software
components for its network management software. These software licenses are
perpetual but will generally terminate after an uncured breach of the agreement
by the Company. The Company has registered trademarks for CIENA, WaveWatcher,
MODULE SCOPE and CIENA Optical Communications. The Company also relies on
contractual rights, trade secrets and copyrights to establish and protect its
proprietary rights in its products.
The Company intends to enforce vigorously its intellectual property rights
if infringement or misappropriation occurs.
The Company'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 the Company. These agreements
acknowledge the Company's exclusive ownership of all intellectual property
developed by the individual during the course of his work with the Company and
require that all proprietary information disclosed to the individual will remain
confidential. The Company's employees generally also sign agreements not to
compete with the Company for a period of twelve months following any termination
of employment.
As of October 1999, the Company had received twenty-nine United States
patents, and had one hundred twenty-three pending patent applications. Of the
United States patents that have been issued to the Company, the earliest any
will expire is 2012. Pursuant to an agreement between the Company and General
Instrument Corporation dated March 10, 1997, the Company 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." The Company has also acquired
from Tyco Submarine Systems, Ltd. (TSSL), U.S. Patent No. 5,173,957 and eight
corresponding foreign patents based thereon as well as a license to a portfolio
of seven U.S. patents owned by TSSL.
STRATEGY
- --------------------------------------------------------------------------------
CIENA's strategy has been and will continue to be to maintain and build
upon its market leadership in the deployment of optical networking systems and
to leverage the Company's high-bandwidth technologies in order to provide
solutions for both voice and data communications-based network architectures.
Important elements of CIENA's strategy include:
- - MAINTAIN LEADERSHIP IN DEPLOYMENT OF OPTICAL NETWORKING SOLUTIONS. The
Company believes that the technological, operational and cost benefits of
the Company's optical networking solutions create competitive advantages
for telecommunications carriers worldwide, which are being pressed by
their customers to deliver
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services to address the dramatic growth in Internet and other data
communications traffic. The Company also believes that achieving early
widespread operational deployment of its systems in a particular carrier's
network will provide CIENA significant competitive advantages with respect
to additional optical networking deployments and will enhance its
marketing to other carriers as a field proven supplier. The Company
therefore intends to continue aggressively serving its existing customers
while actively pursuing additional optical networking deployment
opportunities among fiber optic carriers in domestic and foreign long
distance, interoffice and local exchange markets. The Company intends to
emphasize its global service and support excellence as a differentiating
factor in its efforts to maintain and enhance its market position.
- - CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. The Company
markets technically advanced systems to sophisticated customers. The
nature of the Company's systems and market require a high level of
technical support and customer service, including installation assistance.
The Company's efforts to develop substantial customer service and
installation support organization were significantly enhanced with the
acquisition of ATI Telecom International, Ltd. ("Alta") in February of
1998. Through the combination of its existing technical support and
customer service operations and Alta, CIENA offers complete engineering,
furnishing and installation services in addition to full-time customer
support from selected locations worldwide where it develops significant
customer relationships.
- - CONTINUE TO ENHANCE WORLD CLASS MANUFACTURING CAPABILITY. The Company's
MultiWave systems serve a mission critical role in its customers'
networks. Quality assurance and manufacturing excellence are necessary for
the Company to achieve success. CIENA believes it has developed a world
class manufacturing capability and that this capability provides the
Company with a significant competitive advantage. The Company achieved ISO
9001 certification in July 1997 in further support of this element of its
strategy. The Company expects to continue to invest in both the capital
and the human resources necessary to maintain and leverage this advantage.
- - EXPAND SALES AND MARKETING EFFORTS. The nature of the target customer base
for all MultiWave product lines requires a focused sales effort on a
customer-by-customer basis. The Company will continue to increase its
sales and marketing efforts by focusing on the worldwide market of fiber
optic carriers. The Company increased the number of optical transport
customers from fourteen in 1998 to twenty-seven during 1999. In addition,
CIENA significantly increased its international presence, particularly in
Europe, growing the number of international customers from nine to
fourteen and the percentage of revenues from international customers from
approximately 23% of total revenue in 1998 to approximately 44% of revenue
in 1999. The Company will continue to strengthen its marketing programs
and to increase its international presence through both direct sales and
international distributor relationships.
- - LEVERAGE THE COMPANY'S HIGH BANDWIDTH TECHNOLOGIES AND KNOW-HOW. The
Company believes the overall growth in demand for bandwidth and the need
for 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. The Company expects to
leverage the core competencies it has developed in the design, development
and manufacturing of the MultiWave product lines by pursuing new product
development efforts, and strategic alliances or acquisitions, to address
these expected opportunities. The Company intends to move aggressively to
maintain leadership in the design and development of communications
equipment and software which will both respond to customer needs and help
the customers move toward newer, higher capacity, more cost-efficient
network designs for the future.
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EMPLOYEES
- --------------------------------------------------------------------------------
As of October 31, 1999, the Company and its subsidiaries employed 1,928
persons, of whom 416 were primarily engaged in research and development
activities, 682 in manufacturing, 404 in installation services, 251 in sales,
marketing, customer support and related activities and 175 in administration.
None of the Company's employees are currently represented by a labor union. The
Company 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 the Company:
Name Age Position
- -------------------------------- ------- ----------------------------------------------------------
Patrick H. Nettles, Ph.D.(1) 56 President, Chief Executive Officer and Director
Gary B. Smith 39 Senior Vice President, Chief Operating Officer
Joseph R. Chinnici 45 Senior Vice President, Finance and Chief Financial Officer
Steve W. Chaddick 48 President, Core Switching Division
Michael A. Champa 48 President, Access Systems Division
Mark Cummings 48 Senior Vice President, Operations
Jesus Leon 55 Senior Vice President, Products and Technology
Rebecca K. Seidman 53 Senior Vice President, Human Resources Development
Stephen B. Alexander 40 Vice President, Chief Technology Officer
Charles Chi 33 Vice President, Marketing
Michael O. McCarthy 34 Vice President, General Counsel and Secretary
Andrew C. Petrik 36 Vice President, Controller and Treasurer
Michael J. Zak(1)(2)(3) 46 Director
Harvey B. Cash(1)(2) 61 Director
Billy B. Oliver(1)(2) 74 Director
Stephen P. Bradley, Ph.D.(1)(3) 58 Director
John R. Dillon(1)(3) 58 Director
- ----------
(1) The Company's Directors hold staggered terms of office, expiring as
follows: Messrs Bradley and Oliver in 2000; Messrs Dillon and Nettles in
2001; and Messrs Cash and Zak in 2002
(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 Chief Executive Officer and
Director of the Company since February 1994, and as Director, President and
Chief Executive Officer since April 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 which 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 Senior Vice President, Chief Operating Officer
since August 1999 and from September 1998 to August 1999, served as Senior Vice
President Worldwide Sales 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.
JOSEPH R. CHINNICI joined the Company in September 1994 as Controller, and
became Vice President, Finance and Chief Financial Officer in May 1995. He was
promoted to Senior Vice President Finance and Chief Financial Officer in August
1997. 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 Platex 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. in accounting from
Villanova University and an M.B.A. from Southern Illinois University.
STEVE W. CHADDICK has served as President, Core Switching Division since
September 1999 and from September 1998 to August 1999, served as Senior Vice
President, Strategy and Corporate Development., 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.
MICHAEL A. CHAMPA has served as President, Access Systems Division since
joining the Company in July 1999. From June 1997 to June 1999, Mr. Champa was
President and CEO of Omnia Communications, Inc., and a co-founder of that
company. From April 1992 to May 1997, Mr. Champa served as Vice President,
Worldwide Sales and Service at Cascade Communications. Mr. Champa has a B.A.
degree from the University of Massachusetts at Amherst as well as M.B.A. and
M.P.A. degrees from Suffolk University.
MARK CUMMINGS joined the Company in May 1996 as Vice President,
Manufacturing and was promoted to Senior Vice President, Operations in August
1997. 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. 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.
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. from the University of Florida,
an A.B.D. (all but doctoral dissertation) from the Georgia Institute of
Technology and an M.B.A. from Georgia State University.
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REBECCA K. SEIDMAN joined the Company in April 1996 as Director of Human
Resources Development, and was promoted to Vice President, Human Resources
Development in June 1996. She was promoted to Senior Vice President, Human
Resources Development in August 1999. 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.
STEPHEN B. ALEXANDER has served as Vice President, Chief Technology
Officer since September 1998, 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.
CHARLES CHI has served as the Company's Vice President, Marketing since
April 1999. From March 1998 to March 1999 Mr. Chi served as Vice President of
Marketing and co-founder of Lightera Networks, Inc. From November 1997 to March
1998 Mr. Chi was Director of Partnership and Alliance Marketing with the
Company. From May 1995 to November 1997, Mr. Chi was with Cisco Systems in sales
and marketing, most recently as the Group Manager for carrier ATM systems. From
1988 to 1995, Mr. Chi held both technical and group management positions with
AT&T Canada and Bell Canada in marketing, sales and corporate engineering. Mr.
Chi earned his Bachelor of Engineering in Systems and Computer Engineering from
Carleton University in Ottawa.
MICHAEL O. MCCARTHY has served as the Company's Vice President & General
Counsel since July 1999 and previously 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.
ANDREW C. PETRIK joined the Company in July 1996 as Controller, and became
Treasurer in December 1996 and was promoted to Vice President in August 1997.
From 1989 to 1996, Mr. Petrik was employed by Microdyne Corporation where he was
the Assistant Controller from 1989 to 1994 and Assistant Vice President of
Marketing and Product Planning from 1994 to 1996. Mr. Petrik holds a B.S. in
Accounting from the University of Maryland and is a Certified Public Accountant.
MICHAEL J. ZAK has been a Director of the Company since December 1994. He
has been employed by Charles River Ventures of Waltham, Massachusetts since
1991. From 1986 through 1991, he was a founder and corporate officer of Concord
Communications, Inc., a developer of network management software. He is a
director of four other private companies. Mr. Zak has a B.S. degree in
engineering from Cornell University and an M.B.A. from Harvard Business School.
HARVEY B. CASH has been 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 which 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. in electrical
engineering from Texas A&M University and an M.B.A. 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.
BILLY B. OLIVER has been a Director of the Company since June 1996. Since
his retirement in 1985 after nearly 40 years of services at AT&T, Mr. Oliver has
worked as a self-employed communications consultant. During his last 15 years
with AT&T, he held the position of Vice President, Engineering Planning and
Design, where he was directly involved in and had significant responsibility for
the evolution of AT&T's long distance network during that period. He was a
co-recipient of the Alexander Graham Bell Medal for the conception and
implementation of
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Nonhierarchical Routing in AT&T's network. Mr. Oliver is also a director of
Enterprise Network Services Inc. and Communications Network Enhancement Inc. Mr.
