1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 6, 1997
(Amending Report dated February 19, 1997)
CIENA CORPORATION
-------------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 0-21969 23-2725311
- - --------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
920 Elkridge Landing Road, Linthicum, Maryland
-----------------------------------------------------
(Address of principal executive offices)
21090
(Zip Code)
(410) 865-8500
Registrant's telephone number, including area code:
8530 Corridor Road, Savage, Maryland
------------------------------------
(Former name or former address, if changed since last report)
================================================================================
Exhibit Index is on page 5 .
---
2
CIENA CORPORATION
ITEM 5. OTHER EVENTS.
On August 6, 1997, the Company announced certain financial results for
the third fiscal quarter ended August 2, 1997. The text of this announcement
is included as an exhibit to this Form 8-K/A.
In addition, in connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, and because of the large
volume of shares first becoming eligible for secondary trading on August 7,
1997, CIENA Corporation ("CIENA") is hereby amending and restating in their
entirety the previously filed cautionary statements identifying important
factors that could cause CIENA's actual results to differ materially from those
projected in forward-looking statements made by or on behalf of CIENA.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(99) Additional Exhibits
99.1 Press Release dated August 6, 1997
99.2 Cautionary Statements for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.
- 2 -
3
EXHIBITS:
Exhibit
Number Exhibit Description
- - -------- -------------------
99.1 Press Release dated August 6, 1997.
99.2 Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
- 3 -
4
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 hereunto duly authorized.
CIENA CORPORATION
Date: August 6, 1997 By: G. Eric Georgatos
------------------------------------------------
G. Eric Georgatos
Vice President, General Counsel and
Secretary
- 4 -
5
INDEX TO EXHIBITS
EXHIBIT
- - -------
NUMBER EXHIBIT DESCRIPTION PAGE
- - ------------- ------------------- ----
99.1 Press Release dated August 6, 1997 6
99.2 Cautionary Statements for Purposes of the "Safe Harbor" 9
Provisions of the Private Securities Litigation Reform Act
of 1995
- 5 -
1
EXHIBIT 99.1
INVESTOR CONTACT: Suzanne DuLong
CIENA Corporation
(410) 865-8500
email: ir@CIENA.com
PRESS CONTACT: Denny Bilter
CIENA Corporation
(410) 865-8500
FOR IMMEDIATE RELEASE:
CIENA CORPORATION ANNOUNCES THIRD QUARTER REVENUE AND
AGREEMENT WITH AT&T
LINTHICUM, MD - August 6, 1997 - CIENA Corporation (NASDAQ: CIEN)
today reported revenue of $112.2 million for its third fiscal quarter ended
August 2, 1997. This compares with $16.9 million for the third fiscal quarter
in 1996 and $86.7 million for the quarter ended April 30, 1997. Based on
current information, the Company expects that earnings per share for the third
quarter of 1997 will be in the range of $0.31 to $0.33 per share, compared to
$0.10 per share for the third quarter of 1996.
CIENA expects to report final results for the third quarter following the close
of the financial markets on August 20, 1997.
The Company also announced today that it has reached agreement on a
five year contract under which it would supply its MultiWave Sentry(TM) systems
to AT&T, after successful evaluation.
"This is an important and timely next step in our developing
relationship with AT&T," said Larry Huang, senior vice president, sales and
marketing for CIENA. "We are very optimistic about the potential for a mutually
beneficial and successful long-term relationship."
The AT&T supply agreement, like CIENA's other long-term supply
agreements with Sprint and Worldcom, contains no minimum purchase commitment
and provides the framework of terms and conditions under which AT&T may
purchase CIENA's dense wave division multiplexing (DWDM) systems, including
TMN-compliant network management software and installation services. Evaluation
is currently continuing under the previously announced trial evaluation
agreement, with orders not expected until 1998.
(more)
- 6 -
2
"CIENA's growth over the past three quarters has been significantly
above expectations, in part because we have succeeded in rapidly increasing our
manufacturing capacity," said Patrick Nettles, president and chief executive
officer of CIENA. "Our financial performance and our progress with expanding
our customer base to date are indicators of what we believe is a solid
foundation for continued long-term growth for this Company."
"Last year our manufacturing capacity constraints may have insulated
us from a year-end wind-down of our customers' annual capital equipment
procurement cycles, and also to any seasonal slowdown that might have occurred
toward the end of the calendar year," continued Nettles. "We caution that while
CIENA did not see a deceleration in customer spending last year, investors
should not be surprised to see moderating sequential growth for the Company for
the fourth quarter of fiscal year 1997 and the first quarter of fiscal year
1998."
