1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM..................TO.........................
COMMISSION FILE NUMBER: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of Principal Executive Offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 21, 1999
---------------------------- ---------------------------
Common stock. $.01 par value 121,375,665
Page 1 of 25 pages
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CIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and six months ended April 30, 1998
and April 30, 1999 3
Consolidated Balance Sheets
October 31, 1998 and April 30, 1999 4
Consolidated Statements of Cash Flows
Six months ended April 30, 1998 and
April 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
April 30, April 30, April 30, April 30,
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
Revenue $ 142,718 $ 111,490 $ 287,810 $ 211,907
Cost of goods sold 63,915 71,238 122,895 137,016
---------------- ---------------- ---------------- ----------------
Gross profit 78,803 40,252 164,915 74,891
---------------- ---------------- ---------------- ----------------
Operating expenses:
Research and development 16,706 21,167 26,909 40,950
Selling and marketing 11,063 12,427 21,031 25,301
General and administrative 4,519 5,467 8,311 10,229
Merger costs - 2,253 - 2,253
Purchased research and development 9,503 - 9,503 -
Pirelli litigation 10,000 - 10,000 -
---------------- ---------------- ---------------- ----------------
Total operating expenses 51,791 41,314 75,754 78,733
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 27,012 (1,062) 89,161 (3,842)
Interest and other income (expense), net 3,433 3,614 7,208 6,876
Interest expense (81) (94) (165) (168)
---------------- ---------------- ---------------- ----------------
Income before income taxes 30,364 2,458 96,204 2,866
Provision for income taxes 15,154 864 41,296 989
---------------- ---------------- ---------------- ----------------
Net income $ 15,210 $ 1,594 $ 54,908 $ 1,877
================ ================ ================ ================
Basic net income per common share $ 0.14 $ 0.01 $ 0.53 $ .02
================ ================ ================ ================
Diluted net income per common share
and dilutive potential common share $ 0.14 $ 0.01 $ 0.50 $ .01
================ ================ ================ ================
Weighted average basic common shares
outstanding 106,245 121,135 103,443 120,646
================ ================ ================ ================
Weighted average basic common and
dilutive potential dilutive
potential common shares
outstanding 112,455 128,910 110,045 127,824
================ ================ ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
October 31, April 30,
1998 1999
------------------ -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 239,780 $ 194,920
Marketable debt securities 15,993 100,021
Accounts receivable, net 85,472 96,448
Inventories, net 70,908 54,062
Deferred income taxes 16,421 13,514
Prepaid income taxes 8,558 -
Prepaid expenses and other 4,524 9,615
------------------ -------------------
Total current assets 441,656 468,580
Equipment, furniture and fixtures, net 124,792 127,085
Goodwill and other intangible assets, net 16,270 14,446
Other assets 4,848 4,737
------------------ -------------------
Total assets $ 587,566 $ 614,848
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,925 $ 24,144
Accrued liabilities 34,437 40,773
Income taxes payable - 9,216
Deferred revenue 1,084 719
Other current obligations 953 1,276
------------------ -------------------
Total current liabilities 62,399 76,128
Deferred income taxes 34,125 36,580
Other long-term obligations 2,257 3,703
------------------ -------------------
Total liabilities 98,781 116,411
------------------ -------------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock - par value $.01; 360,000,000 shares authorized;
119,817,209 and 121,330,173 shares issued and outstanding 1,198 1,213
Additional paid-in capital 310,888 319,268
Unearned compensation - (687)
Notes receivable from stockholders (568) (629)
Cumulative translation adjustment (107) 21
Retained earnings 177,374 179,251
------------------ -------------------
Total stockholders' equity 488,785 498,437
------------------ -------------------
Total liabilities and stockholders' equity $ 587,566 $ 614,848
================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended April 30,
-------------------------------------------------
1998 1999
------------------- -------------------
Cash flows from operating activities:
Net income $ 54,908 $ 1,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash charges from equity transactions 20 262
Amortization of premiums on marketable debt securities 164 87
Effect of Translation Adjustments (24) 128
Purchased research and development 9,503 -
Depreciation and amortization 13,928 23,501
Allowance for doubtful accounts 194 -
Provision for inventory excess and obsolescence 1,683 2,033
Provision for warranty and other contractual obligations 6,400 4,617
Changes in assets and liabilities:
Increase in accounts receivable (59,848) (10,976)
Increase in prepaid expenses and other (4,565) (5,178)
Decrease in prepaid income tax - 8,558
(Increase) decrease in inventories (29,529) 14,813
(Increase) decrease in deferred income tax asset (1,247) 2,907
(Increase) decrease in other assets (3,670) 111
Increase (decrease) in accounts payable and accruals 16,956 (62)
Increase in income taxes payable 1,919 9,216
Increase in deferred income tax liability 1,957 2,455
Increase (decrease) in deferred revenue and other
obligations 1,131 (365)
------------------- -------------------
Net cash provided by operating activities 9,880 53,984
------------------- -------------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (58,155) (23,970)
Purchases of marketable debt securities (88,305) (118,277)
Maturities of marketable debt securities 36,376 34,249
Net cash paid for business combination (2,103) -
------------------- -------------------
Net cash used in investing activities (112,187) (107,998)
------------------- -------------------
Cash flows from financing activities:
Net (repayment of) proceeds from other obligations (495) 1,769
Proceeds for issuance of common stock and warrants 10,962 3,497
Tax benefit related to exercise of stock warrants 6,885 3,796
Repayment of notes receivable from stockholders - 92
------------------- -------------------
Net cash provided by financing activities 17,352 9,154
------------------- -------------------
Net increase (decrease) in cash and cash equivalents (84,955) (44,860)
Cash and cash equivalents at beginning of period 268,588 239,780
------------------- -------------------
Cash and cash equivalents at end of period $ 183,633 $ 194,920
=================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation
("CIENA") have been prepared by CIENA, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, financial statements included in this report reflect all normal
recurring adjustments which CIENA considers necessary for the fair presentation
of the results of operations for the interim periods covered and of the
financial position of CIENA at the date of the interim balance sheet. Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
CIENA believes that the disclosures are adequate to understand the information
presented. The operating results for interim periods are not necessarily
indicative of the operating results for the entire year. These financial
statements should be read in conjunction with CIENA's October 31, 1998 audited
supplemental consolidated financial statements and notes thereto included in
CIENA's Form 8-K filed on April 1, 1999 and amended on April 5, 1999.
As more fully described in Note 5, CIENA acquired Lightera Networks
Incorporated ("Lightera") in March 1999. The acquisition was accounted for as a
pooling of interests, and the historical consolidated financial statements of
CIENA for all periods prior to this acquisition have been restated to include
the financial position, results of operations and cash flows of Lightera.