Oliver earned his B.S.E.E. degree from North Carolina State University.
STEPHEN P. BRADLEY, PH.D. became a Director of the Company in 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. in
Electrical Engineering from Yale University in 1963 and his M.S. and Ph.D. in
Operations Research from the University of California, Berkeley, in 1965 and
1968 respectively.
JOHN R. DILLON became a Director of the Company in October 1999. 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 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 currently serves on the Georgia Institute of Technology National
Advisory Board.
ITEM 2. PROPERTIES
All of the Company's properties are leased. The Company's principal
executive offices, sales and marketing functions are located in Linthicum,
Maryland in a 68,000 square foot facility. The Company's product development
functions are located in a 96,000 square foot facility in Linthicum, Maryland; a
27,500 square foot facility in Alpharetta, Georgia; and a 8,700 square foot
facility in Santa Barbara, California. Combined product development and
manufacturing functions are also located in a 43,000 square foot facility in
Marlborough, Massachusetts; and in three facilities with a total of
approximately 27,000 square feet located in Cupertino, California. The Company
has leased an additional facility of approximately 109,000 square feet in
Cupertino, California, where it intends to transfer the current Cupertino
product development and manufacturing functions in the second quarter of fiscal
2000. The Company intends to sublease the vacated Cupertino facilities. The
Company also has manufacturing facilities located in both Savage and Linthicum,
Maryland which consist of four facilities with a total of approximately 210,000
square feet that are used for such functions as manufacturing production,
systems integration and test, pilot production and customer service and support.
The Company's primary engineering, furnishment and installation facility is
located in a 26,000 square foot facility located in Duluth, Georgia. The Company
has sales, marketing and customer support offices located in Overland Park,
Kansas; Richardson, Texas; Tulsa, Oklahoma; Middletown, New Jersey; Boca Raton,
Florida; Denver, Colorado; Minneapolis, Minnesota; Portland, Oregon; Bellevue,
Washington; Edmonton, Canada; London, England; Paris, France; Brussels, Belgium;
Frankfurt, Germany; Tokyo, Japan; Sao Paulo, Brazil; and Mexico City, Mexico.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
A class action complaint was filed on August 26, 1998 in U.S. District
Court for the District of Maryland entitled Witkin et al. v. CIENA Corporation
et al. (Case No. Y-98-2946). Several other complaints, substantially similar in
content were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. On July 19, 1999 the
United States District Court dismissed the suit with leave to amend before any
discovery had been taken. On August 20, 1999, plaintiffs filed a second amended
class action complaint alleging that CIENA and certain officers and directors
violated certain provisions of the federal securities laws, including Section
10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other actions
intending to artificially inflate and maintain the market price of CIENA's
common stock during the Class Period of May 21, 1998 to September 14, 1998,
inclusive. The plaintiffs intend to seek certification of the suit as a class
action on behalf of all persons who purchased shares of CIENA's common stock
during the Class Period and the awarding of compensatory damages in
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an amount to have been determined at trial together with attorneys' fees. CIENA
has filed, and the parties have fully briefed, a motion to dismiss the second
amended complaint. CIENA believes the suit is without merit and CIENA intends
to continue to defend the case 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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
since the Company's initial public offering on February 7, 1997 under the Nasdaq
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.
Price Range of Common Stock
High Low
------ ------
Fiscal Year 1998
First Quarter ended January 31, 1998 ............... $63.56 $47.44
Second Quarter ended April 30, 1998 ................ $58.25 $37.25
Third Quarter ended July 31, 1998 .................. $92.38 $46.88
Fourth Quarter ended October 31, 1998............... $75.88 $ 8.13
Fiscal Year 1999
First Quarter ended January 31, 1999 ............... $23.00 $12.44
Second Quarter ended April 30, 1999 ................ $29.25 $16.63
Third Quarter ended July 31, 1999 .................. $37.75 $22.69
Fourth Quarter ended October 31, 1999............... $42.81 $29.06
The closing sale price for the Common Stock on October 29, 1999 was
$35.25.
The market price of the Company'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, 1999, there were approximately 1,661 holders of record
of the Company's Common Stock and 138,187,356 shares of Common Stock
outstanding.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
18
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". 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. For purposes of
financial statement presentation, each fiscal year is described as having ended
on October 31. Fiscal 1995, 1997, 1998 and 1999 comprised 52 weeks and fiscal
1996 comprised 53 weeks.
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue .................................... $ 21,691 $ 88,463 $ 413,215 $ 508,087 $ 482,085
Cost of goods sold ......................... 16,185 47,315 166,472 256,014 299,769
--------- --------- --------- --------- ---------
Gross profit ............................. 5,506 41,148 246,743 252,073 182,316
--------- --------- --------- --------- ---------
Operating expenses:
Research and development ................. 6,361 8,922 23,773 73,756 104,641
Selling and marketing .................... 1,907 5,641 22,627 47,343 61,603
General and administrative ............... 3,034 6,422 11,965 19,274 22,986
Purchased research and development ....... - - - 9,503 -
Pirelli litigation ....................... - - 7,500 30,579 -
Merger related costs ..................... - - - 2,548 13,021
--------- --------- --------- --------- ---------
Total operating expenses ................... 11,302 20,985 65,865 183,003 202,251
--------- --------- --------- --------- ---------
Income (loss) from operations .............. (5,796) 20,163 180,878 69,070 (19,935)
Other income (expense), net ................ 172 653 7,178 12,830 13,944
--------- --------- --------- --------- ---------
Income (loss) before income taxes .......... (5,624) 20,816 188,056 81,900 (5,991)
Provision (benefit) for income taxes ....... 824 3,553 72,488 36,200 (2,067)
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (6,448) $ 17,263 $ 115,568 $ 45,700 $ (3,924)
========= ========= ========= ========= =========
Basic net income (loss) per common
share ................................... $ (0.51) $ 1.25 $ 1.52 $ 0.39 $ (0.03)
========= ========= ========= ========= =========
Diluted net income (loss) per common
and dilutive potential common share .... $ (0.51) $ 0.19 $ 1.10 $ 0.36 $ (0.03)
========= ========= ========= ========= =========
Weighted average basic common shares
outstanding ........................... 12,717 13,817 75,964 117,990 133,521
========= ========= ========= ========= =========
Weighted average basic common and
dilutive potential common shares
outstanding ............................ 12,717 92,407 104,843 127,894 133,521
========= ========= ========= ========= =========
OCTOBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents ................. $ 8,261 $ 24,040 $273,286 $250,714 $143,440
Working capital ........................... 7,221 42,240 338,078 391,305 427,471
Total assets .............................. 17,706 79,676 468,247 602,809 677,835
Long-term obligations, excluding
current portion ......................... 2,074 3,465 1,900 3,029 4,881
Mandatorily redeemable preferred stock .... 14,454 40,404 - - -
Stockholders' equity (deficit) ............ (6,662) 10,783 377,278 501,036 530,473
19
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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 emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery 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, providing its customers with a competitive
advantage.
In conjunction with the agreements to acquire Lightera and Omnia, CIENA
announced its LightWorks(TM) Initiative, CIENA's vision of how to change the
fundamental economics of optical telecommunication service provider networks.
The eventual addition of Lightera's and Omnia's products to CIENA's product
suite will make it possible for CIENA to offer telecommunications service
providers a comprehensive next-generation optical network architecture that
dramatically reduces the total number of network elements, thereby lowering
network costs.
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 agreement, the Company acquired all of the outstanding
shares and assumed outstanding stock options and warrants of Lightera in
exchange for approximately 17.5 million shares of CIENA common stock and 2.9
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.
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 agreement, the
Company acquired all of the outstanding shares and assumed the stock options of
Omnia in exchange for approximately 15.2 million shares of CIENA common stock
and 0.8 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.
On August 3, 1999, CIENA announced that the Omnia AXR 500 multi-service
transport platform had been integrated into the CIENA LightWorks architecture
and that CIENA had renamed the product the MultiWave EdgeDirector(TM) 500.
CIENA's MultiWave EdgeDirector 500 is a next generation multi-service transport
platform that combines the functions of traditional transport equipment with
advanced data networking. The MultiWave EdgeDirector 500 utilizes packet and
cell technology to enable service providers to cost effectively deliver
traditional voice and new high-speed data services over a single optical
network. The initial release of the MultiWave EdgeDirector 500 became
commercially available during the fourth quarter of fiscal 1999.
During the third quarter of fiscal 1999 both the MultiWave(R) Metro(TM),
CIENA's system designed for use in metropolitan ring applications, and the
MultiWave CoreStream(TM), CIENA's next generation long-distance optical
transport system capable of up to 96channels of 2.5 Gb/s, became available for
commercial shipments. During the fourth quarter of fiscal 1999, 10 Gb/s
transmission capability of up to 48-channel configuration for its MultiWave
CoreStream system became commercially available.
CIENA intends to continue the development of the MultiWave
CoreDirector(TM) product. MultiWave CoreDirector is believed to be the world's
first intelligent optical core. The MultiWave CoreDirector allows carriers to
deliver a
20
21
full range of transport services, without costly SONET/SDH multiplexers or
inflexible "wavelength only" devices. We expect that field deployable units of
the MultiWave CoreDirector will be available at the end of the first calendar
quarter 2000. See "Risk Factors".
In November 1999, the Company announced it was pursuing enhancements to
its MultiWave CoreStream product that enable the system to offer the optimal
combination of ultra long-distance transport functionality and, channel count to
further lower network costs for service providers. Using forward error
correction (FEC), nonlinearity management, and dispersion mapping technologies,
plus embedded software intelligence, MultiWave CoreStream will be able to
support optical spans longer than 5,000 kilometers without additional
optical-to-electrical signal regeneration. The Company expects to begin beta
trails of the ultra long distance feature of this product in the first half of
calendar 2000. See "Risk Factors".
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 distributor sales where risks of
ownership have not transferred, CIENA recognizes revenue when the product is
shipped through to the end user.
CIENA increased the number of its revenue generating optical transport
equipment customers from a total of fourteen during fiscal 1998 to twenty-seven
for fiscal 1999. CIENA's gross margin percentage decreased from 49.6% in fiscal
1998 to 37.8% in fiscal 1999. While this gross margin pressure continues, CIENA
believes that its product and service quality, manufacturing experience, and
proven track record of delivery will enable it to be successful while it
concentrates on efforts to reduce product costs and maximize production
efficiencies. CIENA's gross margin percentage improved each quarter of fiscal
1999 as a result of its product cost reductions and production efficiencies.