Nettles concluded, "We remain comfortable with current consensus
expectations for the balance of fiscal year 1997 and are very positive about
our prospects for 1998."
The Company's announcement was made in advance of the expiration of
lock-up agreements stemming from the Company's initial public offering in
February 1997. As previously disclosed, at the start of trading tomorrow,
August 7, 1997, approximately 55 million shares of CIENA Common Stock will be
released from lock-up agreements and therefore available to trade. An
additional release of approximately 20 to 24 million shares will occur on
October 1, 1997, following expiration of lock-up agreements associated with the
Company's recently completed secondary offering.
The Company also announced today that it is filing an updating
amendment to its February 7, 1997 Form 8-K containing cautionary statements
concerning forward-looking information that the Company may publish, including
those in this press release. This Form 8-K amendment is being filed to take
advantage of the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
# # #
- 7 -
3
NOTE TO INVESTORS:
Forward-looking statements in this release, including statements
regarding (1) the Company's prospects for a mutually beneficial and successful
long term relationship with AT&T, (2) the expectation of orders from AT&T once
ongoing evaluation and testing are completed, (3) moderating sequential growth
in the fourth quarter of fiscal year 1997 and the first quarter of fiscal 1998,
(4) the Company's comfort with current consensus expectations for the balance
of fiscal year 1997, and (5) the Company's very positive outlook for its
prospects for fiscal 1998, are based on information available to the Company as
of the date hereof. The Company is unable at this time to predict the volume,
duration or timing of any purchases which might ensue from AT&T or any other
customer. The Company's actual results could differ materially from those
stated or implied by such forward-looking statements, due to risks and
uncertainties associated with the Company's dependence on its major customers,
the recent introduction of its products, and the overall management of its
expansion. The forward-looking statements should be considered in the context
of these and other risk factors disclosed in the Company's report on Form 8-K,
as filed with the Securities and Exchange Commission ("SEC") on February 19,
1997, as supplemented by the discussion of risk considerations in the Company's
Quarterly Report on Form 10-Q, as filed with the SEC on May 22, 1997, and as
further amended and restated by Amendment No. 1 to the Form 8-K, as filed with
the SEC concurrent with the filing of this press release.
ABOUT CIENA
CIENA Corporation is a leading supplier of dense wavelength division
multiplexing (DWDM) systems to long distance fiberoptic telecommunications
carriers. CIENA's DWDM systems alleviate capacity constraints and enable
flexible provisioning of additional bandwidth on high-traffic routes in
carriers' networks. Additional information about CIENA can be found on its
World Wide Website: http://www.ciena.com.
- 8 -
1
EXHIBIT 99.2
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES REFORM ACT OF 1995
CIENA Corporation ("CIENA" or the "Company") desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 (the "Act") and is amending and restating a previously filed
Form 8-K in order to do so.
CIENA wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, CIENA's actual results, and could cause CIENA's actual results to
differ materially from those expressed in any forward-looking statements made
by or on behalf of CIENA. The filing of this list should not be construed as
constituting all factors which investors should consider prior to making an
investment decision in CIENA's securities, nor should investors assume that the
information contained herein is complete or accurate in all respects after the
date of this filing. The Company disclaims any duty to update the statements
contained herein.
Concentration of Potential Customers; Dependence on Major Customers.
