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 JULY 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.........................
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 AUGUST 19, 1999
---------------------------- ------------------------------
Common stock. $.01 par value 137,363,709
Page 1 of 24 pages
Exhibit Index on page 23
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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 nine months ended July 31, 1998
and July 31, 1999 3
Consolidated Balance Sheets
October 31, 1998 and July 31, 1999 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 1998 and
July 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
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ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
July 31, July 31, July 31, July 31,
1998 1999 1998 1999
--------- --------- --------- ---------
Revenue $ 129,116 $ 128,826 $ 416,926 $ 340,733
Cost of goods sold 70,431 79,361 193,326 216,377
--------- --------- --------- ---------
Gross profit 58,685 49,465 223,600 124,356
--------- --------- --------- ---------
Operating expenses:
Research and development 21,965 28,402 51,196 74,714
Selling and marketing 12,937 16,839 34,019 43,539
General and administrative 4,186 5,433 12,927 16,318
Purchased research and development -- -- 9,503 --
Pirelli litigation 20,579 -- 30,579 --
Merger related costs 2,017 10,768 2,017 13,021
--------- --------- --------- ---------
Total operating expenses 61,684 61,442 140,241 147,592
--------- --------- --------- ---------
Income (loss) from operations (2,999) (11,977) 83,359 (23,236)
Interest and other income, net 2,840 3,692 10,058 10,786
Interest expense (71) (200) (242) (410)
--------- --------- --------- ---------
Income (loss) before income taxes (230) (8,485) 93,175 (12,860)
Provision (benefit) for income taxes 20 (2,928) 40,337 (4,437)
--------- --------- --------- ---------
Net income (loss) $ (250) $ (5,557) $ 52,838 $ (8,423)
========= ========= ========= =========
Basic net income (loss) per common share $ (0.00) $ (0.04) $ 0.47 $ (0.06)
========= ========= ========= =========
Diluted net income (loss) per common share
and dilutive potential common share $ (0.00) $ (0.04) $ 0.43 $ (0.06)
========= ========= ========= =========
Weighted average basic common shares outstanding 121,820 133,016 113,602 132,712
========= ========= ========= =========
Weighted average basic common and dilutive
potential common shares outstanding 121,820 133,016 124,130 132,712
========= ========= ========= =========
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, July 31,
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 250,714 $ 142,599
Marketable debt securities 15,993 155,657
Accounts receivable, net 85,472 103,156
Inventories, net 70,908 64,638
Deferred income taxes 16,421 19,324
Prepaid income taxes 11,688 --
Prepaid expenses and other 4,728 11,804
--------- ---------
Total current assets 455,924 497,178
Equipment, furniture and fixtures, net 125,767 128,333
Goodwill and other intangible assets, net 16,270 13,544
Other assets 4,848 5,842
--------- ---------
Total assets $ 602,809 $ 644,897
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,893 $ 30,467
Accrued liabilities 34,437 48,786
Income taxes payable -- 4,661
Deferred revenue 1,084 3,697
Other current obligations 1,205 1,164
--------- ---------
Total current liabilities 64,619 88,775
Deferred income taxes 34,125 36,766
Other long-term obligations 3,029 3,962
--------- ---------
Total liabilities 101,773 129,503
--------- ---------
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 137,263,120 shares issued and outstanding 1,346 1,373
Additional paid-in capital 328,821 351,029
Notes receivable from stockholders (586) (280)
Cumulative translation adjustment (107) 133
Retained earnings 171,562 163,139
--------- ---------
Total stockholders' equity 501,036 515,394
--------- ---------
Total liabilities and stockholders' equity $ 602,809 $ 644,897
========= =========
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)
Nine Months Ended July 31,
-------------------------------
1998 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 52,838 $ (8,423)
Adjustments to reconcile net income to net cash
from operating activities:
Non-cash charges from equity transactions 31 8,364
Amortization of premiums on marketable debt securities 362 100
Effect of translation adjustments (60) 240
Purchased research and development 9,503 --
Depreciation and amortization 23,106 37,192
Provision for doubtful accounts 194 --
Provision for inventory excess and obsolescence 4,116 4,022
Provision for warranty and other contractual obligations 9,583 6,619
Changes in assets and liabilities:
Increase in accounts receivable (36,103) (17,684)