Gross margin percentage improved from 31.2% in the fourth quarter fiscal 1998 to
41.0% in the fourth quarter fiscal 1999. CIENA intends to preserve and enhance
its market leadership and eventually build on its installed base with new and
additional products.
Pursuit of these strategies, in conjunction with increased investments in
research and development, selling, marketing, and customer service activities,
will likely continue to limit CIENA's operating profitability during the first
six months of fiscal 2000. CIENA intends to continue to pursue new or
complementary technologies either through ongoing internal development or by
acquisition in order to further broaden CIENA's product line.
As of October 31, 1999 the Company and its subsidiaries employed
approximately 1,928 persons, which was an increase of 452 persons over the
approximate 1,476 employed on October 31, 1998.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 1997, 1998 AND 1999
REVENUE. The Company recognized $482.1 million, $508.1 million and $413.2
million in revenue for the fiscal years ended October 31, 1999, 1998 and 1997,
respectively. 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. The
approximate $94.9 million or 23.0% increase in revenue from fiscal 1997 to
fiscal 1998 was primarily due to an increase in product shipments.
CIENA recognized revenues from a total of twenty-seven, fourteen, and five
optical equipment customers during fiscal 1999, 1998, and 1997, respectively.
During fiscal year 1999 Sprint, MCIWorldCom, and GTS Network Ltd. (formerly
Hermes Europe Railtel) 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 and fiscal 1997
where both MCIWorldCom and Sprint were 10% customers and combined accounted for
88.0% of CIENA's fiscal 1997 revenue. Revenue derived from foreign sales
accounted for approximately 44.3%, 23.0%, and 2.8% of the Company's revenues
during fiscal 1999, 1998 and 1997, respectively.
21
22
For fiscal 1999 CIENA's optical network equipment revenues were derived
from sales of the MultiWave Sentry 4000, MultiWave Sentry 1600, MultiWave 1600,
MultiWave Metro, MultiWave Firefly, MultiWave EdgeDirector 500 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. For fiscal year 1997 all of the Company's optical network
equipment revenues were derived from the MultiWave 1600 product. The amount of
revenue recognized from MultiWave Sentry 1600 and MultiWave 1600 sales declined
in fiscal 1999 as compared to fiscal 1998 and also declined in fiscal 1998 as
compared to fiscal 1997. This decline in MultiWave Sentry 1600 sales in fiscal
1999 was offset by the introduction of new revenues from the MultiWave
CoreStream, MultiWave EdgeDirector 500 and MultiWave Metro products in fiscal
1999 and in fiscal 1998. The decline was offset by revenue recognized from sales
of MultiWave Firefly, and MultiWave Sentry 4000 systems. 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
12.1%, 9.2% and 7.0% for the fiscal years 1999, 1998, and 1997, respectively.
Based on overall new bid activity, as well as expected network deployment
plans of existing customers, the Company believes revenue growth in fiscal 2000
over fiscal 1999 is possible, but will be highly dependent on winning new bids
from new and existing customers for shipments of the existing products as well
as for the MultiWave CoreDirector and MultiWave EdgeDirector 500 systems. CIENA
expects that field deployable units of the MultiWave CoreDirector will be
available at the end of the first calendar quarter 2000. CIENA also expects the
percentage of fiscal 2000 revenue derived from foreign sales to be comparable to
the levels obtained during fiscal 1999. Competition of new bids is intense, and
there is no assurance the Company will be successful in winning enough new bids
and new customers to achieve year over year sequential growth. See "Risk
Factors".
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to the Company's
manufacturing and engineering, furnishing and installation operations. Gross
profit was $182.3 million, $252.1 million, and $246.7 million for fiscal years
1999, 1998, and 1997, respectively. Gross margin was 37.8%, 49.6%, and 59.7%
for fiscal 1999, 1998, and 1997, respectively. The decrease in gross profit
from fiscal 1998 to fiscal 1999 and from fiscal 1997 to fiscal 1998 was largely
attributable to lower selling prices.
CIENA's gross margins may be affected by a number of factors, including
continued competitive market pricing, lower manufacturing volumes and
efficiencies and fluctuations in component costs. During fiscal 2000, CIENA
expects to face continued pressure on gross margins, primarily as a result of
substantial price discounting by competitors seeking to acquire market share.
CIENA intends to counter this pressure with the addition of new products and
continued product cost reduction and production efficiency programs. See "Risk
Factors".
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$104.6 million, $73.8 million, and $23.8 million for fiscal 1999, 1998, and
1997, respectively. The approximate $30.9 million or 41.9% increase from fiscal
1998 to 1999 and the approximate $50.0 million or 210.3% increase from fiscal
1997 to 1998 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 1999, 1998, and 1997 research and development
expenses were 21.7%, 14.5%, and 5.8% 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 2000 to
support the continued development of the various 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 $61.6
million, $47.3 million, and $22.6 million for fiscal 1999, 1998, and 1997,
respectively. The approximate $14.3 million or 30.1% increase from fiscal 1998
to 1999 and the approximate $24.7 million or 109.2% increase from fiscal 1997 to
1998 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 1999, 1998, and 1997 selling and marketing expenses were
12.8%, 9.3%, and 5.5% 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 2000 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 and Asia, will increase as the Company's installed base
of operational MultiWave systems increases.
22
23
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $23.0 million, $19.3 million, and $12.0 million for fiscal 1999, 1998, and
1997, respectively. The approximate $3.7 million or 19.3% increase from fiscal
year 1998 to 1999 and the approximate $7.3 million or 61.1% increase from fiscal
1997 to 1998 in general and administrative expenses was primarily the result of
increased staffing levels and outside consulting services. During fiscal 1999,
1998 and 1997, general and administrative expenses were 4.8%, 3.8%, and 2.9% 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 2000 as a result of the expansion of the Company's
administrative staff required to support its expanding operations.
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. The Pirelli
litigation expense in fiscal 1997 was primarily the result of a $7.5 million
charge for actual and estimated legal and related costs associated with the
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 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.
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 $13.9 million, $12.8 million, and
$7.2 million for fiscal 1999, 1998, and 1997, respectively. The year to year
increase in other income (expense), net, was primarily the result of the
investment of the net proceeds of the Company's stock offerings and net
earnings.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's benefit for income
taxes was $2.1 million or 34.5% of pre-tax losses for fiscal 1999 and provision
was $36.2 million and $72.5 million or 44.2% and 38.5% of pre-tax earnings for
fiscal 1998 and 1997, respectively. The benefit for fiscal 1999 was less than
the expected statutory benefit of 35% due to non-deductible merger costs. The
increase in the tax rate from fiscal 1997 to fiscal 1998 was primarily the
result of charges for purchased research and development expenses recorded in
fiscal 1998 and an adjustment to the estimated prior year state income tax
liability associated with Alta operations. 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.
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24
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, 1999. 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, April 30, Jul. 31, Oct. 31, Jan. 31, April 30,
1998 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- ---------
Revenue ............................... $ 145,092 $ 142,718 $ 129,116 $ 91,161 $ 100,417 $ 111,490
Cost of goods sold .................... 58,980 63,915 70,431 62,688 65,778 71,238
--------- --------- --------- --------- --------- ---------
Gross profit ...................... 86,112 78,803 58,685 28,473 34,639 40,252
--------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development .......... 11,245 17,986 21,965 22,560 22,218 24,094
Selling and marketing ............. 9,975 11,107 12,937 13,324 13,608 13,092
General and administrative ........ 3,984 4,757 4,186 6,347 5,036 5,849
Purchased research & development .. - 9,503 - - - -
Pirelli litigation ................ - 10,000 20,579 - - -
Merger related costs .............. - - 2,017 531 - 2,253
--------- --------- --------- --------- --------- ---------
Total operating expenses .............. 25,204 53,353 61,684 42,762 40,862 45,288
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ......... 60,908 25,450 (2,999) (14,289) (6,223) (5,036)
Other income (expense), net ........... 3,697 3,350 2,769 3,014 3,301 3,583
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ..... 64,605 28,800 (230) (11,275) (2,922) (1,453)
Provision (benefit) for income taxes .. 25,710 14,607 20 (4,137) (1,041) (468)
--------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 38,895 $ 14,193 $ (250) $ (7,138) $ (1,881) $ (985)
========= ========= ========= ========= ========= =========
Basic net income (loss) per
common share .......................... $ 0.37 $ 0.13 $ 0.00 $ (0.06) $ (0.01) $ (0.01)
========= ========= ========= ========= ========= =========
Diluted net income (loss) per
common share and dilutive
potential common share .............. $ 0.33 $ 0.12 $ 0.00 $ (0.06) $ (0.01) $ (0.01)
========= ========= ========= ========= ========= =========
Weighted average basic common share ... 106,405 112,302 121,820 128,384 131,202 132,530
========= ========= ========= ========= ========= =========
Weighted average basic common and
dilutive potential common share .... 116,875 122,483 121,820 128,384 131,202 132,530
========= ========= ========= ========= ========= =========
Jul. 31, Oct. 31,
1999 1999
--------- ---------
Revenue ............................... $ 128,826 $ 141,352
Cost of goods sold .................... 79,361 83,392
--------- ---------
Gross profit ...................... 49,465 57,960
--------- ---------
Operating expenses:
Research and development .......... 28,402 29,927
Selling and marketing ............. 16,839 18,064
General and administrative ........ 5,433 6,668
Purchased research & development .. - -
Pirelli litigation ................ - -
Merger related costs .............. 10,768 -
--------- ---------
Total operating expenses .............. 61,442 54,659
--------- ---------
Income (loss) from operations ......... (11,977) 3,301
Other income (expense), net ........... 3,492 3,568
--------- ---------
Income (loss) before income taxes ..... (8,485) 6,869
Provision (benefit) for income taxes .. (2,928) 2,370
--------- ---------
Net income (loss) ..................... $ (5,557) $ 4,499
========= =========
Basic net income (loss) per
common share .......................... $ (0.04) $ 0.03
========= =========
Diluted net income (loss) per
common share and dilutive
potential common share .............. $ (0.04) $ 0.03
========= =========
Weighted average basic common share ... 133,016 133,808
========= =========
Weighted average basic common and
dilutive potential common share .... 133,016 145,302
========= =========
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31, Oct. 31,
1998 1998 1998 1998 1999 1999 1999 1999
------ ------ ------ ------ ------ ------ ------ ------
Revenue ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ...................... 40.7 44.8 54.5 68.8 65.5 63.9 61.6 59.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ...................... 59.3 55.2 45.5 31.2 34.5 36.1 38.4 41.0
Operating expenses:
Research and development .......... 7.8 12.6 17.0 24.7 22.1 21.6 22.1 21.2
Selling and marketing ............. 6.9 7.8 10.0 14.6 13.6 11.7 13.1 12.8
General and administrative ........ 2.7 3.3 3.3 7.0 5.0 5.3 4.2 4.7
Purchased research & development .. - 6.7 - - - - - -
Pirelli litigation ................ - 7.0 15.9 - - - - -
Merger related costs .............. - - 1.6 0.6 - 2.0 8.4 -
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses ................ 17.4 37.4 47.8 46.9 40.7 40.6 47.8 38.7
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations ........... 41.9 17.8 (2.3) (15.7) (6.2) (4.5) (9.4) 2.3
Other income (expense), net ............. 2.6 2.3 2.1 3.3 3.3 3.2 2.7 2.5
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes ....... 44.5 20.1 (0.2) (12.4) (2.9) (1.3) (6.7) 4.8
Provision (benefit) for income taxes .... 17.7 10.2 - (4.6) (1.0) (0.4) (2.3) 1.7
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ....................... 26.8% 9.9% (0.2)% (7.8)% (1.9)% (0.9)% (4.4)% 3.1%
====== ====== ====== ====== ====== ====== ====== ======
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25
CIENA's quarterly operating results have varied and are expected to vary
significantly 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". In addition to those
factors, in fiscal 1998, the distraction attendant to the aborted Tellabs merger
had a significant, though difficult to quantify impact on CIENA's operations in
the third and fourth quarter. But apart from the distraction factor, CIENA
believes the single most significant trend affecting CIENA's financial
performance is the material effect of very aggressive price discounting by
competitors seeking to acquire market share in the market for high-capacity
solutions. CIENA chose in the face of this pressure to continue to build market
share in fiscal 1998 at the cost of declining margins. CIENA's gross margin
percentage improved each quarter of fiscal 1999 as a result of its product cost
reductions and production efficiencies. Gross margin percentage improved from
31.2% in the fourth quarter fiscal 1998 to 41.0% in the fourth quarter fiscal
1999. While this gross margin pressure continues, CIENA believes that its
product and service quality, manufacturing experience, and proven track record
of delivery will enable it to be successful while it concentrates on efforts to
reduce product costs and maximize production efficiencies. The Company intends
to continue this strategy in order to preserve and enhance its market leadership
and eventually build on its installed base with new and additional products.