The Company is currently dependent on two customers and has only a few
potential customers, consisting almost exclusively of long distance and other
telecommunications carriers using fiberoptic networks. There are only a small
number of long distance telecommunications carriers, and that number may
decrease if and as customers merge with or acquire one another. The Company's
business will for the foreseeable future be dependent on a small number of
existing and potential customers. Substantially all of the Company's revenue
for fiscal 1997 continues to be expected to be derived from Sprint Corporation
and LDDS WorldCom ("WorldCom"). WorldCom may terminate all or any part of an
outstanding purchase order upon the payment of a termination fee and the
Company's agreement with WorldCom does not require minimum purchase
commitments. Although the Company now has five customers, there can be no
assurance that the Company will be able to develop additional customers or that
the Company will not continue to be dependent on Sprint and WorldCom. Although
the Company has previously announced a trial evaluation agreement and a
five-year supply agreement with AT&T, before AT&T would become a purchasing
customer, the Company will have to be successful in rigorous testing and
evaluation which will be ongoing over the next several months. The Company
believes it will be successful in such testing and evaluation, but there is no
assurance of that outcome, nor is there assurance as to when the period of
testing will be completed. Even if testing is successfully completed, the
Company is unable to predict the volume, duration or timing of any purchases
which might ensue from AT&T. The reduction, delay or cancellation of orders,
or a delay in shipment of the Company's products to Sprint or WorldCom, or the
inability of the Company to develop AT&T as a significant customer, as well as
additional customers in the long distance telecommunications market, could and
likely would have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company's dependence on sizable orders from very few customers
makes the relationship between the Company and each customer critically
important to the Company's business. While each customer relationship is
typically structured around a detailed, heavily negotiated contract, as the
relationship evolves over time, adjustments to such items as product
specifications, laboratory and field testing plans, customer forecasts and
delivery timetables, and installation and field support requirements may be
required in response to customer demands and expectations. The inability of
the Company to manage its customer relationships successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Recent Product Introduction. The Company first began commercial
shipments of its MultiWave 1600 system in May 1996 and its first operational
systems began carrying live traffic in October 1996. Accordingly, the
Company's systems do not have a history of live traffic operation over an
extended period of time. The Company's history of installation activity
indicates that the newness and high precision nature of DWDM equipment may
require enhanced customer training
- 9 -
2
and installation support from the Company. The Company is aware of instances in
which product operation has been delayed or interrupted due to faulty
components found in certain portions of certain MultiWave 1600 systems,
especially during installation and activation. However, if recurring or
material reliability, quality or network monitoring problems should develop, a
number of material and 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 level of interest from potential customers. Although
the Company maintains accruals for product warranties, there can be no
assurance that actual costs will not exceed these amounts. There is a
considerable number of the Company's systems scheduled to be turned up for live
traffic operation over the next several months, and many already activated
systems may be scheduled to add new operating channels. The Company expects
there will be interruptions or delays from time to time in the activation of
the systems and the addition of channels, particularly because the Company does
not control all aspects of the installation and activation activities. If
significant interruptions or delays occur, or if their cause is not promptly
identified, diagnosed and resolved, confidence in the MultiWave system could be
undermined. An undermining of confidence in the MultiWave system would have a
material adverse effect on the Company's customer relationships, business,
financial condition and results of operations.
Management of Expansion. The Company is experiencing rapid
expansion in all areas of its operations, particularly in manufacturing, and
the Company anticipates that this expansion will continue in the near future.
Total personnel grew from 301 at January 31, 1997 to 639 at July 31, 1997.
Total facilities' space has increased from 50,500 square feet in one facility
as of the fiscal year ended October 31, 1996, to approximately 210,000 square
feet in three facilities by the end of May 1997. This expansion, and the
attendant separation and relocation of various operating functions to different
facilities, has placed strains on the material, financial and personnel
resources of the Company and will continue to do so. The pace of the Company's
expansion, in combination with the complexity of the technology involved in the
manufacture of the Company's systems, demands an unusually high level of
managerial effectiveness in anticipating, planning, coordinating and meeting
the operational needs of the Company and the needs of the Company's customers
for quality, reliability, timely delivery and post-installation field support.
The rapid pace and volume of new hiring, and the accelerated ramp up in
manufacturing capacity, if not effectively managed, could adversely affect the
quality or efficiency of the Company's manufacturing process. Additionally,
as the Company's installed base of equipment expands, the Company must keep up
the rapid pace and volume of new hiring and employee training in important
areas such as customer support. The Company continues to increase its flow of
materials, optical assembly, final assembly and final component module and
system test functions in anticipation of a level of customer orders that has
not been historically experienced by the Company and that may not be achieved.
The Company is also encountering increased demands for test systems from
various potential customers domestically and internationally. Manufacturing
capacity must be planned to accommodate these demands even though revenue for
test systems may not be realized until later, if at all. Given the small
number of existing and potential customers for the Company's systems, as well
as the widely varying volume requirements they may have once a purchasing
decision has been made, the adverse effect on the Company resulting from a lack
of effective management in any of these areas will be magnified. Inability to
manage the expansion of the Company's business would have a material adverse
effect on its business, financial condition and results of operations.