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified. For transactions where CIENA has yet to obtain customer acceptance,
revenue is deferred until the terms of acceptance are satisfied. Revenue for
installation services is recognized as the services are performed unless the
terms of the supply contract combine product acceptance with installation, in
which case revenues for installation services are recognized when the terms of
acceptance are satisfied and installation is completed. Revenues from
installation service fixed price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date compared to estimated total costs for each contract. Amounts received in
excess of revenue recognized are included as deferred revenue in the
accompanying balance sheets. For distributor sales where risks of ownership have
not transferred, CIENA recognizes revenue when the product is shipped through to
the end user.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, April 30,
1998 1999
---------------- ---------------
Raw materials $ 43,268 $ 30,409
Work-in-process 8,592 13,086
Finished goods 30,202 21,047
---------------- ---------------
82,062 64,542
Less reserve for excess and obsolescence (11,154) (10,480)
---------------- ---------------
$ 70,908 $ 54,062
================ ===============
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(3) EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of
the basic net income per common share ("basic EPS") and diluted net income per
common and dilutive potential common share ("diluted EPS"). Basic EPS is
computed using the weighted average number of common shares outstanding. Diluted
EPS is computed using the weighted average number of common shares outstanding,
stock options and warrants using the treasury stock method. (in thousands except
per share amounts):
Quarter ended April 30,
-----------------------------------------
1998 1999
----------------- -----------------
Net Income.......................... $ 15,210 $ 1,594
================= =================
Weighted average shares-basic....... 106,245 121,135
----------------- -----------------
Effect of dilutive securities:
Employee stock options......... 6,210 7,775
----------------- -----------------
Weighted average shares-diluted..... 112,455 128,910
================= =================
Basic EPS........................... $ 0.14 $ 0.01
================= =================
Diluted EPS......................... $ 0.14 $ 0.01
================= =================
Six months ended April 30,
-----------------------------------------
1998 1999
------------------- -----------------
Net Income.......................... $ 54,908 $ 1,877
=================== =================
Weighted average shares-basic....... 103,443 120,646
------------------- -----------------
Effect of dilutive securities:
Employee stock options............. 6,602 7,178
------------------- -----------------
Weighted average shares-diluted.... 110,045 127,824
=================== =================
Basic EPS........................... $ 0.53 $ 0.02
=================== =================
Diluted EPS......................... $ 0.50 $ 0.01
=================== =================
Stock options to purchase 298,500 and 258,316 shares of common stock were
outstanding during the quarter ended and six months ended April 30,1999,
respectively, but were not included in the computation of diluted EPS as the
effect would be antidilutive.
(4) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS No.130), "Comprehensive Income".
SFAS No.130 became effective for CIENA's fiscal year 1999. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components: however, the adoption of this statement had no impact on CIENA's
net income or shareholders' equity. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
CIENA's accumulated other comprehensive income is comprised entirely of
accumulated foreign currency translation adjustments and is shown as a separate
amount on CIENA's Consolidated Balance Sheets. During the second quarter of
fiscal 1998 and 1999, total comprehensive income, which includes net income and
changes in foreign currency translation adjustments, amounted to $15,218,000 and
$1,723,000 of comprehensive income, respectively. During the six months ended
April 30, 1998 and 1999, total comprehensive income, which includes net income
and changes in foreign currency translation adjustments, amounted to $54,884,000
and $2,005,000 of comprehensive income, respectively.
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(5) ACQUISITION
Lightera
During March 1999, CIENA completed a merger with Lightera, a Delaware
Corporation headquartered in Cupertino, California, in a transaction valued at
approximately $463.5 million. Lightera is a developer of carrier class optical
core switches for fiberoptic communications networks. Under the terms of the
merger agreement with Lightera, CIENA acquired all of the outstanding shares of
Lightera in exchange for approximately 17.5 million shares of CIENA common
stock. In connection with the transaction CIENA also assumed outstanding stock
options and warrants which represent rights to acquire an additional 3.1 million
of CIENA stock. As a result of the transaction CIENA recorded a charge of $2.3
million for merger costs. These costs include fees for legal, accounting,
investment banking services and other related expenses. The transaction
constituted a tax-free reorganization and has been accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16. Accordingly, all
prior period consolidated financial statements presented have been restated to
include the combined results of operations, financial position and cash flows of
Lightera as though it had been a part of CIENA.
The following table shows the separate historical results of CIENA and
Lightera for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal years ended
1997 and 1996 as Lightera did not commence operations until April 1998.
(in thousands)
Year Ended Six Months Ended
October 31, 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
================ ================
Omnia
On March 15, 1999 CIENA signed an Agreement and Plan of Merger with Omnia
Communications, Inc. ("Omnia"), a Delaware corporation located in Marlborough,
Massachusetts, in a transaction valued at approximately $429 million. Omnia is a
developer of carrier class optical access solutions for fiberoptic
communications networks. Under the terms of the agreement, CIENA will acquire
all of the outstanding shares of Omnia in exchange for approximately 16 million
shares of CIENA common stock. The merger is subject to shareholder approval by
Omnia stockholders and other customary conditions. The transaction is intended
to constitute a tax-free reorganization and will be accounted for as a pooling
of interests under Accounting Principles Board Opinion No. 16. Accordingly, all
prior period consolidated financial statements presented will be restated to
include the combined results of operations, financial position and cash flows of
Omnia as though it had been a part of CIENA once the merger is consummated. For
the six months ended April 30, 1998 and 1999, Omnia had no revenues and recorded
a net loss of 2,230,000 and 7,246,000, respectively. CIENA expects to incur
charges of approximately $10,600,000 in connection with the merger. Of the
$10,600,000, $7,900,000 is the estimated non-cash charge that relates to the
acceleration of certain Omnia warrants and the remaining $2,700,000 relates to
financial advisory fees, legal and accounting services and other integration
costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
risks and uncertainties. CIENA has set forth below under the heading "Risk
Factors" a further discussion of certain of those risks as they relate to the
period covered by this report, CIENA's near term outlook with respect thereto,
and the forward-looking statements set forth herein.
OVERVIEW
CIENA Corporation is a market leader of open architecture, optical
networking systems leveraging the bandwidth enhancing abilities of dense
wavelength division multiplexing ("DWDM") technology. As a leader in the
implementation of new technology in a rapidly evolving and often unpredictable
industry, CIENA's quarterly operating results have varied and are expected to
vary in the future. See "Risk Factors" for a detailed discussion of the many
factors that have caused such variation in the past, and may cause similar
variations in the future.
On March 15, 1999, CIENA announced agreements to acquire Lightera
Networks, Inc. ("Lightera") and Omnia Communications, Inc. ("Omnia"), both
privately held entities, in two separate transactions. Lightera is a developer
of carrier-class optical core switches for fiberoptic communications networks.
Omnia is a developer of carrier-class optical access solutions for fiberoptic
communications networks.
CIENA completed the merger with Lightera in a transaction valued at
approximately $463.5 million. Under the terms of the agreement, CIENA acquired
all of the outstanding shares of Lightera in exchange for approximately 17.5
million shares of CIENA common stock. In connection with the transaction, CIENA
also assumed outstanding stock options and warrants which represents rights to
acquire an additional 3.1 million of CIENA stock. The transaction constituted a
tax-free reorganization and has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, all prior period
consolidated financial statements presented have been restated to include the
combined results of operations, financial position and cash flows of Lightera as
though it had been a part of CIENA.