Increase in prepaid expenses and other (7,753) (7,176)
(Increase)/decrease in prepaid income tax (21,015) 11,688
(Increase)/decrease in inventories (39,356) 2,248
Decrease/(increase) in deferred income tax asset 1,511 (2,903)
Increase in other assets (8,520) (994)
Increase in accounts payable and accruals 8,667 10,304
(Decrease)/increase in income taxes payable (1,093) 4,661
Increase in deferred income tax liability 3,179 2,641
(Decrease)/increase in deferred revenue and other
obligations (2,399) 2,613
--------- ---------
Net cash (used) provided by operating activities (3,209) 53,512
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (79,105) (37,032)
Purchases of marketable debt securities (90,008) (235,770)
Maturities of marketable debt securities 61,876 96,106
Net cash paid for business combinations (2,103) --
--------- ---------
Net cash used in investing activities (109,340) (176,696)
--------- ---------
Cash flows from financing activities:
Net proceeds from other obligations 235 892
Net proceeds from the issuance of common stock and warrants 34,035 7,369
Tax benefit related to exercise of stock warrants 25,481 6,405
(Borrowings)/repayment of notes receivable from stockholders (163) 403
--------- ---------
Net cash provided by financing activities 59,588 15,069
--------- ---------
Net decrease in cash and cash equivalents (52,961) (108,115)
Cash and cash equivalents at beginning of period 273,286 250,714
--------- ---------
Cash and cash equivalents at end of period $ 220,325 $ 142,599
========= =========
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 July 21, 1999.
Principles of Consolidation
The Company completed a merger with Omnia Communications, Inc.
("Omnia") a Delaware company headquartered in Marlborough, Massachusetts on July
1, 1999. 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 March 31, 1999 the Company completed a merger with Lightera
Networks, Inc. ("Lightera") a Delaware company headquartered in Cupertino,
California. 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.
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 31, 1998; November 1,
1997; and November 2, 1996). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 1998 and
1997 comprised 52 weeks and fiscal 1996 comprised 53 weeks. Omnia's fiscal year
ends 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
----- -----
Quarter ended July 31, 1998 July 1, 1998 to September 30, 1998
Nine months ended July 31, 1998 January 1, 1998 to September 30, 1998
The nine months ended July 31, 1999 contain two months of Omnia's financial
results, which are also recorded in the quarter and fiscal year ending October
31, 1998. The net loss for these two months, November and December 1998 was
$1,621,000.
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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.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, July 31,
1998 1999
-------- --------
Raw materials $ 43,268 $ 36,184
Work-in-process 8,592 17,913
Finished goods 30,202 21,878
-------- --------
82,062 75,975
Less: reserve for excess and obsolescence (11,154) (11,337)
-------- --------
$ 70,908 $ 64,638
======== ========
(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 July 31,
-----------------------------
1998 1999
--------- ---------
Net loss ...................... $ (250) $ (5,557)
========= =========
Weighted average shares-basic . 121,820 133,016
========= =========
Effect of dilutive securities:
Restricted stock ......... -- --
--------- ---------
Employee stock options ... -- --
--------- ---------
Weighted average shares-diluted 121,820 133,016
========= =========
Basic EPS ..................... $ (0.00) $ (0.04)
========= =========
Diluted EPS ................... $ (0.00) $ (0.04)
========= =========
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Nine months ended July 31,
------------------------------
1998 1999
--------- ---------
Net Income (loss) ........................... $ 52,838 $ (8,423)
========= =========
Weighted average shares-basic ............... 113,602 132,712
--------- ---------
Effect of dilutive securities:
Restricted stock ....................... 3,953 --
--------- ---------
Employee stock options ................. 6,575 --
--------- ---------
Weighted average shares-diluted......... 124,130 132,712
========= =========
Basic EPS ................................... $ 0.47 $ (0.06)
========= =========
Diluted EPS ................................. $ 0.43 $ (0.06)
========= =========
Approximately 10,963,000 and 12,202,000 options and restricted stock
were outstanding during the quarters ended July 31, 1998 and July 31, 1999,
respectively, but were not included in the computation of the diluted EPS as the
effect would be anti-dilutive.