Dependence on a Single Product--the MultiWave System. The MultiWave
1600 system is the Company's only product that has generated revenue and is
focused exclusively on providing additional bandwidth to long distance
telecommunications carriers. The MultiWave Sentry has only recently been
introduced and has generated no revenue to date. A softening or slowdown in
demand for the Company's product or for additional bandwidth by long distance
telecommunications carriers would have a material adverse effect on the
Company's business, financial condition and results of operations. Patent
litigation recently brought against the Company by a competitor could also
adversely affect demand for the MultiWave systems. There can be no assurance
that the Company will be successful in developing any other products or taking
other
- 10 -
3
steps to reduce the risk associated with any softening or slowdown in the
demand for additional bandwidth, nor is there any assurance the Company will be
able to leverage successfully its DWDM technology into other network
applications. Conversely, if the demand for additional bandwidth accelerates,
there is no assurance that the Company's MultiWave systems will deliver
sufficient capacity as rapidly as needed, or that competing DWDM products from
other vendors offering higher capacity would not displace or render obsolete
the MultiWave system.
Fluctuation in Quarterly and Annual Results. The Company's revenue
and operating results are likely to vary significantly from quarter to quarter
and from year to year as a result of a number of factors, including the size
and timing of orders, product mix and shipments of systems. 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, may cause material fluctuations in revenue. Delays or deferrals in
purchasing decisions may increase as the Company develops other DWDM products.
The Company's dependence on a small number of existing and potential customers
increases the revenue impact of each customer's actions relative to these
factors. Delivery of new equipment for installation may also be deferred during
the high telecommunications traffic periods in November and December so as not
to risk network reliability problems. The Company's expense levels in the
future will be partially based on its expectations of long term future revenue
and as a result net income any quarterly period in which material orders are
shipped or delayed or not forthcoming could vary significantly.
Quarter-to-quarter sequential growth rates in the first two or three years of
operations are likely to vary widely and therefore may not be reliable
indicators of annual performance.
Long and Unpredictable Sales Cycles. The Company expects that the
period of time between initial customer contact and an actual purchase order
may span a year or more. In addition, even when committed to proceed with
deployment of equipment, long distance telecommunications carriers typically
undertake extensive and length product evaluation and factory acceptance and
field testing of new equipment before purchasing and installing any of its in
their networks. Additionally, the purchase of network equipment such as DWDM
equipment is typically carried out by network operators pursuant to multiyear
purchasing programs which may increase or decrease annually as the operators
adjust their capital equipment budgets and purchasing priorities. The
Company's customers do not typically share information on the duration or
magnitude of planned purchasing programs, nor do they consistently provide to
the Company advance notice of contemplated changes in their capital equipment
budgets and purchasing priorities. Additionally, a typical year end wind-down
of customers' annual capital equipment procurement cycles, or a seasonal slow
down in purchasing at year end, neither of which was experienced by the Company
in its first year of product shipments, may be experienced in this and future
years. These uncertainties substantially complicate the Company's
manufacturing planning, and may lead to substantial fluctuations in the timing
of orders and revenue. Curtailment or termination of customer purchasing
programs, decreases in customer capital budgets or reduction in the purchasing
priority assigned to equipment such as DWDM equipment, particularly if
significant and unanticipated by the Company, could have a material adverse
effect on the Company's business, financial condition and results of
operations. Long distance carriers may also encounter delays in their buildout
of new routes or in their installation of new equipment in existing routes,
with the result that orders for the MultiWave 1600 systems may be delayed or
deferred. Any such delay with any major customer, as well as any other delay
or deferral of orders for the MultiWave 1600 systems, could result in material
fluctuations in the timing of orders and revenue, and could have material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. The Company believes the rapid pace at which the need
for higher and more cost-effective bandwidth has developed was not widely
anticipated in the global telecommunications industry. However, competition in
the global telecommunications industry historically has been dominated by a
small number of very large companies, each of which have greater financial,
technical and marketing resources, greater manufacturing capacity and more
extensive and established customer relationships with network operators than
the Company. Each of Lucent Technologies Inc., formerly part of AT&T
Corporation ("Lucent"), Alcatel Alsthom Group
- 11 -
4
("Alcatel"), Northern Telecom Inc. ("Nortel"), NEC Corporation ("NEC"), Pirelli
SpA ("Pirelli"), Siemens AG ("Siemens") and Telefon AB LM Ericsson are expected
to move aggressively to capture market share in the DWDM market. The Company
expects aggressive competitive moves to include early announcement of competing
or alternative products, and significant price discounting. In addition,
Lucent, Alcatel, Nortel, NEC and Siemens are already providers of a full
complement of switches, fiberoptic transmission terminals and fiberoptic signal
regenerators and thereby can position themselves as vertically integrated,
"one-stop shopping" solution providers to potential customers. Further, in
certain cases, competitors have offered the Company's target customers, on an
immediate delivery basis, off-the-shelf time division multiplexing ("TDM")
transmission equipment at comparatively lower prices, with a promise to upgrade
to DWDM or other improved equipment in the future. Competitors have also
offered the newest TDM equipment, referred to as OC-192 (capable of 10 gigabit
per second transmission), with similar promises of upgrade. The substantial
system integration resources, sales and support staff and manufacturing
capability of the TDM suppliers, in combination with any difference in
timeliness of delivery, can be important to long distance network operators.