The acquisition of Omnia is a transaction valued at approximately $429
million and is expected to be completed in June or July 1999. Under the terms of
the merger agreement with Omnia, CIENA will acquire all of the outstanding
shares of Omnia in exchange for approximately 16 million shares of CIENA common
stock. The acquisition is subject to shareholder approval by Omnia stockholders
and other customary conditions. The transaction is intended to constitute a
tax-free reorganization and will be accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, once the
acquisition is completed, all prior period consolidated financial statements
presented will be restated to include the combined results of operations,
financial position and cash flows of Omnia as though it had been a part of
CIENA.
In conjunction with the agreements to acquire Lightera and Omnia, CIENA
announced its LightWorks(TM) Initiative, CIENA's vision of how to change the
fundamental economics of optical telecommunication service provider networks.
The eventual addition of Lightera's and Omnia's products to CIENA's product
suite will make it possible for CIENA to offer telecommunications service
providers a comprehensive next-generation optical network architecture that
dramatically reduces the total number of network elements, thereby lowering
network costs. By sweeping the functionality and performance of what are now
several network elements into dramatically fewer network elements, without
sacrificing network reliability or performance, CIENA LightWorks architecture
should lower both a carrier's equipment cost and its operational costs. In
addition, LightWorks network architecture may enhance the revenue generating
potential of carrier networks by shortening their service delivery intervals
and enabling them to offer their customers a wide variety of services from a
single network platform.
CIENA has increased the number of its optical transport equipment
customers from a total of seven during the six months ended April 30, 1998 to
seventeen for the six months ended April 30, 1999. This reflects CIENA's ongoing
strategy in the face of aggressive price competition to continue to build market
share at the cost of reduced margins.
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CIENA intends to preserve and enhance its market leadership and eventually build
on its installed base with new and additional products. While this gross margin
pressure continues, CIENA believes that its product and service quality,
manufacturing experience, and proven track record of delivery will enable it to
be successful while it concentrates on efforts to reduce product costs and
maximize production efficiencies.
CIENA believes that the need for customer financing assistance is
increasingly a factor among the new carriers seeking rapid buildout of their
networks. To date CIENA has not recognized revenue from customers with extended
payment terms beyond 90 days from customer acceptance. Revenue recognition from
future customers who require financing assistance may be deferred until
collection is probable.
CIENA is committed to achieving general commercial availability of
MultiWave(R) Metro(TM), CIENA's system designed for use in metropolitan ring
applications within the next several months, as well as 10 gigabit per second
transmission capability for its MultiWave Sentry(TM) line of products in the
second half of the year. The general commercial availability of CIENA's next
generation long-distance optical transport system, a MultiWave platform capable
of 96-channel configuration, is also expected in the second half of the year.
CIENA intends to continue the development of the CoreDirector(TM) product
developed by Lightera. CoreDirector is believed to be the world's first
intelligent optical core switch and reduces the cost of deploying and operating
telecommunication service provider networks with industry-leading capacity and
advanced networking software. Because it supports capacities from optical
wavelengths down to STS-1s with what CIENA believes is industry-leading scale
and density, the CoreDirector allows carriers to deliver a full range of
transport services, without costly SONET/SDH multiplexers or inflexible
"wavelength only" devices. The general commercial availability of the
CoreDirector is expected by the end of the first quarter calendar 2000.
Pursuit of these strategies, in conjunction with increased investments in
research and development, selling, marketing, and customer service activities,
will likely limit CIENA's operating profitability over the remaining six months
of fiscal 1999, and may result in operating losses during the period. CIENA
intends to continue to pursue new or complementary technologies either through
ongoing internal development or by acquisition in order to further broaden
CIENA's product line.
As of April 30, 1999 CIENA employed 1,557 people, which includes 69
persons as a result of CIENA's acquisition of Lightera. This was an increase of
175 persons over the 1,382 employed on October 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999
REVENUE. CIENA recognized $142.7 million and $111.5 million in revenue
for the second quarters ended April 30, 1998 and 1999, respectively. The
approximate $31.2 million or 21.9% decrease in revenues in the second quarter
1999 compared to the second quarter 1998 was largely the result of reduced
selling prices. CIENA recorded an increase in revenues recognized from fourteen
optical transport equipment customers in the quarter ended April 30, 1999, as
compared to six such customers in the same quarter of the prior year.
Additionally, during the quarter ended April 30, 1999, each of three optical
transport equipment customers accounted for at least 10% or more of CIENA's
quarterly revenue and combined accounted for 72% of CIENA's quarterly revenue.
This compares to the quarter ended April 30, 1998 where one customer accounted
for at least 10% or more of CIENA's quarterly revenue and in total that same
customer accounted for approximately 69% of CIENA's quarterly revenue. Revenues
derived from foreign sales accounted for approximately 10.3% and 27.2% of
CIENA's revenues during the second quarter ended April 30, 1998 and 1999,
respectively. The increase in foreign sales reflects an increase in sales to new
customers.
Revenues in CIENA's second quarter 1998 and 1999 were both largely
attributed to sales of CIENA's 40 channel MultiWave Sentry(TM) 4000 systems.
Revenues derived from engineering, furnishing and installation services
increased by less than 10% from second quarter 1998 compared to second quarter
1999. Sales from this activity
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increased as a percentage of total revenue from approximately 9.1% to 12.7% of
CIENA's revenue from the second quarter 1998 to second quarter 1999,
respectively.
CIENA expects revenue in the near term to be largely dependent upon sales
to several new customers and to be derived primarily from sales of MultiWave
Sentry 4000, new products using a MultiWave platform capable of 96-channel
configuration, products using 10 gigabit per second transmission capability, and
MultiWave Metro. Some of the new customers from whom CIENA expects to obtain
customer acceptance for product shipments and installation services during the
third and fourth quarters of fiscal 1999 have extended payment terms. This
revenue may be deferred until collection is probable. There are material
risks associated with CIENA's dependence on these customers, as well as the
successful ramping up of the manufacturing of these products. See "Risk
Factors".
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to CIENA's
manufacturing and engineering, furnishing and installation operations. Gross
profits were $78.8 million and $40.3 million for the second quarters ended April
30, 1998 and 1999, respectively. The approximate $38.5 million or 48.9% decrease
in gross profit in the second quarter 1999 compared to the second quarter 1998
was the result of decreased revenues in the second quarter 1999 compared to
second quarter 1998. Gross margin as a percentage of revenues was 55.2% and
36.1% for the second quarters 1998 and 1999, respectively. The decrease in gross
margin percentage for the second quarter 1999 compared to the second quarter
1998 was largely attributable to aggressive price competition resulting in
significantly lower selling prices for optical transport systems.
CIENA's gross margins may be affected by a number of factors, including
continued competitive market pricing, manufacturing volumes and efficiencies,
and fluctuations in component costs. During the remainder of fiscal 1999, CIENA
expects to face continued pressure on gross margins, primarily as a result of
substantial price discounting by competitors seeking to acquire market share.