Stock options to purchase 268,000 shares of common stock were not
included in the computation of diluted EPS for the nine months ended July 31,
1998 because the options exercise price was greater than the average market
price of common shares during the period. Approximately 11,734,000 options and
restricted stock were outstanding during nine months ended July 31, 1999, but
were not included in the computation of the diluted EPS as the effect would be
anti-dilutive.
(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 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 third quarter of fiscal 1998 and 1999,
total comprehensive income (loss), which includes net income (loss) and changes
in foreign currency translation adjustments, amounted to ($286,000) and
($5,445,000) of comprehensive loss, respectively. During the nine months ended
July 31, 1998 and 1999, total comprehensive income (loss), which includes net
income (loss) and changes in foreign currency translation adjustments, amounted
to $52,778,000 and ($8,183,000) of comprehensive income (loss), respectively.
(5) 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
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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.
Year Ended October 31, Nine Months Ended July 31,
------------------------------------- -------------------------------------
1997 1998 1998 1999
------------------ ----------------- ------------------ -----------------
(in thousands) (in thousands)
Revenues:
CIENA $ 413,215 $ 508,087 $ 416,960 $ 340,773
Omnia - - - -
Intercompany elimination's - - - -
----------------- ------------------ ------------------ ------------------
Consolidated revenues $ 413,215 $ 508,087 $ 416,926 $ 340,733
================= ================== ================== ==================
Net Income (loss):
CIENA $ 115,967 $ 51,113 $ 56,133 $ (1,020)
Omnia (399) (5,413) (3,295) (7,403)
----------------- ------------------ ------------------ ------------------
Consolidated net income $ 115,568 $ 45,700 $ 52,838 $ (8,423)
================= ================== ================== ==================
Lightera
On March 31, 1999 the Company completed a merger with Lightera in a
transaction valued at approximately $459 million. Lightera is a developer of
carrier class optical core switches for fiberoptic communications networks.
Under the terms of the merger agreement, the Company acquired all of the
outstanding shares and assumed outstanding stock options and warrants of
Lightera in exchange for approximately 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 years ended
1997 and 1996 as Lightera did not commence operations until April 1998.
Year Ended Six Months Ended
October 31, April 30, 1999
1998
----------------- ------------------
(in thousands)
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
================= ==================
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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. In conjunction with the
agreements to acquire Lightera Networks, Inc. ("Lightera"), a Delaware company
headquartered in Cupertino, California, and Omnia Communications, Inc.
("Omnia"), a Delaware company headquartered in Marlborough, Massachusetts, 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. 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 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 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 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. Commercial availability of the MultiWave EdgeDirector 500 is expected
in the third quarter of calendar 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 96-channel configuration at 2.5 gigabits per second,
became available for commercial shipments. CIENA expects to have 10 gigabit per
second transmission capability for its MultiWave CoreStream system in the second
half of the calendar year.
CIENA intends to continue the development of the MultiWave
CoreDirector(TM) product developed by Lightera. MultiWave CoreDirector is
believed to be the world's first intelligent optical core switch and would
reduce the cost of
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deploying and operating telecommunication service provider networks. The
MultiWave CoreDirector allows carriers to deliver a 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 in the end of the first calendar quarter 2000.
CIENA has increased the number of its optical transport equipment
customers from a total of ten during the nine months ended July 31, 1998 to
twenty for the nine months ended July 31, 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. 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. As a
result of these cost reduction and production efficiency efforts to date CIENA's
gross margin as a percentage of revenue has increased from 36.1% in the second
quarter of fiscal 1999 to 38.4% in the third quarter of fiscal 1999.