Finally, as and when these competitors are able to offer DWDM systems in
combination with their own fiberoptic transmission terminals, they can be
expected to press further on the attractiveness of a "one-stop shopping"
solution. While competition in general is broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate network needs and
foreseeable scaleability requirements, the Company's customers are themselves
under increasing competitive pressure to deliver their services at the lowest
possible cost. This pressure may result in pricing for DWDM systems becoming a
more important factor in customer decisions.
Intellectual property disputes may also be asserted as part of a
competitive effort to reduce the Company's leadership position and limit its
ability to achieve greater market share, even if the merits of specific
disputes are doubtful. See "Proprietary Rights".
There can be no assurance that the Company will be able to compete
successfully with its competitors or that aggressive competitive moves faced by
the Company will not result in lower prices for the Company's products,
decreased gross profit margins, and otherwise have a material adverse effect on
its business, financial condition and results of operations.
Technological Change and New Products. The Company expects that new
technologies will emerge as competition in the telecommunications industry
increases and the need for higher and more cost efficient bandwidth expands.
The Company's ability to anticipate changes in technology, industry standards,
customer requirements and product offerings and to develop and introduce new
and enhanced products will be significant factors in the Company's ability to
remain the leader in the deployment of open architecture DWDM systems. The
market for telecommunications equipment is characterized by substantial capital
investment and diverse and competing technologies such as fiberoptic, cable,
wireless and satellite technologies. The accelerating pace of deregulation in
the telecommunications industry will likely intensify the competition for
improved technology. Many of the Company's competitors have substantially
greater financial, technical and marketing resources and manufacturing capacity
with which to compete for new technologies and for market acceptance of their
products. The introduction of new products embodying new technologies or the
emergence of new industry standards could render the Company's existing product
uncompetitive from a pricing standpoint, obsolete or unmarketable. Any of
these outcomes would have a material adverse effect on the Company's business,
financial condition and results of operations.
Proprietary Rights. The Company relies on patents, contractual
rights, trade secrets, trademarks and copyrights to establish and protect its
proprietary rights in its product. While the Company does not expect that its
proprietary rights in its technology will prevent competitors from developing
technologies and products functionally similar to the Company's, the Company
believes many aspects of its DWDM technologies and know-how are proprietary,
and intends to monitor closely the DWDM products introduced by competitors for
any infringement of the Company's proprietary rights. Additionally, the
Company expects that DWDM technologies and know-how in
- 12 -
5
general will become increasingly valuable intellectual properties as the
competition to achieve higher and more cost effective bandwidth intensifies.
The Company believes this increasing value in an industry marked by a few very
large competing suppliers represents a competitive environment where
intellectual property disputes are likely. On December 20, 1996, a U.S.
affiliate of Pirelli filed a lawsuit against the Company alleging infringement
of certain U.S. patents held by Pirelli (the "Pirelli Litigation").
Intellectual property disputes may be initiated by competitors against the
Company for tactical purposes to gain competitive advantage or overcome
competitive disadvantage, even if the merits of specific disputes are doubtful.
In the future, the Company may be required to bring or defend against other
litigation to enforce any patents issued or assigned to the Company, to protect
trademarks, trade secrets and other intellectual property rights owned by the
Company, to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any litigation, including the Pirelli Litigation, could be costly and a
diversion of management's attention, which could have a material adverse effect
on the company's business, financial condition and results of operations.