See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$16.7 million and $21.2 million for the second quarters ended April 30, 1998 and
1999, respectively. During the second quarters 1998 and 1999, research and
development expenses were 11.7% and 19.0% of revenue, respectively. The
approximate $4.5 million or 26.7% increase in research and development expenses
in the second quarter 1999 compared to the second quarter 1998 was the result of
increases in staffing levels, utilization of outside consultants, facility costs
and depreciation expense. CIENA expects that its research and development
expenditures will continue to increase during the remainder of fiscal year 1999
to support the continued development of optical transport products, intelligent
optical core switching products, the exploration of new or complementary
technologies, and the pursuit of various cost reduction strategies. CIENA
expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $11.1
million and $12.4 million for the second quarters ended April 30, 1998 and 1999,
respectively. During the second quarters 1998 and 1999, selling and marketing
expenses were 7.8% and 11.1% of revenue, respectively. The approximate $1.4
million or 12.3% increase in selling and marketing expenses in the second
quarter 1999 compared to the second quarter 1998 was primarily the result of
increased staffing levels in the areas of sales, technical assistance and field
support. Increases in costs for customer demonstration systems and rent expense
also contributed the comparable quarter to quarter selling and marketing expense
increase. CIENA anticipates that its selling and marketing expenses will
increase during the remainder of fiscal year 1999 as additional personnel are
hired and offices opened, particularly in support of international market
development, to allow CIENA to pursue new market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $4.5 million and $5.5 million for the second quarters ended April 30, 1998
and 1999, respectively. During the second quarters 1998 and 1999, general and
administrative expenses were 3.2% and 4.9% of revenue, respectively. The
approximate $0.9 million or 21.0% increase in general and administrative
expenses from the second quarter 1998 compared to the second quarter 1999 was
primarily the result of increased staffing levels, outside consulting services
and facility costs. CIENA believes that its general and administrative expenses
for the remainder of fiscal 1999 will increase due to the expansion of CIENA's
administrative staff required to support its expanding operations in Cupertino,
California and London, England.
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MERGER COSTS. The merger costs for the second quarter ended April 30,
1999 of $2.3 million were costs related to the merger between CIENA and
Lightera. These costs include fees for legal, accounting, investment banking
services and other related expenses.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the second quarter 1998. These costs were for the
purchase of technology associated with the acquisition of Terabit during the
second quarter 1998.
PIRELLI LITIGATION. The Pirelli litigation expense for the second quarter
1998 was primarily the result of a $10.0 million charge for actual and estimated
legal and related costs associated with the litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $3.4 million and $3.6 million for the second quarters
ended April 30, 1998 and 1999, respectively. The approximate $0.2 million or
5.3% increase in interest income and other income (expense), net was
attributable to higher invested cash balances.
PROVISION FOR INCOME TAXES. CIENA's provision for income taxes were $15.2
million and $0.9 million for the second quarters ended April 30, 1998 and 1999,
respectively. During the second quarters 1998 and 1999, the provision for income
taxes were 38.0% and 35.0% of income before income taxes, respectively,
exclusive of the effect of one-time charges for purchased research and
development expenses. The decline in the income tax rate in second quarter 1999
compared to second quarter 1998 was the result of a lower combined effective
state income tax expenses, increased benefits derived from the Company's Foreign
Sales Corporation, and an increase in expected tax credits derived from research
and development activities.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1999
REVENUE. CIENA recognized $287.8 million and $211.9 million in revenue
for the six months ended April 30, 1998 and 1999, respectively. The approximate
$75.9 million or 26.4% decrease in revenues in the six months ended April 30,
1999 compared to the six months ended April 30, 1998 was largely the result of
decreased selling prices. CIENA recognized revenues from seventeen different
optical transport equipment customers in the six months ended April 30, 1999, as
compared to seven such customers in the same six months of the prior year.
Additionally, during the six months ended April 30, 1999, each of two optical
transport equipment customers accounted for at least 10% or more of CIENA's
revenue and combined accounted for 53.2% of CIENA's revenue. This compares to
the six months ended April 30, 1998 where two customers accounted for at least
10% or more of CIENA's revenue and combined accounted for approximately 71.5% of
CIENA's revenue. Revenues derived from foreign sales accounted for approximately
14.9% and 34.5% of CIENA's revenues during the six months ended April 30, 1998
and 1999, respectively. The increase in foreign sales reflects an increase in
sales to new customers.
Revenues during CIENA's six months ended April 30, 1998 were largely
attributable to both sales of 16 channel MultiWave Sentry and 40 channel
MultiWave Sentry 4000 systems. Revenues during CIENA's six months ended April
30, 1999 were largely attributed to sales of CIENA's MultiWave Sentry 4000
systems. Revenues derived from engineering, furnishing and installation services
increased by less than 10% from the six months ended April 30, 1998 compared to
the six months ended April 30, 1999. Sales from this activity increased as a
percentage of total revenue from approximately 8.3% to 12.2% of CIENA's revenue
from the first six months of 1998 to the first six months of 1999, respectively.
GROSS PROFIT. Gross profits were $164.9 million and $74.9 million for the
six months ended April 30, 1998 and 1999, respectively. The approximate $90.0
million or 54.6% decrease in gross profit in the first six months of 1999
compared to the first six months of 1998 was the result of decreased revenues
for those periods. Gross margin as a percentage of revenues was 57.3% and 35.3%
for the first six months of 1998 and 1999, respectively. The decrease in gross
margin percentage for the first six months of 1999 compared to the first six
months of 1998 was largely attributable to aggressive price competition
resulting in lower selling prices for MultiWave optical transport systems.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$26.9 million and $41.0 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, research and
development expenses were 9.3% and 19.3% of revenue, respectively. The
approximate $14.0 million or 52.2% increase in research and development expenses
in the first six months of 1999 compared to the first six months of 1998 was the
result of increases in staffing levels, consumption of prototype materials,
utilization of outside consultants for certain development efforts and higher
costs of test equipment used to develop and test new products and features.
CIENA expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $21.0
million and $25.3 million for the six months ended April 30, 1998 and 1999,
respectively. During the first six months of 1998 and 1999, selling and
marketing expenses were 7.3% and 11.9% of revenue, respectively. The approximate
$4.3 million or 20.3% increase in selling and marketing expenses in the first
six months of 1999 compared to the first six months of 1998 was primarily the
result of increased staffing levels in the areas of sales, technical assistance
and field support, and increases in commissions earned, trade show
participation, promotional costs, travel expenditures and rent expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $8.3 million and $10.2 million for the six months ended April 30, 1998 and
1999, respectively. During the first six months of 1998 and 1999, general and
administrative expenses were 2.9% and 4.8% of revenue, respectively. The
approximate $1.9 million or 23.1% increase in general and administrative
expenses in the first six months of 1999 compared to the first six months of
1998 was primarily due to increases in staffing levels and outside consulting
services.
MERGER COSTS. The merger costs for the six months ended April 30, 1999 of
$2.3 million were costs related to the merger between CIENA and Lightera. These
costs include fees for legal, accounting, investment banking services and other
related expenses.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the six months ended April 30, 1998. These costs
were for the purchase of technology associated with the acquisition of Terabit
during the second quarter 1998.