Pursuit of this strategy, in conjunction with increased investments in selling,
marketing, and customer service activities, will likely continue to limit the
Company's operating profitability over at least the first half of fiscal 2000.
See "Risk Factors".
LIQUIDITY AND CAPITAL RESOURCES
CIENA completed its initial public offering of Common Stock in February
1997 and realized net proceeds of approximately $121.8 million with an
additional $0.6 million received from the exercise of certain outstanding
warrants. In July 1997, CIENA completed a public offering of Common Stock and
realized net proceeds of approximately $52.2 million. During fiscal 1997, 1998,
and 1999 CIENA also realized approximately $53.1 million, $22.6 million and
$11.0 million in tax benefits from the exercise of stock options and certain
stock warrants, respectively. Also during fiscal 1997 and fiscal 1998 CIENA
received approximately $5.2 million and $12.8 million, respectively, from
issuance of stock associated with the initial capitalization of Omnia. During
fiscal 1998 CIENA received approximately $15.5 million from the issuance of
stock associated with the initial capitalization of Lightera. As of October 31,
1999, the Company had $143.4 million in cash and cash equivalents, and $119.0
million in corporate debt securities and U.S. Government obligations, with
contractual maturities of six months or less.
The Company's operating activities provided cash of $17.7 million, $26.2
million and $84.7 million for fiscal 1999, 1998 and 1997, respectively. Cash
provided by operations in fiscal 1999 was primarily attributable to a net loss
adjusted for the non-cash charges of depreciation amortization, provisions for
inventory obsolescence and warranty, a decrease in prepaid income taxes,
increases in accounts payable, and accrued expenses; offset by increases in
accounts receivable and inventories. Cash provided by operations in fiscal 1997
and 1998 was principally attributable to net income adjusted for the non-cash
charges of depreciation, amortization, provisions for 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 1999, 1998 and 1997 was $149.7
million, $107.0 million and $67.0 million, respectively. Included in investment
activities were additions to capital equipment and leasehold improvements in
fiscal 1999, 1998 and 1997 of $46.8 million, $88.9 million and $67.0 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 $55.0
million to be made during fiscal 2000 to support selling and marketing,
manufacturing and product development activities and the construction of
leasehold improvements for its facilities
The Company believes that its existing cash balance and cash flows
expected from future operations will be sufficient to meet the Company's capital
requirements for at least the next 18 to 24 months.
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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 will be effective
for the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
YEAR 2000 READINESS
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. CIENA's operations make
use of a variety of computer equipment and software. If the computer equipment
and software used in the operation of CIENA and its products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on CIENA's operations.
CIENA has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by CIENA,
CIENA currently believes and warrants to its customers that its products are
Year 2000 compliant. However, since all customer situations cannot be
anticipated, particularly those involving interaction of CIENA's products with
third party products, CIENA may experience warranty and other claims as a result
of the Year 2000 transition. The impact of customer claims, if broader than
anticipated, could have a material adverse impact on CIENA's results of
operations or financial condition.
CIENA has concluded a comprehensive inventory and evaluation of both
information technology ("IT") or software systems and non-IT systems used to run
its systems. Non-IT systems typically include embedded technology such as
microcontrollers. Examples of CIENA's Non-IT systems include certain equipment
used for production, research, testing and measurement processes and
calibration. CIENA has completed the process of upgrading or replacing those
identified non-compliant systems. For the Year 2000 non-compliance systems
identified, the cost of remediation was not material to CIENA's financial
condition or operating results. However, if significant new noncompliance issues
are identified, CIENA's results of operations or financial condition may be
materially adversely affected.
CIENA changed its main financial, manufacturing and information system to
a company-wide Year 2000 compliant enterprise resource planning ("ERP")
computer-based system during the fourth quarter of fiscal 1998. CIENA estimates
that it has spent approximately $4.5 million on its ERP implementation. During
fiscal 1999, CIENA spent approximately $400,000 to address identified Year 2000
issues. CIENA used cash from operations for Year 2000 remediation and
replacement costs. Approximately less than 2% of the information technology
budget was used for remediation. No other information technology projects have
been deferred due to the Year 2000 efforts. CIENA has employed an independent
verification consultant to validate CIENA's processes in order to assure the
reliability of CIENA's risk estimates. The consultant's findings identify
CIENA's processes as sufficient and our risk of negative impact as low.
CIENA has contacted its critical suppliers to determine whether a
supplier's operations, products and services are Year 2000 compliant. To date,
CIENA's optical suppliers have represented that their products are Year 2000
compliant or have represented that they are in the process of becoming fully
compliant by December 31, 1999. If these suppliers fail to adequately address
the Year 2000 issue for the products they provide to CIENA, this could have a
material adverse impact on CIENA's operations and financial results. Initial
contingency plans have been developed in case CIENA or its key suppliers will
not be Year 2000 compliant, and such noncompliance is expected to have a
material adverse impact on CIENA's operations.
The risks to CIENA resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness are generally similar to
those faced by other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that could
result in the event of one or more major failures of CIENA's information
systems, factories or facilities to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to CIENA: (1) information
systems - could include interruptions or
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disruptions of business and transaction processing such as customer billing,
payroll, accounts payable and other operating and information processes, until
systems can be remedied or replaced; (2) factories and facilities - could
include interruptions or disruptions of manufacturing processes and facilities
with delays in delivery of products, until non-compliant conditions or
components can be remedied or replaced; and (3) major suppliers to CIENA - could
include interruptions or disruptions of the supply of raw materials, supplies
and Year 2000 ready components which could cause interruptions or disruptions of
manufacturing and delays in delivery of products, until the third party supplier
remedied the problem or contingency measures were implemented. Risks of major
failures of CIENA's principal products could include adverse functional impacts
experienced by customers, the costs and resources for CIENA to remedy problems
or replace products where CIENA is obligated or undertakes to take such action,
and delays in delivery of new products.
RISK FACTORS
OUR RESULTS CAN BE UNPREDICTABLE
Our near term results may be break-even or may involve losses. In general,
sequential revenue and operating results over the next 12 months are likely to
fluctuate and may continue to fluctuate in the future due to factors including:
- timing and size of orders from customers
- the introduction of new products
- satisfaction of contractual customer acceptance criteria
- manufacturing and shipment delays and deferrals
Our products require a relatively large investment and our target
customers are highly demanding and technically sophisticated. There are only a
small number of 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 introduction to the customer and their
commitment to purchase.
We budget expense levels on our expectations of long-term future revenue.
These levels reflect our substantial investment in 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. As a result, we may continue to experience increased
inventory levels, operating expenses and general overhead.
Additionally, our Core Switching Division and Access Systems Division have
ongoing development and operating expenses but are not expected to contribute
materially to revenues until calendar 2000.
CHANGES IN TECHNOLOGY OR THE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT
OUR NEAR TERM PROSPECTS
The market for optical networking equipment is changing at a rapid pace.
The accelerated pace of deregulation in the telecommunications industry likely
will intensify the competition for improved technology. Our ability to
successfully develop and introduce new and enhanced products will depend upon
our ability to successfully anticipate changes in technology, industry standards
and customer requirements. If we fail to deploy new and improved products in a
timely manner, our competitive position and financial condition would be
materially and adversely affected. The complexity of the technology involved
with several of our new products including the MultiWave CoreDirector and the
MultiWave CoreStream products using 10 Gb/s transmission capability or ultra
long-distance transport functionality could result in unanticipated delays in
development and manufacturing. In addition, the complexity of technology
associated with support equipment for these products could result in
unanticipated delays in the deployment of these products. These delays could
adversely affect our competitive and financial condition.
The introduction of new products embodying new technologies or the
emergence of new industry standards could render our existing products
uncompetitive from a pricing standpoint, obsolete or unmarketable. Any of these
outcomes would have a material adverse effect on our business, financial
condition and results of operations. The certification process for new
telecommunications equipment used in RBOC networks, which is a process
traditionally
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conducted by Telcordia Technologies, has in the past resulted in and may
continue to result in unanticipated delays which may affect the deployment of
our products for the RBOC market.
Any delays in component availability could result in delays in deployment
of these products and in recognizing revenues. These delays could adversely
affect our customer relationships.
WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
The market for optical networking equipment is extremely competitive.