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
three months of fiscal 1999. 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 July 31, 1999 CIENA employed 1,821 people, which includes the 145
people added as a result of CIENA's acquisitions of Lightera and Omnia. This was
an increase of 439 people over the 1,382 CIENA employees on October 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1999
REVENUE. CIENA recognized $129.1 million and $128.8 million in revenue
for the third quarters ended July 31, 1998 and 1999, respectively. The
approximate $0.3 million or 0.2% decrease in revenues in the third fiscal
quarter 1999 compared to the third fiscal quarter 1998 was largely the result of
reduced selling prices. CIENA recorded revenues recognized from eighteen optical
transport equipment customers in the quarter ended July 31, 1999, as compared to
ten such customers in the same quarter of the prior year. Additionally, during
the quarter ended July 31, 1999, each of three optical transport equipment
customers accounted for at least 10% or more of CIENA's quarterly revenue and
combined accounted for 58.1% of CIENA's quarterly revenue. This compares to the
quarter ended July 31, 1998 where each of two customers accounted for at least
10% or more of CIENA's quarterly revenue and combined accounted for
approximately 72.2% of CIENA's quarterly revenue. Revenues derived from foreign
sales accounted for approximately 25.3% and 40.3% of CIENA's revenues during the
third quarter ended July 31, 1998 and 1999, respectively. The relative increase
in foreign sales reflects an increase in sales to several new customers.
Revenues in CIENA's third fiscal quarter 1998 and 1999 were both
largely attributed to sales of CIENA's MultiWave Sentry(TM) 4000 systems. Also
contributing to CIENA's third fiscal quarter 1999 revenues were sales of CIENA's
96 channel Multiwave CoreStream systems. The Multiwave CoreStream did not begin
commercial shipments until the third fiscal quarter of 1999. Revenues derived
from engineering, furnishing and installation services as a percentage of total
revenue were approximately 8.5% and 12.4% for the third fiscal quarter 1998 and
1999, respectively.
CIENA expects revenue in the near term to be largely dependent upon
sales to existing customers and to be derived primarily from sales of MultiWave
Sentry 4000, MultiWave CoreStream, products using 10 gigabit per second
transmission capability, and MultiWave Metro. 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 $58.7 million and $49.5 million for
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the third quarters ended July 31, 1998 and 1999, respectively. The approximate
$9.2 million or 15.7% decrease in gross profit in the third fiscal quarter 1999
compared to the third fiscal quarter 1998 was the result of decreased selling
prices in the third quarter 1999 compared to third quarter 1998. Gross margin as
a percentage of revenues was 45.5% and 38.4% for the third fiscal quarters 1998
and 1999, respectively. The decrease in gross margin percentage for the third
fiscal quarter 1999 compared to the third 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.
CIENA will continue to concentrate on efforts to reduce product costs and
maximize production efficiencies and, if successful in these efforts, may be
able to improve gross margins in the future. See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $22.0 million and $28.4 million for the third quarters ended July 31, 1998
and 1999, respectively. During the third fiscal quarters 1998 and 1999, research
and development expenses were 17.0% and 22.0% of revenue, respectively. The
approximate $6.4 million or 29.3% increase in research and development expenses
in the third fiscal quarter 1999 compared to the third quarter 1998 was the
result of increases in staffing levels, prototype materials, 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
$12.9 million and $16.8 million for the third quarters ended July 31, 1998 and
1999, respectively. During the third fiscal quarters 1998 and 1999, selling and
marketing expenses were 10.0% and 13.1% of revenue, respectively. The
approximate $3.9 million or 30.2% increase in selling and marketing expenses in
the third fiscal quarter 1999 compared to the third fiscal quarter 1998 was
primarily the result of increased staffing levels in the areas of sales,
technical assistance and field support. Increases in costs for tradeshows,
advertising and depreciation 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 are 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 $4.2 million and $5.4 million for the third quarters ended July
31, 1998 and 1999, respectively. During the third fiscal quarters 1998 and 1999,
general and administrative expenses were 3.2% and 4.2% of revenue, respectively.
The approximate $1.2 million or 29.8% increase in general and administrative
expenses from the third quarter 1998 compared to the third quarter 1999 was
primarily the result of increased staffing levels, depreciation 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, Marlborough, Massachusetts and London, England.