PIRELLI LITIGATION. The Pirelli litigation expense for the six months
ended 1998 was primarily the result of a $10.0 million charge for actual and
estimated legal and related costs associated with the litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $7.2 million and $6.9 million for the six months
ended April 30, 1998 and 1999, respectively. The approximate $0.3 million or
4.6% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION FOR INCOME TAXES. CIENA's provision for income taxes were $41.3
million and $1.0 million for the six months ended April 30, 1998 and 1999,
respectively. During the first six months of 1998 and 1999, the provision for
income taxes were 38.4% and 34.5% of income before income taxes, respectively,
exclusive of the effect of one-time charges for purchased research and
development expenses. The decline in the income tax rate in the first six months
of 1999 compared to 1998 was the result of a lower combined effective state
income tax expenses, increased benefits derived from the Company's Foreign Sales
Corporation, and an increase in expected tax credits derived from research and
development activities.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, CIENA's principal source of liquidity was its cash and
cash equivalents of $194.9 million and its marketable debt securities of $100.0
million. CIENA's marketable debt securities have maturities no longer than six
months.
Cash generated from operations was $54.0 million for the six months ended
April 30, 1999. This amount was principally attributable to the non-cash charges
of depreciation, amortization, provisions for inventory obsolescence and
warranty, and reductions in inventories, increases in accounts payable, accrued
expenses and income tax payable.
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This amount was offset by increases in accounts receivable and prepaid expenses
due to increased revenue and to the general increase in business activity.
Investment activities in the six months ended April 30, 1999 included the
net purchase of $84.0 million worth of corporate debt securities and $24.0
million invested in capital expenditures. Of the amount invested in capital
expenditures, $21.6 million was used for additions to capital equipment and
furniture and the remaining $2.4 million was invested in leasehold improvements.
CIENA expects to use an additional $50.0 million to $60.0 million of
capital during the remainder of fiscal 1999 to complete the construction of
leasehold improvements for its facilities and additional investments in capital
equipment.
CIENA believes that its existing cash balance and cash flows from future
operations will be sufficient to meet CIENA's capital requirement for at least
the next 18 to 24 months.
YEAR 2000 READINESS DISCLOSURE
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. CIENA's operations make
use of a variety of computer equipment and software. If the computer equipment
and software used in the operation of CIENA and its products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on CIENA's operations.
CIENA has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by CIENA,
CIENA currently believes and warrants to its customers that its products are
Year 2000 compliant. However, since all customer situations cannot be
anticipated, particularly those involving interaction of CIENA's products with
third party products, CIENA may experience warranty and other claims as a result
of the Year 2000 transition. The impact of customer claims, if broader than
anticipated, could have a material adverse impact on CIENA's results of
operations or financial condition.
CIENA has concluded a comprehensive inventory and evaluation of both
information technology ("IT") or software systems and non-IT systems used to run
its systems with the exception of the systems it acquired in its merger with
Lightera. Non-IT systems typically include embedded technology such as
microcontrollers. Examples of CIENA's Non-IT systems include certain equipment
used for production, research, testing and measurement processes and
calibration. CIENA has begun the process of upgrading or replacing those
identified non-compliant systems and the process is 60% complete. Completion is
expected during the third quarter of fiscal 1999. For the Year 2000
non-compliance systems identified to date, the cost of remediation is not
considered to be material to CIENA's financial condition or operating results.
However, if implementation of replacement systems is delayed, or if significant
new noncompliance issues are identified, CIENA's results of operations or
financial condition may be materially adversely affected.
CIENA has begun the process of evaluating the systems acquired in the
Lightera merger and has not to date evaluated in detail the systems in use by
Omnia. CIENA expects to complete the evaluation process concerning the Lightera
systems during the third quarter of fiscal 1999. CIENA plans to begin the
process of upgrading or replacing those identified non-compliant systems by the
end of the third fiscal quarter of 1999 with completion expected by the end of
the fourth quarter of fiscal 1999. Depending on the timing of the closing of its
merger with Omnia, CIENA expects to evaluate, upgrade and or replace as
necessary those systems identified as non-compliant systems by December 1, 1999.
CIENA changed its main financial, manufacturing and information system to
a company-wide Year 2000 compliant enterprise resource planning ("ERP")
computer-based system during the fourth quarter of fiscal 1998. CIENA estimates
that it has spent approximately $4.0 million on its ERP implementation and
during the six months ended April 30, 1999 CIENA has spent approximately
$300,000 to address identified Year 2000 issues. CIENA estimates that it will
likely spend an additional $100,000 to $200,000 to address remaining identified
Year 2000 issues. CIENA expects that
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it will use cash from operations for Year 2000 remediation and replacement
costs. Approximately less than 2% of the information technology budget is
expected to be used for remediation. No other information technology projects
have been deferred due to the Year 2000 efforts. CIENA has employed an
independent verification consultant to validate CIENA's processes in order to
assure the reliability of CIENA's risk and cost estimates.
CIENA has contacted its critical suppliers to determine that suppliers'
operations and the products and services they provide are Year 2000 compliant.
To date, CIENA's optical suppliers have represented that their products are year
2000 compliant and have represented that they are in the process of becoming
fully compliant by December 31, 1999. If these suppliers fail to adequately
address the Year 2000 issue for the products they provide to CIENA, this could
have a material adverse impact on CIENA's operations and financial results.
Contingency plans will be developed if it appears CIENA or its key suppliers
will not be Year 2000 compliant, and such noncompliance is expected to have a
material adverse impact on CIENA's operations.
The risks to CIENA resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness are generally similar to
those faced by other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that could
result in the event of one or more major failures of CIENA's information
systems, factories or facilities to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to CIENA: (1) information
systems - could include interruptions or disruptions of business and transaction
processing such as customer billing, payroll, accounts payable and other
operating and information processes, until systems can be remedied or replaced;
(2) factories and facilities - could include interruptions or disruptions of
manufacturing processes and facilities with delays in delivery of products,
until non-compliant conditions or components can be remedied or replaced; and
(3) major suppliers to CIENA - could include interruptions or disruptions of the
supply of raw materials, supplies and Year 2000 ready components which could
cause interruptions or disruptions of manufacturing and delays in delivery of
products, until the third party supplier remedied the problem or contingency
measures were implemented. Risks of major failures of CIENA's principal products
could include adverse functional impacts experienced by customers, the costs and
resources for CIENA to remedy problems or replace products where CIENA is
obligated or undertakes to take such action, and delays in delivery of new
products.
RISK FACTORS
OUR QUARTERLY AND ANNUAL RESULTS HAVE FLUCTUATED AND WE EXPECT THEM TO CONTINUE
TO FLUCTUATE
Our revenue and operating results have varied and are likely to continue
to vary significantly from quarter to quarter and from year to year as a result
of a number of factors, including the timing of order placement, size of orders,
satisfaction of contractual customer acceptance criteria, as well as order
delays or deferrals and shipment delays and deferrals. Delays or deferrals in
purchasing decisions may increase as competitors introduce new competing
products, customers change purchasing practices, and we develop and introduce
new products or move to next-generation versions of existing products.
We will base our expense levels in the future partially on our
expectations of long term future revenue. Net income for any quarterly period in
which material orders are delayed or not forthcoming could vary significantly.
Our expense levels to some extent reflect our substantial investment in
financial, engineering, manufacturing and logistics support resources to
position ourselves for successful commercial relationships with large potential
customers, even though there is no assurance as to the volume, duration or
timing of any purchases which might ensue from them. As a result of this
investment of resources, we have experienced and may continue to experience:
- - increased inventory levels and operating expenses
- - a rise in manufacturing and general overhead and expense structure
These factors are magnified over the near term by the acquisitions of
Lightera and Omnia, both of which have ongoing development and operating
expenses but are not expected to contribute materially to revenues until
calendar 2000.