Competition in the optical networking market is broadly based on varying
combinations of price, manufacturing capability, comprehensiveness of the system
solution meeting immediate network needs and foreseeable scalability
requirements. A small number of very large companies have historically dominated
the telecommunications equipment industry including Lucent, Alcatel, Nortel,
NEC, Pirelli, Siemens, Ericsson, Fujitsu, and Hitachi. 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. We sell systems which compete directly with
product offerings of these companies and in some cases displace their legacy
equipment. As such, we represent a specific threat to these companies. The
continued expansion of our product offerings with products such as the MultiWave
CoreDirector and MultiWave EdgeDirector likely will increase this perceived
threat. We expect continued aggressive tactics from many of these competitors,
including:
- substantial price discounting
- early announcements of competing products
- "one-stop shopping" appeals
- customer financing assistance
- intellectual property disputes
These tactics can be particularly effective in a highly concentrated
customer base such as ours. Our customers are under increasing competitive
pressure to deliver their services at the lowest possible cost. This pressure
may result in pricing for optical networking systems becoming a more important
factor in customer decisions, which may favor larger competitors that can spread
the effect of price discounts in their optical networking product lines across
an array of products and services and across a customer base which is larger
than ours. Our inability to compete successfully against our competitors would
have a material adverse effect on our business, financial condition and results
of operations.
Several of our customers have indicated that they intend to establish a
second vendor for optical transport products. We do not know when or if these
customers will select a second vendor or what impact the selection might have on
purchases from us. These customers could reduce their purchases from us, which
could in turn have a material adverse effect on us.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding of new
companies intending to develop new products for the optical networking market.
These companies have time to market advantages due to the narrow and exclusive
focus of their efforts. In particular, a number of companies, including several
start-ups, have announced products that compete with our MultiWave CoreStream,
Multiwave Metro, MultiWave CoreDirector and MultiWave EdgeDirector products.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF NEW PRODUCTS
The MultiWave CoreDirector is in the customer trials phase and has not
matured into commercially manufacturable units suitable for field deployment. We
expect that field deployable units of the Multiwave CoreDirector will be
available in the end of the first calendar quarter 2000. The MultiWave
CoreStream product with ultra long-distance transport functionality is in the
laboratory testing phase and has not matured into commercially manufacturable
units suitable for field deployment. We expect that the MultiWave CoreStream
product with ultra long-distance transport functionality will be available for
customer trials in the first half of calendar 2000. The
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maturing process from laboratory prototype to customer trials to commercial
acceptance involves a number of steps, including:
- successful completion of product development
- the qualification and multiple sourcing of critical components,
including application-specific integrated circuits ("ASIC's") which
are not yet finalized
- validation of manufacturing methods
- extensive quality assurance and reliability testing, and staffing of
testing infrastructure
- software validation
- establishment of systems integration and burn in 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 materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's and intensive software testing and validation, in particular,
are key to the timely introduction of the MultiWave CoreDirector, and schedule
delays are common in the final software and validation phase, as well as in the
manufacture of specialized ASICS. In addition, unexpected intellectual property
disputes, failure of critical design elements, and a host of other execution
risks may delay or even prevent the introduction of these products.
If we do not develop these products in a timely manner, our competitive
position and financial condition could be adversely affected. The markets for
the MultiWave CoreDirector and MultiWave EdgeDirector products are relatively
new. Commercial acceptance of these products also is not established and there
is no assurance 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 competitive position and financial condition
could be adversely affected.
We are in the laboratory testing phase for future releases of the
MultiWave EdgeDirector product. These releases expand upon the limited
functionality of the initial release of the MultiWave EdgeDirector and address
anticipated market requirement. We can make no assurances about the market
acceptance for the initial release of the MultiWave EdgeDirector or our ability
to introduce future releases of the MultiWave EdgeDirector in a timely manner.
If market acceptance of the initial or future releases of the MultiWave
EdgeDirector is limited or we are unable to successfully develop future
releases of the MultiWave EdgeDirector, our competitive position and financial
condition could be adversely affected.
SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN OUR RESULTS
As we continue to address smaller emerging carriers, timing and volume of
purchasing from these carriers can also be more unpredictable due to factors
such as their need to build a customer base, acquire rights of way and
interconnections necessary to sell network service, and build out new capacity,
all while working within capital budget constraints. This increases the
unpredictability of our financial results because even these carriers purchase
our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. Most of our anticipated revenue over the next
several quarters is comprised of orders of less than $25 million each from
several customers, some of which involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
these carriers will be impacted by their financial condition. Further, we will
need to evaluate the collectibility of receivables from these carriers if their
financial condition deteriorates in the future. Additionally, purchasing delays
or changes in the amount of purchases by any of these customers, could have a
material adverse effect on us.
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WE MAY EXPERIENCE DELAYS FROM OUR SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE
SUBSTITUTE SUPPLIERS
We depend on a small number of suppliers for components of our products,
as well as equipment used to manufacture and test our products. Our highest
capacity product currently being shipped, the MultiWave CoreStream which
currently is capable of up to 96 channels at 2.5 Gb/s or 48 channels at 10.0
Gb/s transmission speeds, includes several higher performance components for
which reliable, high volume suppliers are particularly limited. On occasion, we
have experienced delays in receipt of components. Any future difficulty in
obtaining sufficient and timely delivery of them could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations. Delayed
deliveries of key components from these sources could have a material adverse
effect on CIENA's near-term results of operations.
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 Lightera and Omnia have received a substantial number of CIENA
shares and vested options that can be sold at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before CIENA's future products have matured into commercially deliverable
products. Under the circumstances, we face a difficult and significant task of
retaining and motivating these key personnel. As CIENA has grown and matured,
competitors' efforts to entice our employees to leave have intensified,
particularly among competitive startups and other early stage companies seeking
to replicate CIENA's experience. CIENA and its employees are parties to
agreements that limit the employee's ability to work for a competitor and to
solicit CIENA employees and customers following termination of employment. We
expect our competitors will respect these agreements and not interfere with
them. However, CIENA has in the past been required and may in the future, be
required to resort to legal actions to enforce these agreements. We could incur
substantial costs in enforcing these claims. We can make no assurances that we
will be successful in these suits, or that we will be able to retain all of our
key contributors or attract new personnel to add to or replace them. The loss of
key personnel would likely have a material adverse effect on our business,
financial condition and results of operations.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new fiberoptic products and systems with high technology
content involves occasional problems as the technology and manufacturing methods
mature. We are aware of instances domestically and internationally of delayed
installation and activation of some of our products due to faulty components. If
significant reliability, quality or network monitoring problems develop, a
number of material adverse effects could result, including:
- manufacturing rework costs
- high service and warranty expense
- high levels of product returns
- delays in collecting accounts receivable
- reduced orders from existing customers, and
- declining interest from potential customers
Although we maintain accruals for product warranties, actual costs could
exceed these amounts.
From time to time, there will be interruptions or delays in the activation
of our products and the addition of channels, particularly because we do not
control all aspects of the installation and activation activities. If we
experience significant interruptions or delays that we can not promptly resolve,
confidence in our products could be undermined, which could have a material
adverse effect on us.
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OUR PROSPECTS DEPEND ON DEMAND WHICH WE CANNOT PREDICT OR CONTROL
We may not anticipate changes in direction or magnitude of demand for
bandwidth. Unanticipated reductions in bandwidth demand would adversely affect
us.
Our products enable high capacity transmission over long distance, and
certain short-haul portions, of optical communications networks. Our Multiwave
CoreDirector product is targeted to high capacity applications and our Multiwave
EdgeDirector product is targeted to providers of integrated fiberoptic access
and transport networks. Customers, however, determine:
- the quantity of bandwidth needed
- the timing of its deployment, and
- the equipment configurations and network architectures they want
Customer determinations are subject to abrupt change in response to their
own competitive pressures, pressures to raise capital and financial performance
expectations.
OUR STOCK PRICE MAY EXHIBIT VOLATILITY
Our common stock price has experienced substantial volatility in the past,
and is likely to remain volatile in the future. Volatility can arise as a result
of the activities of short sellers and risk arbitrageurs, and may have little
relationship to our financial results or prospects. Volatility can also result
from any divergence between our actual or anticipated financial results and
published expectations of analysts, and announcements we may make. This occurred
in 1998. We attempt to address this possible divergence through our public
announcements and reports; however, the degree of specificity we can offer in
these announcements, and the likelihood that any forward-looking statements we
make will prove correct in actual results, can and will vary. This is due
primarily to:
- the uncertainties associated with our dependence on a small number
of existing and potential customers
- the impact of changes in the customer mix
- the actions of competitors
- long and unpredictable sales cycles and customer purchasing programs
- the absence of unconditional minimum purchase commitments from any
customer
- a lack of visibility into our customers' deployment plans over the
course of the capital equipment procurement year, and
- the lack of reliable data on which to anticipate core demand for
high bandwidth transmission capacity and for demand for edge service
delivery and optical switching products such as our MultiWave
CoreDirector.
Divergence will likely occur from time to time in the future, with
resulting stock price volatility, irrespective of our overall year-to-year
performance or long-term prospects. As long as we continue to depend on
relatively few customers, and particularly when a substantial majority of their
purchases consist of newly-introduced products like the MultiWave CoreStream,
Multiwave EdgeDirector and MultiWave Metro, there is substantial risk of widely
varying quarterly results.
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
In August 1998, shareholder class action lawsuits were filed against us
and certain of our officers and directors. These lawsuits, which were
consolidated into one amended complaint, which was dismissed by the United
States District Court on July 19, 1999, with leave to amend. On August 20, 1999
plaintiffs filed the second amended class action complaint. We have filed and
briefed a motion asking the Court to dismiss the second amended complaint. We
believe the allegations in the complaint are without merit and intend to defend
the case vigorously. If, after discovery
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and trial, the case is decided adversely to CIENA, it could have a material
adverse effect on our financial condition 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
certain components from:
- Lucent
- Alcatel
- Nortel
- NEC, and
- Siemens
Each of these companies offers optical communications systems and
equipment which are competitive with our products. Also, Lucent is the sole
source of two components and is one of two suppliers of two others. Alcatel and
Nortel are suppliers of lasers used in our products and NEC is a supplier of an
important piece of testing equipment. A decline in reliability or other adverse
change in these supply relationships could materially and adversely affect our
business, financial condition and results of operations.