PIRELLI LITIGATION. The Pirelli litigation charge of $20.6 million in
the third fiscal quarter 1998 was attributable to a $30.0 million payment made
to Pirelli during third fiscal quarter 1998 and to additional other legal and
related costs incurred in connection with the settlement of this litigation.
These charges were partially offset by accrued legal and related costs
associated with this litigation.
MERGER RELATED COSTS. The merger costs for the third fiscal quarter
1998 of $2.0 million were costs related to the contemplated merger between CIENA
and Tellabs. The merger costs for the third quarter 1999 of $10.8 million were
costs related to CIENA's acquisition of Omnia. 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 $2.7 million for fees, legal and
accounting services and other integration costs. The warrants were issued to one
of Omnia's customers and became exercisable upon the consummation of the merger.
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INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $2.8 million and $3.7 million for the third quarters
ended July 31, 1998 and 1999, respectively. The approximate $0.9 million or
30.0% increase in interest income and other income (expense), net was
attributable to higher invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. Tax expense for the third fiscal
quarter 1998 was primarily attributable to State income taxes. CIENA's benefit
for income taxes of $2.9 million for third fiscal quarter 1999 was the result of
recognizing the benefit of net operating losses. During the third fiscal quarter
1999, the benefit for income taxes was 34.5% of losses before income taxes.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
REVENUE. CIENA recognized $416.9 million and $340.7 million in revenue
for the nine months ended July 31, 1998 and 1999, respectively. The approximate
$76.2 million or 18.3% decrease in revenues in the nine months ended July 31,
1999 compared to the nine months ended July 31, 1998 was largely the result of
decreased selling prices. CIENA recognized revenues from twenty different
optical transport equipment customers in the nine months ended July 31, 1999, as
compared to ten such customers in the same nine months of the prior year.
Additionally, during the nine months ended July 31, 1999, each of three 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 nine months ended July 31, 1998 where one customer accounted for at least
10% or more of CIENA's revenue and in total accounted for approximately 59.6% of
CIENA's revenue. Revenues derived from foreign sales accounted for approximately
18.1% and 36.7% of CIENA's revenues during the nine months ended July 31, 1998
and 1999, respectively. The increase in foreign sales reflects an increase in
sales to new customers.
Revenues during CIENA's nine months ended July 31, 1998 were largely
attributable to both sales of MultiWave Sentry and MultiWave Sentry 4000
systems. Revenues during CIENA's nine months ended July 31, 1999 were largely
attributed to sales of CIENA's MultiWave Sentry 4000 systems. Revenues derived
from engineering, furnishing and installation services as a percentage of total
revenue were approximately 8.8% and 12.3% for the nine months ended July 31,
1998 and 1999, respectively.
GROSS PROFIT. Gross profits were $223.6 million and $124.4 million for
the nine months ended July 31, 1998 and 1999, respectively. The approximate
$99.2 million or 44.4% decrease in gross profit in the first nine months of 1999
compared to the first nine months of 1998 was the result of decreased revenues
for those periods. Gross margin as a percentage of revenues was 53.6% and 36.5%
for the first nine months of fiscal 1998 and 1999, respectively. The decrease in
gross margin percentage for the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998 was largely attributable to aggressive price
competition resulting in lower selling prices for MultiWave optical transport
systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $51.2 million and $74.7 million for the nine months ended July 31, 1998 and
1999, respectively. During the first nine months of fiscal 1998 and 1999,
research and development expenses were 12.3% and 21.9% of revenue, respectively.
The approximate $23.5 million or 45.9% increase in research and development
expenses in the first nine months of fiscal 1999 compared to the first nine
months of fiscal 1998 was the result of increases in staffing levels,
depreciation, 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
$34.0 million and $43.5 million for the nine months ended July 31, 1998 and
1999, respectively. During the first nine months of 1998 and 1999, selling and
marketing expenses were 8.2% and 12.8% of revenue, respectively. The approximate
$9.5 million or 28.0% increase in selling and marketing expenses in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 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 $12.9 million and $16.3 million for the nine months ended July 31,
1998 and 1999, respectively. During the first nine months of fiscal 1998 and
1999, general and administrative expenses were 3.1% and 4.8% of revenue,
respectively. The approximate $3.4 million or 26.2% increase in general and
administrative expenses in the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998 was primarily due to increases in staffing
levels and outside consulting services.