Accordingly, near term results of operations may be only at break-even
levels or may involve operating losses, even if revenues sequentially increase.
In general, quarter-to-quarter sequential revenue and operating results over the
next 12 months are likely to fluctuate and therefore may not be reliable
indicators of annual performance.
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INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY COULD HURT OUR SALES AND
PROFITABILITY
A small number of very large companies have historically dominated the
global telecommunications industry. Our competitors include Lucent, Alcatel,
Nortel, NEC, Pirelli, Siemens, Ericsson, Fujitsu, and Hitachi. Many of them have
substantial economic interests in continuing sales of the legacy equipment that
has dominated the historical network architecture designed for voice traffic.
New market entrants like us, that sell systems which displace legacy equipment,
can represent a specific threat to these established companies. Our completed
acquisition of Lightera and our pending acquisition of Omnia are likely to
increase this perceived threat. As a result, we expect continued aggressive
tactics from many of our competitors. In the past, these tactics have included
the following:
- - Substantial and increasing price discounting - Customers are under
increasing competitive pressure to deliver bandwidth to their customers
at the lowest possible cost. As a result of this pressure, the price of
DWDM products is an increasingly important factor in customer decisions.
This may favor larger competitors who can spread the effect of price
discounts in their DWDM products across an array of products and
services, and a larger customer base. This also increases pressure on our
gross margins.
- - Early announcements of competing or alternative systems - When
competitors make early announcements of competing products, our customers
may delay their purchasing decisions, particularly if they believe the
claimed performance of the announced product, and the time within which
it will be available. Customer orders for our products may also diminish
if competitors are able to develop these announced products, if the
products perform as advertised, and if competitors can manufacture the
products in sufficient volume. If customers delay purchasing our products
while they evaluate a competitor's product, we could experience
substantial revenue swings and potentially material and adverse effects
on our quarterly financial condition and results of operations.
- - Packaged, "one-stop shopping deals" - Most of our competitors provide a
full range of telecommunications equipment in addition to systems similar
to the ones that we offer.
- - Customer financing assistance - This is becoming an important factor
primarily to new carriers that are trying to quickly build their
networks. Our competitors are in a better position to offer longer and
more attractive financing terms to these customers than we are because
our competitors are larger and more heavily capitalized than we are. As a
result, we may lose new business opportunities where financing is a key
factor.
As competitors are able to manufacture products that are realistic
alternatives to ours, our customers may reduce their purchases from us. Sprint
has long indicated that it intends to establish a second vendor for our
products. We don't know when Sprint will select a second vendor or what impact
the selection might have on Sprint's purchases from us. This decision may result
in Sprint reducing the amount of products it purchases from us, which could in
turn have a material adverse effect on our financial condition and results of
operations.
Competitors may also engage in intellectual property disputes with us as
part of their effort to reduce our leadership position and limit our ability to
achieve greater market share. Some of our competitors are also key suppliers of
components for our products, and could harm us through delay, interruption or
other failures to supply us with appropriate quality supplies. See "Certain of
Our Suppliers are Also Our Competitors".
We have also observed an increase in the funding of new companies
intending to develop new products for the rapidly evolving telecom industry.
These companies may provide additional competition for our existing products as
well as our future products.
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DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS COULD HURT OUR NEAR TERM PROSPECTS AND
IMPACT OUR ABILITY TO REMAIN A MARKET LEADER
Our ability to remain a market leader, and, to a lesser extent, avoid
significant fluctuation in our quarterly results, depends on our ability to:
- - anticipate changes in technology, industry standards, customer
requirements, and product offerings, and
- - develop and introduce new and enhanced products in a timely fashion
For us to develop and qualify new suppliers for our products requires
extensive planning and can result in unanticipated delays. The software
certification process for new telecommunications equipment used in RBOC
networks, which is a process traditionally conducted by Telcordia Technologies,
has in the past resulted in and may continue to result in unanticipated delays
which affect the commercial introduction of our products for the RBOC market.
Failure to deliver new and improved products would have a material adverse
effect on our competitive position and financial condition. See "Intense
Competition in the Telecommunications Industry Could Hurt Our Sales and
Profitability".
We have committed to producing one of our new products, MultiWave Metro,
within the next few months. We expect that Omnia's complementary "edge services"
delivery product will become available at about the same time. We also expect to
have 10 gigabit per second transmission, or higher single channel transmission
capacity, in our products in the second half of the year. Enhanced optical
amplifiers necessary for the long distance operation of our most recent high
capacity product, the fully-configured 96-channel system, are also expected to
be available in the second half of this year. If we are unable to meet customer
expectations with respect to these commitments, our leadership position in our
portion of the communications industry will be adversely impacted. In order to
meet these commitments, we will need to finalize component sourcing, which we
have not yet completed. Any delays in shipment could result in delays in
recognizing revenues and, ultimately, could adversely affect our customer
relationships.
OUR TRANSITION TO A MIX OF SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN DEMAND
AND IN OUR RESULTS
We are focusing our sales efforts on a greater number of smaller
opportunities now that:
- - Sprint has installed our equipment in much of its network
- - MCI WorldCom is purchasing at relatively modest levels, and
- - There is little likelihood of any additional, comparably sized customers.
Smaller opportunities in our business are still in the millions of
dollars, and typically represent new or less established carriers trying to
break into local, regional or national markets. Such carriers can be even less
predictable as to both timing and volume of purchasing than established
carriers, due to a variety of factors including their need to build their own
customer base, acquire all necessary rights of way and interconnections
necessary to sell network service, and build out new capacity sufficient to meet
anticipated needs, while working within capital budget constraints. This tends
to exacerbate our problem of limited visibility, one with which we regularly
struggle in conducting sales forecasting and materials and manufacturing
planning, and in communicating with investors. It may also increase fluctuations
in quarterly operating results and stock price volatility. See "Our Stock Price
May Exhibit Volatility". Newer carriers are also increasingly seeking financing
assistance with their purchases, as they seek to leverage their capital and
build out their networks as quickly and extensively as possible. It is possible
that CIENA's ability to recognize revenue from financed sales to such carriers
will be impacted by their financial condition and results of operations at the
time of product acceptance.
Unanticipated changes in customer purchasing plans could adversely impact
our results relative to investor expectations. Most of our anticipated revenue
over the next several quarters is comprised of less than $25 million orders from
each of several customers, some of which have been provided extended payment
terms or other financing assistance. Slips in timing of purchases, or changes in
the amount of purchases by one or more of these customers, or the customer's
slowness or inability to raise capital to properly fund their network buildouts,
could have a material adverse effect on our results of operations and relative
to investor expectations.
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OUR GROWTH DEPENDS ON DEMAND FOR BANDWIDTH WHICH WE CANNOT PREDICT OR CONTROL
We are uncertain whether we can accurately anticipate changes in
direction or magnitude of demand for bandwidth. Unanticipated reductions in
demand would adversely affect our profitability. Depending on the size of the
gap between actual demand, reduced demand, and investor expectation of demand,
we could experience changes in our stock price, irrespective of our overall
competitive position and long term prospects.