Adverse determinations in litigation, including in the Pirelli Litigation,
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from manufacturing or selling its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has received, and may receive in the future, notices
from holders of patents in the optical technology field that raise issues as to
possible infringement by the Company's products. Pirelli sent a notice in
December 1995 identifying eleven patents it possesses in the field of optical
communications. The Company believes the MultiWave 1600 system does not
infringe any valid patents cited in the notices received. However, questions
of infringement in the field of DWDM technologies involve highly technical and
subjective analyses. There can be no assurance that any such patent holders or
others will not in the future initiate legal proceedings against the Company or
that, if any such proceedings were initiated, the Company would be successful
in defending against these actions. On December 20, 1996, a U.S. affiliate of
Pirelli filed a lawsuit against the Company alleging infringement of certain
U.S. patents. Even if the Company is successful in defending against the
Pirelli Litigation or any other such actions, these actions could have an
adverse effect on existing and potential customer relationships and therefore
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's existing customer
agreements provide for indemnification of customers for liability that may be
incurred in connection with the infringement of a third party's intellectual
property rights, and the Company expects that it will be requested to agree to
indemnify other potential customers in the future. There can be no assurance
that such indemnification against alleged liability will not be required from
the Company in the future.
Patent applications in the United States are not publicly disclosed
until the patent issues. The Company anticipates, based on the size and
sophistication of its competitors and the history of rapid technological
advances in its industry, that several competitors may have patent applications
in progress in the United States that, if issued, could relate to the Company's
products. If such patents were to issue, there can be no assurance that the
patent holders or licensees will not assert infringement claims against the
Company or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such
claims, regardless of the merits of such claims. Parties making such claims
may be able to obtain injunctive or other equitable relief which could
effectively block the Company's ability to sell its products, and each claim
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company and its customers may be required to obtain
one or more licenses from third parties. There can be no assurance that the
Company or its customers could obtain necessary licenses from third parties at
a reasonable or acceptable cost or at all.
Substantial inventories of intellectual property are held by a few
industry participants, such as Bell Laboratories (now owned by Lucent) and
major universities and research laboratories. This concentration of
intellectual property in the hands of few major entities also poses certain
risks to the Company in seeking to hire qualified personnel. The Company has
on a few occasions recruited such personnel from competitors. The Company in
the past received letters from
- 13 -
6
counsel to Lucent asserting that the hiring of their personnel compromises
Lucent's intellectual property. There can be no assurance that other companies
will not claim the misappropriation or infringement of their intellectual
property, particularly when and if employees of these companies leave to work
for the Company. To date, the Company has not experienced litigation
concerning the assertions by Lucent, and believes there is no basis for claims
against the Company. Nevertheless, there can be no assurance that the Company
will be able to avoid litigation in the future, particularly if new employees
join the Company after having worked for a competing company. Such litigation
could be very expensive to defend, regardless of the merits of the claims.
The successful resolution of intellectual property disputes may
depend, in part, on the extent of the Company's portfolio of intellectual
property rights which could be available for cross-licensing as a means of
settling disputes. The Company's current portfolio of patents is not as broad
or extensive as those of its major competitors, and there is no assurance the
Company will be able to add to its patent portfolio.
As the Company seeks to expand internationally, the Company will
need to take steps to protect its proprietary rights under foreign patent and
trademark laws. Many of these laws are not as well developed or do not afford
the same degree of protection as United States laws and no assurance can be
given that the Company will not encounter difficulties in protecting its
proprietary rights outside the United States or will not infringe the rights of
others outside the United States.
Legal Proceedings. Pirelli Litigation. On December 20, 1996, a U.S.
affiliate of Pirelli SpA ("Pirelli") filed suit in U.S. District Court in
Delaware, alleging willful infringement by the Company of five U.S. patents
held by Pirelli. The lawsuit seeks treble damages, attorneys' fees and costs,
as well as preliminary and permanent injunctive relief against the alleged
infringement. On February 10, 1997, the Company filed its answer denying
infringement, alleging inequitable conduct on the part of Pirelli in the
prosecution of certain of its patents, and stating a counterclaim against the
relevant Pirelli parties for a declaratory judgment finding the Pirelli patents
invalid and/or not infringed. Following the filing of the Company's answer,
Pirelli dedicated to the public and withdrew from the lawsuit all infringement
claims relating to one of the five patents.
Discovery proceedings are ongoing, and are currently expected to be
completed by January 31, 1997, with trial expected no earlier than February
1998.