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,
1999, the fair value of the portfolio would decline by approximately $7.9
million. The Company has the ability to hold its fixed income investments until
maturity, and therefore the Company would not expect its operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union began during the Company's fiscal year 1999. The foreign
currency exposure resulting from the introduction of the Euro has been
immaterial to the operating results of the Company. The Company is prepared to
hedge against fluctuations in the Euro if this exposure becomes material. As of
October 31, 1999 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................................. 34
Consolidated Balance Sheets....................................... 35
Consolidated Statements of Operations............................. 36
Consolidated Statements of Changes in Stockholders' Equity........ 37
Consolidated Statements of Cash Flows............................. 38
Notes to Consolidated Financial Statements........................ 39
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34
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, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of CIENA
Corporation and its subsidiaries at October 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
McLean, VA
November 24, 1999
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31,
------------------------
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 250,714 $ 143,440
Marketable debt securities ................................................... 15,993 118,956
Accounts receivable (net of allowance of $1,528 and $1,703) .................. 78,791 144,348
Inventories, net ............................................................. 70,908 79,608
Deferred income taxes ........................................................ 16,421 25,385
Prepaid income taxes ......................................................... 11,688 -
Prepaid expenses and other ................................................... 11,409 21,262
--------- ---------
Total current assets ....................................................... 455,924 532,999
Equipment, furniture and fixtures, net ........................................... 125,767 125,252
Goodwill and other intangible assets, net ........................................ 16,270 12,635
Other assets ..................................................................... 4,848 6,949
--------- ---------
Total assets ................................................................. $ 602,809 $ 677,835
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 27,893 $ 34,399
Accrued liabilities .......................................................... 34,437 58,486
Income taxes payable ......................................................... - 8,697
Deferred revenue ............................................................. 1,084 2,954
Other current obligations .................................................... 1,205 992
--------- ---------
Total current liabilities .................................................. 64,619 105,528
Deferred income taxes ........................................................ 34,125 36,953
Other long-term obligations .................................................. 3,029 4,881
--------- ---------
Total liabilities .......................................................... 101,773 147,362
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized; zero shares
issued and outstanding ..................................................... - -
Common stock - par value $.01; 360,000,000 shares authorized;
134,605,491 and 138,187,356 shares issued and outstanding .................. 1,346 1,382
Additional paid-in capital ................................................... 328,821 360,082
Notes receivable from stockholders ........................................... (586) (210)
Accumulated other comprehensive income ....................................... (107) (40)
Retained earnings ............................................................ 171,562 169,259
--------- ---------
Total stockholders' equity ................................................. 501,036 530,473
--------- ---------
Total liabilities and stockholders' equity ................................... $ 602,809 $ 677,835
========= =========
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,
---------------------------------------
1997 1998 1999
--------- --------- ---------
Revenue ........................................... $ 413,215 $ 508,087 $ 482,085
Cost of goods sold ................................ 166,472 256,014 299,769
--------- --------- ---------
Gross profit ............................... 246,743 252,073 182,316
--------- --------- ---------
Operating expenses:
Research and development ................... 23,773 73,756 104,641
Selling and marketing ...................... 22,627 47,343 61,603
General and administrative ................. 11,965 19,274 22,986
Purchased research and development ......... - 9,503 -
Pirelli litigation ......................... 7,500 30,579 -
Merger related costs ....................... - 2,548 13,021
--------- --------- ---------
Total operating expenses ............ 65,865 183,003 202,251
--------- --------- ---------
Income (loss) from operations ..................... 180,878 69,070 (19,935)
Interest and other income (expense), net .......... 7,586 13,143 14,448
Interest expense .................................. (408) (313) (504)
--------- --------- ---------
Income (loss) before income taxes ................. 188,056 81,900 (5,991)
Provision (benefit) for income taxes .............. 72,488 36,200 (2,067)
--------- --------- ---------
Net income (loss) ................................. $ 115,568 $ 45,700 $ (3,924)
========= ========= =========
Basic net income (loss) per common share .......... $ 1.52 $ 0.39 $ (0.03)
========= ========= =========
Diluted net income (loss) per common share and
dilutive potential common share ............ $ 1.10 $ 0.36 $ (0.03)
========= ========= =========
Weighted average basic common shares outstanding .. 75,964 117,990 133,521
========= ========= =========
Weighted average basic common and dilutive
potential common shares outstanding ........ 104,843 127,894 133,521
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
36
37
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Notes Accumulated
Additional Receivable Other
Common Stock Paid-in- From Comprehensive
Shares Amount Capital Stockholders Income
------------ ------------ ------------ ------------ ------------
Balance of October 31, 1996 .......... 14,191,585 $ 142 $ 407 $ (60) $ -
Net income ........................... - - - - -
Translation adjustment ............... - - - - (5)
Comprehensive income
Exercise of warrants ................. 666,086 7 - - -
Exercise of stock options ............ 3,612,182 36 859 (73) -
Compensation cost of stock options ... - - 85 - -
Issuance of common stock, net of
issuance costs ..................... 16,413,677 164 179,076 (4) -
Conversion of Preferred Stock ........ 74,815,740 748 40,256 - -
Tax benefit from the exercise of
stock options ...................... - - 29,709 - -
Repayment of receivables from
stockholders ....................... - - - 69 -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1997 .......... 109,699,270 1,097 250,392 (68) (5)
Net income ........................... - - - - -
Translation adjustment ............... - - - - (102)
Comprehensive income
Exercise of stock options ............ 2,647,907 26 6,215 (392) -
Compensation of stock options ........ - - 54 - -
Issuance of common stock, net of
issuance costs ..................... 21,954,170 220 28,474 (225) -
Tax benefit from the exercise of ..... -
stock options ...................... - - 22,634 - -
Repayment of receivables from
stockholders ....................... - - - 99 -
Purchase acquisitions, net of
transaction costs .................. 304,144 3 20,817 - -
Issuance of warrants for technology
rights ............................. - - 235 - -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1998 .......... 134,605,491 1,346 328,821 (586) (107)
Net loss ............................. - - - - -
Translation adjustment ............... - - - - 67
Comprehensive loss
Exercise of warrants ................. 403,951 4 - -
Exercise of stock options ............ 1,721,384 17 8,219 - -
Compensation cost of stock options
and warrants ....................... - - 8,521 - -
Issuance of common stock, net of
issuance costs ..................... 1,456,530 15 3,517 (481) -
Tax benefit from the exercise of
stock options ...................... - - 11,004 - -
Repayment of receivables from
stockholders ....................... - - - 857 -
Adjustment to conform fiscal year
ends of pooled acquisition ......... - - - - -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1999 .......... 138,187,356 $ 1,382 $ 360,082 $ (210) $ (40)
============ ============ ============ ============ ============
Total
Retained Stockholders'
Earnings Equity
------------ ------------
Balance of October 31, 1996 .......... $ 10,294 $ 10,783
Net income ........................... 115,568 115,568
Translation adjustment ............... - (5)
------------
Comprehensive income 115,563
Exercise of warrants ................. - 7
Exercise of stock options ............ - 822
Compensation cost of stock options ... - 85
Issuance of common stock, net of
issuance costs ..................... - 179,236
Conversion of Preferred Stock ........ - 41,004
Tax benefit from the exercise of
stock options ...................... - 29,709
Repayment of receivables from
stockholders ....................... - 69
- -------------------------------------- ------------ ------------
Balance at October 31, 1997 .......... 125,862 377,278
Net income ........................... 45,700 45,700
Translation adjustment ............... - (102)
------------
Comprehensive income 45,598
Exercise of stock options ............ - 5,849
Compensation of stock options ........ - 54
Issuance of common stock, net of
issuance costs ..................... - 28,469
Tax benefit from the exercise of .....
stock options ...................... - 22,634
Repayment of receivables from
stockholders ....................... - 99
Purchase acquisitions, net of
transaction costs .................. - 20,820
Issuance of warrants for technology
rights ............................. - 235
- -------------------------------------- ------------ ------------
Balance at October 31, 1998 .......... 171,562 501,036
Net loss ............................. (3,924) (3,924)
Translation adjustment ............... - 67
------------
Comprehensive loss ................... (3,857)
Exercise of warrants ................. - 4
Exercise of stock options ............ - 8,236
Compensation cost of stock options
and warrants ....................... - 8,521
Issuance of common stock, net of
issuance costs ..................... - 3,051
Tax benefit from the exercise of
stock options ...................... - 11,004
Repayment of receivables from
stockholders ....................... - 857
Adjustment to conform fiscal year
ends of pooled acquisition ......... 1,621 1,621
- -------------------------------------- ------------ ------------
Balance at October 31, 1999 .......... $ 169,259 $ 530,473
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
37
38
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) .................................................... $ 115,568 $ 45,700 $ (3,924)
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to conform fiscal year ends of pooled acquisitions ..... - - 1,621
Non-cash charges from equity transactions ......................... 85 289 8,521
Amortization of premiums on marketable debt securities ............ - 464 1,776
Effect of translation adjustment .................................. (5) (102) 67
Purchased research and development ................................ - 9,503 -
Write down of leasehold improvements and equipment ................ 923 1,605 -
Depreciation and amortization ..................................... 10,256 33,623 50,418
Provision for doubtful accounts ................................... 489 806 250
Provision for inventory excess and obsolescence ................... 7,585 9,617 6,534
Provision for warranty and other contractual obligations .......... 11,866 10,523 8,396
Changes in assets and liabilities:
Increase in accounts receivable ................................ (46,309) (7,026) (65,807)
Increase in inventories ........................................ (35,466) (39,416) (15,234)
Increase in deferred income tax assets ......................... (7,305) (7,282) (8,964)
(Increase) decrease in prepaid income taxes .................... - (11,688) 11,688
Increase in prepaid expenses and other assets .................. (2,468) (18,528) (13,222)
Increase (decrease) in accounts payable and accrued expenses ... 30,608 (6,288) 22,159
Increase (decrease) in income taxes payable .................... (3,916) (46) 8,697
Increase in deferred income tax liabilities .................... 4,793 5,958 2,828
Increase (decrease) in deferred revenue and other obligations .. (2,007) (1,507) 1,870
--------- --------- ---------
Net cash provided by operating activities .......................... 84,697 26,205 17,674
--------- --------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures ..................... (67,030) (88,913) (46,776)
Purchase of marketable debt securities ............................. - (93,869) (274,897)
Maturities of marketable debt securities ........................... - 77,876 171,934
Net cash paid for business combinations ............................ - (2,070) -
--------- --------- ---------
Net cash used in investing activities .......................... (67,030) (106,976) (149,739)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations ................. (2,238) 1,148 1,639
Net proceeds from issuance of common stock ......................... 180,665 34,318 11,291
Tax benefit related to exercise of stock options and warrants ...... 53,083 22,634 11,004
Repayment of notes receivable from stockholders .................... 69 99 857
--------- --------- ---------
Net cash provided by financing activities ...................... 231,579 58,199 24,791
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 249,246 (22,572) (107,274)
Cash and cash equivalents at beginning of period ....................... 24,040 273,286 250,714
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 273,286 $ 250,714 $ 143,440
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................ $ 405 $ 265 $ 504
========= ========= =========
Income taxes .................................................... $ 27,455 $ 30,203 $ 313
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from stockholders ..... $ 77 $ 617 $ 481
========= ========= =========
The accompanying notes are an integral part of
these supplemental consolidated financial statements.