Most of our products enable high capacity transmission over long
distance, and some of our products, the MultiWave Firefly and MultiWave Metro,
enable high capacity transmission over certain short-haul portions of optical
communications networks. Our Core Director switching products are targeted to
high capacity applications. Our customers and target customers, however,
determine:
- the quantity of bandwidth needed
- the timing of its deployment, and
- the equipment configurations and network architectures they want.
Some carriers believe the deployment of large-scale bandwidth quickly is
a competitive advantage. As a result, these carriers engage in prompt and
widespread deployment of high capacity systems. Other carriers have adopted a
wait-and-see approach, which dictates a more gradual deployment of higher
capacity systems. New carriers sometimes try to combine these viewpoints. They
favor rapid and widespread installation of the foundational elements of high
capacity systems, but employ pricing and other supply agreement features which
allow them to delay broader deployment until necessary. Carriers' views in this
regard are further influenced by the pace at which the higher bandwidth
available over long distance routes is distributed or distributable over "the
last mile" of the networks, and carriers' willingness to aggressively lower
their charges for services as a means of accelerating consumption of the higher
bandwidth. These views are also subject to abrupt change as our customers
respond to their own competitive pressures as well as pressures to raise capital
and meet financial performance expectations.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. As CIENA has grown and matured, competitors' efforts to entice our
employees to leave have intensified, particularly among competitive startups and
other early stage companies seeking to replicate CIENA's experience. CIENA and
its employees are parties to agreements that limit the employee's ability to
work for a competitor following termination of employment. We expect our
competitors will respect these agreements and not interfere with them. But we
can make no assurances of that, or that we will be able to retain all of our key
contributors or attract new personnel to add to or replace them. The loss of key
personnel would likely have a material adverse effect on our business, financial
condition and results of operations.
WE DEPEND ON AN UNUSUALLY SMALL NUMBER OF SUPPLIERS FOR KEY COMPONENTS FOR OUR
PRODUCTS
We depend on a small number of suppliers for key components of our
products, as well as equipment used to manufacture our products. Our highest
capacity product, the MultiWave Sentry which is capable of 96-channel
configurations, includes several higher performance components for which
reliable, high volume suppliers are particularly limited. On occasion, we have
experienced delays in receipt of key components. Any future difficulty in
obtaining sufficient and timely delivery of them could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations. Uniphase
Corporation and JDS FITEL, Inc., both of which are significant suppliers to
CIENA, recently announced a planned merger. If this merger and related
integration activities result in delayed deliveries of key components from
either of these sources, those delays could have a material adverse effect on
CIENA's near-term results of operations.
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OUR NEW PRODUCTS COULD EXPERIENCE OCCASIONAL PROBLEMS AS THEIR TECHNOLOGY AND
MANUFACTURING METHODS MATURE
The production of new fiberoptic systems with high technology content
involves occasional problems as the technology and manufacturing methods mature.
We are aware of instances domestically and internationally, of delayed
installation and activation of some of our products due to faulty components. If
recurring or material reliability, quality or network monitoring problems should
develop, a number of material and adverse effects could result. Those effects
include:
- - manufacturing rework costs
- - high service and warranty expense
- - high levels of product returns
- - delays in collecting accounts receivable
- - reduced orders from existing customers, and
- - declining level of interest from potential customers
Although we maintain accruals for product warranties, we cannot make any
assurances that actual costs will not exceed these amounts. The pace at which
the customer requires upgrades from 16 to 40 to higher channel count products
can further complicate our assessment of appropriate product warranty reserves.
From time to time, we expect to experience interruptions or delays in the
activation of our products and the addition of channels, particularly because we
do not control all aspects of the installation and activation activities. In the
event we experience significant interruptions or delays that we can not promptly
identify, diagnose and resolve, confidence in our products could be undermined.
Undermined confidence in our products would have a material adverse effect on
our customer relationships, business, financial condition and results of
operations.
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND NEW COMPANIES COULD RESULT IN MORE
COMPETITION
New technologies will emerge, and existing technologies will rapidly
evolve, as competition in the telecommunications industry increases and the need
for higher and more cost efficient bandwidth expands. Our ability to anticipate
changes in technology, industry standards, customer requirements and product
offerings, and to develop and introduce new and enhanced products will impact
our ability to remain the leader in the deployment of open architecture DWDM
products and other high-capacity solutions. We cannot make any assurances that
we will succeed in doing so.
The accelerating pace of deregulation in the telecommunications industry
will likely intensify the competition for improved technology. Many of our
competitors have substantially greater financial, technical and marketing
resources and manufacturing capacity with which to develop or acquire new
technologies. We have also observed an increase in the funding of new companies
intending to develop new products for the rapidly evolving telecom industry. The
business and product plans for these companies are not always publicly known,
but they are recognized as having the potential for time-to-market advantages
due to the narrow and exclusive focus of their efforts. New companies may
provide additional competition as to CIENA's existing product lines as well as
potential future products. The introduction of new products embodying new
technologies or the emergence of new industry standards could render our
existing products uncompetitive from a pricing standpoint, obsolete or
unmarketable. Any of these outcomes would have a material adverse effect on our
business, financial condition and results of operations.
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OUR STOCK PRICE MAY EXHIBIT VOLATILITY
Our common stock price has experienced substantial volatility in the
past, and is likely to remain volatile in the future. Volatility can arise as a
result of the activities of short sellers and risk arbitrageurs, and may have
little relationship to our financial results or prospects. Volatility can also
result from any divergence between our actual or anticipated financial results
and published expectations of analysts, and announcements we may make. This
occurred in 1998. We attempt to address this possible divergence through our
public announcements and reports; however, the degree of specificity we can
offer in such announcements, and the likelihood that any forward-looking
statements we make will prove correct in actual results, can and will vary. This
is due primarily to:
- - the uncertainties associated with our dependence on a small number of
existing and potential customers
- - the impact of changes in the customer mix
- - the actions of competitors
- - long and unpredictable sales cycles and customer purchasing programs
- - the absence of unconditional minimum purchase commitments from any
customer
- - a lack of visibility into our customers' deployment plans over the course
of the capital equipment procurement year, and
- - the lack of reliable data on which to anticipate core demand for high
bandwidth transmission capacity
Divergence will likely occur from time to time in the future, with
resulting stock price volatility, irrespective of our overall year-to-year
performance or long-term prospects. As long as we continue to depend on
relatively few customers, and particularly when a substantial majority of their
purchases consist of newly-introduced products such as the 96-channel MultiWave
Sentry and MultiWave Metro, there is substantial risk of widely varying
quarterly results, including the so-called "missed quarter" relative to investor
expectations. See "Our Growth Depends on Demand for Bandwidth which We Cannot
Predict or Control".
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
In August 1998, shareholder class action lawsuits were filed against us
and certain of our officers and directors. We believe the lawsuits, now
consolidated into one, are without merit and are defending vigorously against
them. However, because the consolidated lawsuit is at an early stage, it is not
possible to predict the outcome at this time. If decided adversely to CIENA,
however, it could have a material adverse effect on our financial condition and
results of operations. See Part II, "Legal Proceedings" for a description of the
lawsuit and current state of the proceedings.
CERTAIN OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Certain of our component suppliers are both primary sources for such
components and major competitors in the market for system equipment. For
example, we buy certain key components from:
- - Lucent
- - Alcatel
- - Nortel
- - NEC, and
- - Siemens.