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PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the nine months ended July 31, 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 costs of $30.6 million for
the nine months ended July 31, 1998 was attributable to a $30.0 million payment
to Pirelli during third fiscal quarter of 1998 and to additional other legal and
related costs incurred in connection with the settlement of this litigation.
MERGER COSTS. The merger costs for the first nine months ended July 31,
1998 of $2.0 million were costs related to the contemplated merger between CIENA
and Tellabs. The merger costs for the first nine months ended July 31, 1999 of
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 integration costs. The
warrants were issued to one of Omnia's customers and became exercisable upon the
consummation of the merger between CIENA and Omnia.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $10.1 million and $10.8 million for the nine months
ended July 31, 1998 and 1999, respectively. The approximate $0.7 million or 7.2%
increase in interest income and other income (expense), net was attributable to
higher invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision for income
taxes was $40.3 million for the nine months ended July 31, 1998. During the
first nine months of fiscal 1998 the provision for income taxes was 39.3% of
income before income taxes, respectively, exclusive of the effect of one-time
charges for purchased research and development expenses. CIENA's benefit for
income taxes of $4.4 million for the first nine months of 1999 was the result of
recognizing the benefit of net operating losses. During the first nine months of
fiscal 1999, the benefit for income taxes was 34.5% of losses before income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, CIENA's principal source of liquidity was its cash
and cash equivalents of $142.6 million and its marketable debt securities of
$155.7 million. CIENA's marketable debt securities have maturities no longer
than six months.
Cash generated from operations was $53.5 million for the nine months
ended July 31, 1999. This amount was principally attributable to the non-cash
charges of certain equity transactions, depreciation, amortization, provisions
for inventory obsolescence and warranty, and reductions in inventories,
increases in accounts payable, accrued expenses and income tax payable. 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 nine months ended July 31, 1999 included
the net purchase of $139.7 million worth of corporate debt securities and $37.0
million invested in capital expenditures. Of the amount invested in capital
expenditures, $32.3 million was used for additions to capital equipment and
furniture and the remaining $4.7 million was invested in leasehold improvements.
CIENA expects to use an additional $35.0 million to $45.0 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 currently anticipated
capital requirements 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.
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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
Omnia. 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 90% complete. Completion is
expected during the fourth 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
Omnia acquisition. CIENA expects to complete the evaluation process concerning
the Omnia systems during the fourth quarter of fiscal 1999. CIENA expects to
evaluate, upgrade and or replace as necessary those systems identified as
non-compliant systems in Omnia 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 $4.5 million on its ERP implementation. During
the nine months ended July 31, 1999, CIENA has spent approximately $400,000 to
address identified Year 2000 issues. CIENA estimates that it will likely spend
an additional $100,000 to address remaining identified Year 2000 issues. CIENA
expects that 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 estimates. His findings identify CIENA's
processes as sufficient and our risk of negative impact as low.
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.
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 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
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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
- the introduction of new products
- satisfaction of contractual customer acceptance criteria
- manufacturing and shipment delays and deferrals
We budget expense levels partially 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 (formerly Lightera) and
Access Switching Division (formerly Omnia) have ongoing development and
operating expenses but are not expected to contribute materially to revenues
until calendar 2000.
DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT OUR NEAR TERM PROSPECTS
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 such as the Multiwave CoreDirector and the Multiwave CoreStream
products using 10 gigabit per second transmission capability could result in
unanticipated delays in development and manufacturing. Such delays could
adversely affect our competitive and financial condition.
The 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 may affect the deployment of our products for the
RBOC market.
In order to meet our delivery commitments for our newest products, we
will need to finalize component sourcing, which we have not yet completed. Any
delays in component availability could result in delays in deployment of these
products and in recognizing revenues. Such delays could adversely affect our
customer relationships.
WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
A small number of very large companies have historically dominated our
industry including Lucent, Alcatel, Nortel, NEC, Pirelli, Siemens, Ericsson,
Fujitsu, and Hitachi. These companies have substantial financial, marketing and
intellectual property resources. 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
expansion of our product offerings as a result of our acquisitions of Lightera
and Omnia likely will increase this perceived threat. We expect continued
aggressive tactics from many of these competitors such as:
- 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.
Sprint, a significant customer of ours, has long indicated that it
intends to establish a second vendor for DWDM products. In addition, other
customers that in the past have purchased DWDM equipment from CIENA, may select
a second vendor for DWDM 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. In particular, a number of companies, including
several start-ups, have announced products that compete with our MultiWave
CoreStream, MultiWave CoreDirector and EdgeDirector products.
SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN OUR RESULTS
We have recently shifted our sales focus to smaller emerging carriers.
Timing and volume of purchasing from these smaller 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
smaller 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 at the time of
product acceptance. Further, we will need to evaluate the collectibility of
receivables from these carriers if their financial condition deteriorates in the
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future. Additionally, purchasing delays or changes in the amount of purchases by
any of these customers, could have a material adverse effect on us.
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 key components of our
products, as well as equipment used to manufacture our products. Our highest
capacity product currently being shipped, the MultiWave CoreStream which is
capable of 96-channel configurations at 2.5 gigabits per second 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 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. 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
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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. However, 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 MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF LIGHTERA AND OMNIA PRODUCTS
Lightera's product, the MultiWave CoreDirector is in the laboratory-
testing 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. We expect that Omnia's product, the MultiWave EdgeDirector 500,
will be commercially available in the third calendar quarter of 1999. The
maturing process from laboratory prototype 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, in particular, are key to the timely introduction of
Lightera'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. Commercial
acceptance of the products is also 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.
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.
OUR PROSPECTS DEPEND ON DEMAND FOR BANDWIDTH 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.
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INVESTMENT IN NEW COMPANIES AND CHANGES IN TECHNOLOGY COULD RESULT IN MORE
COMPETITION
We may not be able to successfully anticipate changes in technology,
industry standards, customer requirements and product offerings, yet our ability
to develop and introduce new and enhanced products will impact our position as a
leader in the deployment of high-capacity solutions. 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. There has been an increase in
the funding of new companies intending to develop new products for the rapidly
evolving telecom industry. These companies have time-to-market advantages due to
the narrow and exclusive focus of their efforts. New companies may provide
additional competition for our 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.
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:
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- 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 MultiWave CoreStream,
Multiwave Edge Director 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 complaint, were dismissed by the United States District
Court on July 19, 1999 with leave to amend until August 20, 1999. We believe the
allegations in the complaint are without merit and intend to defend vigorously
against them should an amended complaint be filed. However, a consolidated
amended complaint has not yet been filed, and it is not possible to predict the
outcome at this time. If an amended complaint is filed and it 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 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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WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE
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. 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 held by former Lightera and Omnia
shareholders, together account for approximately 25% of the outstanding shares
of CIENA. If a large portion of these shares are sold within short periods of
time, 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 July 31,
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.
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 CIENA's foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of July 31, 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 alleged
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
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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 sought 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 have been
determined at trial together with attorneys' fees. On February 16, 1999, an
amended complaint was filed. On July 19, 1999 the United States District Court
dismissed the suit before any discovery had been taken. Plaintiffs were given
leave to amend until August 20, 1999. CIENA believes the suit is without merit
and if the plaintiffs file a second amended complaint, CIENA intends to continue
to defend the case vigorously.
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ITEM 6. EXHIBITS AND REPORTS on Form 8-K
(a) Exhibit Description
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10.20 Omnia Communications, Inc. 1997 Stock Plan and Form
of Agreements
27.10 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K : Form 8-K filed July 21, 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: August 19, 1999 By: /s/ Patrick H. Nettles
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Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: August 19, 1999 By: /s/ Joseph R. Chinnici
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Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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