38
39
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CIENA is a leader in the rapidly emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery 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, providing its customers with a competitive
advantage.
Principles of Consolidation
The Company has twelve 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 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 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 30, 1999; October 31,
1998; and November 1, 1997). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 1999, 1998
and 1997 comprised 52 weeks. Omnia's fiscal year ended on December 31.
Since the fiscal years for CIENA and Omnia differ, 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, contain 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.
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.
39
40
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 have $60,000 and $11,000 of unrealized gains and $9,000 and $108,000 of
unrealized loss, as of October 31, 1998 and 1999, 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 of 6-10 years for leasehold
improvements.
Goodwill
The Company has recorded goodwill from two purchase transactions. See Note
2. It is the Company's policy to continually 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 1999 Sprint, MCI
WorldCom, and GTS Network Ltd. (formerly Hermes Europe Railtel) 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. During 1997 both WorldCom and Sprint were 10% customers and combined
accounted for 88% of the Company's fiscal 1997 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 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.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Company maintains
an allowance for potential losses when identified. 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. As of October 31,
1998 the trade accounts receivable included four customers who each accounted
for 10%, 11%, 25%, and 26% of the trade accounts receivable, respectively.
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41
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 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,
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. 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.
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 remeasurement and exchange rate changes for fiscal
1997, 1998 and 1999 was immaterial for separate financial statement
presentation.
Computation of Basic Net Income per Common Share and Diluted Net Income 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.
41
42
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 1997, 1998, and 1999. 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 and present the pro
forma disclosures required by SFAS No. 123. See Note 8.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Comprehensive Income".
SFAS No. 130 became effective for the Company's fiscal year 1999. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires that changes in the amounts of certain
items, including foreign currency translation adjustments and gains and losses
on certain securities be shown in the financial statements. CIENA's accumulated
other comprehensive income is comprised entirely of accumulated foreign currency
translation adjustments and is shown as a separate amount on CIENA's
Consolidated Balance Sheets.
The components of comprehensive income (loss) are as follows (in
thousands):
October 31,
----------------------
1998 1999
-------- --------
Net income (loss) ............................... $ 45,700 $ (3,924)
Change in accumulated translation adjustments ... (102) 67
-------- --------
Total comprehensive income (loss) ............... $ 45,598 $ (3,857)
======== ========
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.
42
43
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 133 will be effective for
the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year consolidated financial statement presentation.
(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, the Company acquired all of the outstanding shares and assumed the stock
options of Omnia in exchange for approximately 15.2 million shares of CIENA
common stock and 0.8 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 is 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)
========= ========= =========
43
44
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 17.5 million shares of CIENA common stock
and 2.9 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.
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
October 31, Ended
1998 April 30, 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 134,390 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 have
not yet reached technological feasibility and have no alternative future use.
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.
44
45
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% was used to effect the risk associated with Terabits
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
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 agreement the Company exchanged
1,000,000 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 169,754 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.
45
46
(3) MARKETABLE DEBT SECURITIES
Marketable debt securities are comprised of the following (in thousands):
October 31,
-----------------------
1998 1999
-------- --------
Commercial paper .............. $ 15,993 $105,215
U.S. Government obligations ... - 13,741
-------- --------
$ 15,993 $118,956
======== ========
(4) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31,
------------------------
1998 1999
-------- --------
Raw materials ...................... $ 43,268 $ 49,298
Work-in-process .................... 8,592 16,386
Finished goods ..................... 30,202 26,369
-------- --------
82,062 92,053
Reserve for excess and obsolescence .. (11,154) (12,445)
-------- --------
$ 70,908 $ 79,608
======== ========
The following is a table depicting the activity in the Company's reserve for
excess and obsolescence (in thousands):
October 31,
------------------------
1998 1999
-------- --------
Beginning balance ........................ $ 7,466 $ 11,154
Provision charged to operations .......... 9,617 6,534
Amounts written off against the reserve .. (5,929) (5,243)
-------- --------
Ending balance ........................... $ 11,154 $ 12,445
======== ========
(5) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
October 31,
--------------------------
1998 1999
--------- ---------
Equipment, furniture and fixtures ........... $ 141,845 $ 182,794
Leasehold improvements ...................... 24,076 30,231
--------- ---------
165,921 213,025
Accumulated depreciation and amortization .. (41,506) (88,716)
Construction-in-progress .................... 1,352 943
--------- ---------
$ 125,767 $ 125,252
========= =========
46
47
(6) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
October 31,
---------------------
1998 1999
------- -------
Warranty and other contractual obligations .. $17,256 $28,582
Accrued compensation ........................ 9,229 15,471
Other ....................................... 7,952 14,433
------- -------
$34,437 $58,486
======= =======
(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
and shares issued upon conversion of all outstanding shares of Mandatorily
Redeemable Preferred Stock (in thousands except per share amounts).
October 31,
-----------------------------------------
1997 1998 1999
--------- --------- ---------
Net income (loss) .......................... $ 115,568 $ 45,700 $ (3,924)
========= ========= =========
Weighted average shares-basic .............. 75,964 117,990 133,521
--------- --------- ---------
Effect of dilutive securities:
Employee stock options and warrants ... 8,791 9,904 -
Conversion of preferred stock ......... 20,088 - -
--------- --------- ---------
Weighted average shares-diluted ............ 104,843 127,894 133,521
========= ========= =========
Basic EPS .................................. $ 1.52 $ 0.39 $ (0.03)
========= ========= =========
Diluted EPS ................................ $ 1.10 $ 0.36 $ (0.03)
========= ========= =========
Approximately 182,000, 769,000 and 11,886,000 options and restricted stock
were outstanding during fiscal 1997, 1998 and 1999 respectively, but were not
included in the computation of the Diluted EPS as the effect would be
anti-dilutive.
(8) STOCKHOLDERS' EQUITY
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 $.001
per right at the approval of the Company's Board of Directors.
47
48
Public Offerings
In February 1997, the Company successfully completed its initial public
offering of Common Stock. The Company sold 5,750,000 shares, inclusive of
750,000 shares from the exercise of the underwriters over-allotment option, at a
price of $23 per share. Net proceeds from the offering were approximately
$121,800,000 with an additional $600,000 received from the exercise of 300,000
shares of outstanding Convertible Preferred Stock warrants.
In July 1997, the Company completed a public offering of 10,477,216 shares
of Common Stock of which 1,252,060 shares were sold by the Company inclusive of
252,060 shares from the exercise of the underwriters over-allotment option, at a
price of $44 per share. Net proceeds to the Company from the public offering
were approximately $52,200,000.
Other Offerings
During 1997, Omnia issued 9,411,617 shares of common stock in exchange for
approximately $5,223,000. In 1998 and 1999 Omnia issued 5,376,665 and 184,495
shares of common stock in exchange for approximately $12,801,000 and $66,000,
respectively.
During 1998, Lightera issued a total of 16,577,505 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 968,511
shares of common stock in exchange for approximately $104,000.
Stock Incentive Plans
In August of 1999, the Company approved the 1999 Non-Officers Incentive
Stock Plan (the "1999 Plan"). Under the 1999 Plan, 6,000,000 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 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, 20,050,000 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, 750,000
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 759,889 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.
48
49
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 2,529,161 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, 1996 .... 11,083 0.97
Granted ........................ 1,737 32.81
Exercised ...................... (3,612) 0.27
Canceled ....................... (98) 0.52
------
Balance at October 31, 1997 .... 9,110 7.33
Granted ........................ 6,414 18.99
Exercised ...................... (2,648) 2.40
Canceled ....................... (3,340) 40.12
------
Balance at October 31, 1998 .... 9,536 4.82
Granted ........................ 8,131 23.45
Exercised ...................... (1,728) 4.65
Canceled ....................... (878) 13.29
------
Balance at October 31, 1999 .... 15,061 14.43
======
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. A
total of 2,905,116 options with an average exercise price of $42.87 were
cancelled and reissued at $12.38 per share. At October 31, 1999 approximately
2,030,000 shares of Common Stock subject to repurchase by the Company had been
issued upon the exercise of options and restricted stock purchase agreements.
3,961,914 million of the total outstanding options were vested and not subject
to repurchase by the Company upon exercise. As of October 31, 1999,
approximately 6.4 million shares are available for issuance under these plans.
The following table summarizes information with respect to stock options
outstanding at October 31, 1999:
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 1999 (Years) Price 1999 Price
- ------------------- ------------ ----------- ------------ ----------- ---------
$ 0.01 - $ 0.03 754,475 5.24 $ 0.03 752,775 $ 0.03
$ 0.06 - $ 1.66 2,586,246 8.27 $ 0.37 724,100 $ 0.67
$ 2.25 - $ 4.70 2,523,154 6.66 $ 2.47 1,483,635 $ 2.47
$ 7.17 - $ 15.63 2,472,106 8.91 $ 12.36 958,723 $ 12.37
$ 17.00 - $ 24.25 2,328,629 9.16 $ 18.25 17,681 $ 17.10
$ 25.00 - $ 29.81 2,314,488 9.91 $ 29.51 - -
$ 30.06 - $ 43.25 2,082,210 9.76 $ 33.04 25,000 $ 43.25
---------- ---------
$ 0.01 - $ 43.25 15,061,308 8.55 $ 14.43 3,961,914 $ 4.39
========== =========
49
50
Employee Stock Purchase Plan
In March 1998, the shareholders approved the Corporation's 1998 Stock
Purchase Plan ("the Purchase Plan") under which 2.5 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. As of October 31, 1999, 303,524 shares of common stock had
been issued for $3,347,000 and approximately 2.2 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 1997, 1998 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net income and net income per share for fiscal 1997
and 1998 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,
--------------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
Net income (loss) applicable to common stockholders -
as reported ....................................... $ 115,568 $ 45,700 $ (3,924)
============== ============== ==============
Net income (loss) applicable to common stockholders -
pro forma ......................................... $ 110,005 $ 20,816 $ (40,067)
============== ============== ==============
Basic net income (loss) per share - as reported ........ $ 1.52 $ 0.39 $ (0.03)
============== ============== ==============
Basic net income (loss) per share - pro forma .......... $ 1.45 $ 0.18 $ (0.30)
============== ============== ==============
Diluted net income (loss) per share - as reported ...... $ 1.10 $ 0.36 $ (0.03)
============== ============== ==============
Diluted net income (loss) per share - pro forma ........ $ 1.05 $ 0.16 $ (0.30)
============== ============== ==============
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
The aggregate fair value and weighted average fair value of each option
granted under the various stock option plans, excluding the purchase plan, in
fiscal years 1997, 1998 and 1999 were approximately $33.6 million, $73.2
million, and $129.2 million and $19.33, $15.17, and $18.89 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 1997, 1998, and 1999:
October 31,
-----------------------------------
1997 1998 1999
-------- -------- -------
Expected volatility 60% 109% 88%
Risk-free interest rate 5.8% 4.4% 5.5%
Expected life 3.0 yrs. 3.0 yrs. 2.8 yrs
Expected dividend yield 0% 0% 0%
50
51
The aggregate fair value and weighted average fair value of each option
granted under the Stock Purchase Plan in fisca1 1999 was approximately $6.5
million and $11.20, 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 year 1999:
October 31,
-----------
1999
-----------
Expected volatility 88%
Risk-free interest rate 5.5%
Expected life 0.5 yrs.