Each of these companies offers optical communications systems and
equipment which are competitive with our products. Also, Lucent is the sole
source of two components and is one of two suppliers of two others. Alcatel and
Nortel are suppliers of lasers used in our products and NEC is a supplier of an
important piece of testing equipment. A decline in reliability or other adverse
change in these supply relationships could materially and adversely affect our
business, financial condition and results of operations.
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LIGHTERA AND OMNIA ACQUISITION RISK FACTORS
WE MAY NOT BE ABLE TO MANUFACTURE LIGHTERA AND OMNIA PRODUCTS SUCCESSFULLY
Both Lightera and Omnia's products are in the laboratory testing phase
but the products have not matured into commercially manufacturable units
suitable for field deployment. We expect that field deployable units of Omnia's
products will be available in the second half of calendar 1999, and Lightera's
products by the end of the first quarter of calendar 2000. The maturing process
from laboratory prototype to manufacturable units involves a number of steps,
including:
- - the qualification and multiple sourcing of critical components, including
application-specific integrated circuits ("ASIC's") which are not yet
finalized
- - validation of manufacturing methods
- - extensive quality assurance and reliability testing, and staffing of
testing infrastructure
- - software validation, and
- - establishment of systems integration and burn in requirements
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's, in particular, are key to the timely introduction of
Lightera's and Omnia's products, and schedule delays are common in the final
testing and manufacture of such components. In addition, unexpected intellectual
property disputes, failure of critical design elements, and a host of other
execution risks may delay or even prevent the introduction of these products.
WE MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES OF LIGHTERA AND OMNIA
Because of the high valuation we placed on Lightera and Omnia, their key
founders and employees have received or will receive a substantial number of
CIENA shares and can sell these shares at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before the products of either company have fully matured into commercially
deliverable products commanding reasonable market share. Additionally, startup
and other companies will seek out these individuals due to the financial result
they have achieved for their investors. Under the circumstances, we face a
difficult and significant task of retaining and motivating the key personnel of
both companies to stay committed to us. We do not have employment contracts with
these personnel. We may not be successful in retaining them.
THE SUCCESS OF OUR ACQUISITIONS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE
LIGHTERA, OMNIA, AND CIENA
Lightera is based in Cupertino, California and has approximately 69
employees; Omnia is based in Marlborough, Massachusetts and has approximately 70
employees; and CIENA is based in Linthicum, Maryland and has approximately 1,000
employees in Maryland (1,557 employees overall). We face the significant task of
efficiently integrating the people at these sites operationally and culturally,
while preserving the focus and momentum of their individual efforts. Our ability
to do so will be a key determiner of the success or failure of the acquisitions.
We have limited experience with this type of integration, and can make no
assurances that we will succeed in so doing.
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WE MAY FACE GREATER COMPETITION AS A RESULT OF OUR ACQUISITIONS OF LIGHTERA AND
OMNIA
We expect the competitive response to our acquisitions to be intense and
wide-ranging, and more intensive than the competition we faced when we were more
narrowly focused on the DWDM transport sector of the market. Competitive
responses may include, among other things:
- - early announcement of new or different competing products
- - substantial price discounting
- - customer financing assistance
- - intellectual property disputes, and
- - packaged, "one-stop-shopping" deals combining next generation equipment
with legacy equipment and supplies
We can make no assurances that we will succeed against the kind of
tactics large competitors may employ.
WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE
We have historically experienced substantial stock price volatility. The
range of stock prices has not tracked with valuations based on traditional
price/earnings multiples, and takeover speculation appears to have been an
influence on the stock price at various times. However, both Lightera and Omnia
are still completing their respective development stages, and we do not expect
either of them to generate any revenue or earnings for at least several months.
As a result, we expect to report approximately breakeven results of operations,
and may report operating losses, for the balance of the fiscal year. Under these
circumstances, we can expect significant volatility over the next several
quarters as investors make judgments as to our relative progress in:
- - bringing the Lightera and Omnia products to market
- - integrating the two companies
- - managing retention issues, and
- - generally executing on the strategic vision.
Additionally, the shares issued to Lightera shareholders are likely to
become eligible for sale without restriction in June 1999 and the vast majority
of shares issued to Omnia shareholders are likely to become eligible for sale
without restriction in late August 1999. Together, these shares will account for
approximately 25% of the outstanding shares of CIENA. If a large portion of
these shares are sold immediately or soon after they are eligible for sale, the
stock price may experience further volatility and may decline.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency discount notes with an average maturity of less than six months. These
held-to-maturity securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at April 30, 1999,
the fair value of the portfolio would decline by an immaterial amount. The
Company has the ability to hold its fixed income investments until maturity, and
therefore the Company would not expect its operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
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FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union has not had a material impact on the CIENA's foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of April 30, 1999 the assets and
liabilities of the Company related to nondollar-denominated currencies was not
material.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
A class action complaint was filed on August 26, 1998 in U.S. District
Court for the District of Maryland entitled Witkin et.al v. CIENA Corporation
et. al (Case No. Y-98-2946). Several other complaints, substantially similar in
content were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. The complaint alleges
that CIENA and certain officers and directors violated certain provisions of the
federal securities laws, including Section 10(b) and Rule 10b-5 under the
Securities Exchange Act of 1934, by making false statements, failing to disclose
material information and taking other actions intending to artificially inflate
and maintain the market price of CIENA's common stock during the Class Period of
May 21, 1998 to September 14, 1998, inclusive. The plaintiffs seek designation
of the suit as a class action on behalf of all persons who purchased shares of
CIENA's common stock during the Class Period and the awarding of compensatory
damages in an amount to be determined at trial and attorneys' fees. The
proceedings remain at an early stage. No discovery has been taken, and CIENA
moved on April 15, 1999 to dismiss the case in its entirety. No prediction can
be made as to the outcome of this motion or the case as a whole. CIENA believes
the suit is without merit and intends to defend itself vigorously. CIENA filed a
motion to dismiss the consolidated complaint on April 16, 1999. A hearing on the
motion is currently scheduled for July 16, 1999. There is no assurance the
motion will be successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended April 30, 1999, CIENA issued an aggregate of
17,546,016 shares of Common Stock to the shareholders of Lightera in exchange
for all of the outstanding shares of Lightera stock. These shares were not
registered in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Registration D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Registrant was held on March
10, 1999. At the annual meeting, the stockholders voted on the following
matters:
Votes Votes Votes
For Against Abstained Non-Votes
----------- ----------- ------------- -------------
Election of two Class 2 Directors
Harvey B. Cash 83,389,344 656,854
Michael J. Zak 83,345,376 700,822
To ratify the selection of
PricewaterhouseCoopers LLP as
independent public accounts for
the corporation 83,707,936 228,830 113,432 -
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description
10.19 Lightera 1998 stock option plan and form of stock
option agreement
27.0 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K : Form 8-K filed April 1, 1999, April 5, 1999
and Form 8-K/A filed April 5, 1999
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
Date: May 21, 1998 By: /s/ Patrick H. Nettles
----------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: May 21, 1998 By: /s/ Joseph R. Chinnici
------------ ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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