Expected dividend yield 0%
(9) INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income taxes
consists of the following (in thousands):
October 31,
----------------------------------------
1997 1998 1999
--------- --------- ---------
Income (loss) before income taxes ..... $ 188,056 $ 81,900 $ (5,991)
========= ========= =========
Provision (benefit) for income taxes:
Current:
Federal ............................... 67,529 36,865 5,175
State ................................. 7,373 4,444 235
Foreign ............................... 98 40 75
--------- --------- ---------
Total current .................. 75,000 41,349 5,485
--------- --------- ---------
Deferred:
Federal ............................... (2,015) (4,496) (7,477)
State ................................. (497) (653) (75)
Foreign ............................... - - -
--------- --------- ---------
Total deferred ................. (2,512) (5,149) (7,552)
--------- --------- ---------
Provision (benefit) for income taxes .... $ 72,488 $ 36,200 $ (2,067)
========= ========= =========
The tax provision reconciles to the amount computed by multiplying income before
income taxes by the U.S. federal statutory rate of 35% as follows:
October 31,
-------------------------------
1997 1998 1999
------ ------ ------
Provision at statutory rate ........................ 35.0% 35.0% 35.0%
Non-deductible purchased research and development .. - 4.3 -
State taxes, net of federal benefit ................ 2.6 4.3 (2.6)
Research and development credit .................... - (4.0) 48.9
Foreign sales corporation benefit .................. - (1.6) 28.7
Non-deductible merger costs and other .............. 0.9 6.2 (75.5)
------ ------ ------
38.5% 44.2% 34.5%
====== ====== ======
51
52
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
October 31,
----------------------
1998 1999
-------- --------
Deferred tax assets:
Reserves and accrued liabilities .............. $ 14,611 $ 14,931
Other ......................................... 690 637
Net operating loss and credit carry forward ... 2,682 11,244
-------- --------
Gross deferred tax assets .................... 17,983 26,812
Valuation allowance .......................... (1,562) (1,427)
-------- --------
Net current deferred tax asset ............ $ 16,421 25,385
======== ========
Deferred tax liabilities:
Equipment leases .............................. $ 7,978 $ 8,738
Services ...................................... 21,594 23,916
Depreciation and other ........................ 4,553 4,299
-------- --------
Deferred long term tax liabilities ........ $ 34,125 $ 36,953
======== ========
As of October 31, 1998, the Company assumed net operating loss carry
forwards through its acquisitions of Lightera and Omnia. As of October 31, 1999,
the Company has $22.5 million of net operating loss carry forwards which begin
to expire in fiscal 2016.
The income tax provisions do not reflect the tax savings resulting from
deductions associated with the Company's stock option plans or the exercise of
certain stock warrants. Tax benefits of approximately $22.6 million and $3.6
million in fiscal 1998, and $11.0 million and $0.7 million in fiscal 1999 from
exercises of stock options and certain stock warrants were credited directly to
additional paid-in-capital and to long-term deferred income taxes, respectively.
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
Employee 401(k) Plan
In January 1995, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age, 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. In fiscal 1997 the Company revised the plan to
include 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. The Company has made no profit sharing
contributions to date. During fiscal 1997, 1998 and 1999 the Company made
matching contributions of approximately $0.3 million, $1.1 million and $1.7
million, respectively.
52
53
(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, 1999 are as follows (in thousands):
Fiscal year ending October 31,
- ------------------------------
2000................................. $11,187
2001................................. 10,919
2002................................. 9,350
2003................................. 7,666
2004................................. 7,538
Thereafter........................... 29,932
-------
$76,592
=======
Rental expense for fiscal 1997, 1998 and 1999 was approximately
$2,699,000, $6,104,000, and $9,467,000, respectively.
Litigation
A class action complaint was filed on August 26, 1998 in U.S. District
Court for the District of Maryland entitled Witkin et al. v. CIENA Corporation
et al. (Case No. Y-98-2946). Several other complaints, substantially similar in
content were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. On July 19, 1999 the
United States District Court dismissed the suit with leave to amend before any
discovery had been taken. On August 20, 1999, plaintiffs filed a second amended
class action complaint alleging that CIENA and certain officers and directors
violated certain provisions of the federal securities laws, including Section
10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other actions
intending to artificially inflate and maintain the market price of CIENA's
common stock during the Class Period of May 21, 1998 to September 14, 1998,
inclusive. The plaintiffs intend to seek certification of the suit as a class
action on behalf of all persons who purchased shares of CIENA's common stock
during the Class Period and the awarding of compensatory damages in an amount to
have been determined at trial together with attorneys' fees. CIENA has filed,
and the parties have fully briefed, a motion to dismiss the second amended
complaint. CIENA believes the suit is without merit and CIENA intends to
continue to defend the case vigorously.
Pirelli Litigation. 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, 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 $11.7 million, $117.1
million, and $213.6 million in fiscal years 1997, 1998 and 1999, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
53
54
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
Michael A. Champa and Charles Chi each filed a late Form 3 reporting their
initial statement of beneficial ownership of the Company's stock. Stephen
Bradley filed a late Form 4 reporting a single transaction, Charles Chi filed
two late Form 4's reporting six transactions, and Harvey Cash filed one late
Form 4 reporting two transactions. Billy Oliver filed three late Form 4's
totaling 5 transactions. Clifford Higgerson filed one late Form 5 reporting two
transactions.
ITEM 11. EXECUTIVE COMPENSATION
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
2. Exhibits: See Index to Exhibits on page 56. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K
No reports filed on Form 8-K were filed during the fourth quarter fiscal
1999.
54
55
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 10th day of
December 1999.
CIENA CORPORATION
By: /s/ Patrick H. Nettles
-------------------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
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 President, Chief Executive Officer December 10, 1999
------------------------------------- and Director
Patrick H. Nettles
(Principal Executive Officer)
/s/ Joseph R. Chinnici Sr. Vice President, Finance and December 10, 1999
------------------------------------- Chief Financial Officer
Joseph R. Chinnici
(Principal Financial Officer)
/s/ Andrew C. Petrik Vice President, Controller December 10, 1999
------------------------------------- and Treasurer
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Harvey B. Cash Director December 10, 1999
-------------------------------------
Harvey B. Cash
/s/ John Dillon Director December 10, 1999
-------------------------------------
John Dillon
/s/ Billy B. Oliver Director December 10, 1999
-------------------------------------
Billy B. Oliver
/s/ Michael J. Zak Director December 10, 1999
-------------------------------------
Michael J. Zak
/s/ Stephen P. Bradley Director December 10, 1999
-------------------------------------
Stephen P. Bradley
55
56
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1* Certificate of Amendment to Third Restated Certificate of Incorporation
3.2* Third Restated Certificate of Incorporation
3.3* Amended and Restated Bylaws
4.1* Specimen Stock Certificate
4.2*** Rights Agreement dated December 29, 1997
4.3**** Amendment to Rights Agreement
10.1* Form of Indemnification Agreement for Directors and Officers
10.2* Amended and Restated 1994 Stock Option Plan
10.3* Form of Employee Stock Option Agreements
10.4* 1996 Outside Directors Stock Option Plan
10.5* Forms of 1996 Outside Directors Stock Option Agreement
10.7* Lease Agreement dated October 5, 1995 between the Company and CS
Corridor-32 Limited Partnership
10.6* Series C Preferred Stock Purchase Agreement dated December 20, 1995
10.8+* Purchase Agreement Between Sprint/United Management Company and the
Company dated December 14, 1995
10.9+* Basic Purchase Agreement between WorldCom Network Services, Inc. and
the Company dated September 19, 1996
10.10* Settlement Agreement and Mutual Release, between the Company and
William K. Woodruff & Company, dated August 26, 1996
10.13* Employment Agreement dated April 9, 1994 between the Company and
Patrick Nettles
10.14* Lease Agreement dated November 1, 1996 by and between the Company and
Aetna Life Insurance Company
10.15* Revolving Note and Business Loan Agreement dated November 25, 1996
between the Company and Mercantile-Safe Deposit & Trust Company
10.16+* First Addendum to Procurement Agreement between the Registrant and
Sprint/United Management Company dated December 19, 1996
10.17***** Third Addendum to Procurement Agreement between the Registrant and
Sprint/United Management Company
10.18***** Form of Transfer of Control/Severance Agreement
10.19@ Lightera 1998 Stock Option Plan and Form of Stock Option Agreement
10.20- Omnia Communications, Inc. 1997 stock plan and form of agreements
10.21 Employment Agreement dated August 18, 1999 between the Company and Gary
B. Smith (filed herewith)
10.22 1999 Non-Officer Stock Option Plan and Form of Stock Option Agreement
(filed herewith)
10.23 Lease Agreement dated June 1, 1999 between the Company and Ridgeview
Court Associates, L.L.C. (filed herewith)
21** Subsidiaries of registrant
23.1 Consent of Independent Accountants (filed herewith)
27.1 Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (333-17729).
** Incorporated by reference from the Company's Registration Statement on
Form S-1 (333-28525).
*** Incorporated by reference from the Company's Form 8-K dated December
29, 1997.
**** Incorporated by reference from the Company's Form 8-K dated October 14,
1998.
***** Incorporated by reference from the Company's Form 10-K dated December
10, 1998.
@ Incorporated by reference from the Company's Form 10-Q dated May 21,
1999.
- - Incorporated by reference from the Company's Form 10-Q dated August 19,
1999.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain portions of these exhibits.
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