The Company has filed a complaint against Pirelli with the
International Trade Commission ("ITC"), based on the Company's belief that a 32
channel DWDM system announced by Pirelli infringes at least two of the
Company's patents. The Company's complaint seeks a ban on the importation by
Pirelli into the U.S. of any infringing 32 channel system. A formal
investigative proceeding was instituted by the ITC on April 3, 1997. Discovery
proceedings are now ongoing, and a full hearing of the matter is currently
scheduled for December 1997.
On March 14, 1997, the Company filed suit against Pirelli in U.S.
District Court in the Eastern District of Virginia, alleging willful
infringement by Pirelli of three U.S. patents held or co-owned by the Company.
The lawsuit seeks treble damages, attorneys' fees and costs, as well as
permanent injunctive relief against the alleged infringement. The patents at
issue relate to certain of Pirelli's cable television equipment, to Pirelli's 4
and 8 channel WDM systems, and to certain Pirelli fiberoptic communications
equipment announced by Pirelli in January 1997 as being deployed in a field
trial in the MCI network. Pirelli's motion to dismiss or transfer for lack of
jurisdiction was denied April 28, 1997. Discovery proceedings are now ongoing,
with trial expected by late fall 1997.
The Company continues to believe its MultiWave(TM) 1600 system does
not infringe any valid claim of the four remaining Pirelli patents and believes
certain claims of the Pirelli patents may be invalid. The Company intends to
defend itself vigorously, and is planning on all litigation proceeding through
trial. In light of the complexity and likely time-consuming nature of the
litigation, including the Company's counterclaim, the ITC proceeding, and the
Company's patent infringement lawsuit against Pirelli in the Eastern District
of Virginia, the Company accrued during the first fiscal quarter of 1997
approximately $5.0 million in estimated legal and related costs
- 14 -
7
associated with these proceedings. While the Company believes its estimate of
legal and related costs is adequate based on its current understanding of the
overall facts and circumstances, the estimate may be increased depending on the
course of the legal proceedings.
The Company expects that the Pirelli proceedings will not only be
costly but will also involve a substantial diversion of the time and attention
of some members of management. Further, the Company believes Pirelli and other
competitors have used the existence of the Delaware litigation to raise
questions in customers' and potential customers' minds as to the Company's
ability to manufacture and deliver the MultiWave(TM) 1600 system. There can be
no assurance that such efforts by Pirelli and others will not disrupt the
Company's existing and prospective customer relationships.
There can be no assurance that the Company will be successful in the
Pirelli litigation, and an adverse determination in the Delaware court could
result from a finding of infringement of only one claim of a single patent.
The Company may consider settlement due to the costs and uncertainties
associated with litigation in general and patent infringement litigation in
particular and due to the fact that an adverse determination in the litigation
could preclude the Company from producing the MultiWave(TM) 1600 system until
it were able to implement a non-infringing alternative design to any portion of
the system to which such a determination applied. There can be no assurance
that any settlement will be reached by the parties, and the Company is planning
on all litigation proceeding through trial. An adverse determination in, or
settlement of, the Pirelli litigation could involve the payment of significant
amounts, or could include terms in addition to such payments, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Kimberlin Litigation. Kevin Kimberlin and parties controlled by him
(the "Kimberlin Parties") are owners of Common Stock of the Company, the
substantial majority of which has been derived from the conversion at the time
of the Company's IPO of Series A, Series B and Series C Preferred Stock then
owned by them. On November 20, 1996, the Kimberlin Parties filed suit in U.S.
District Court for the Southern District of New York against the Company, and
certain directors of the Company, alleging that the Kimberlin Parties were
entitled to purchase additional shares of Series C Preferred Stock at the time
of the closing of the Series C Preferred Stock financing, but were denied that
opportunity by the defendants. The lawsuit alleges that certain rights of
first refusal existing under the Series B Preferred Stock Purchase Agreement
entitled the Kimberlin Parties to purchase more shares of Series C Preferred
Stock than were in fact purchased by them at the time of the closing of the
Series C Preferred Stock financing in December 1995. The lawsuit claims breach
of contract, breach of fiduciary duty and violation of Securities and Exchange
Commission Rule 10b-5 by the defendants. On January 6, 1997, the Company filed
its answer to the Kimberlin Parties complaint, and filed a counterclaim for
rescission of the sale of the shares of Series C Preferred Stock purchased by
the Kimberlin Parties in the Series C Preferred Stock financing.
The Kimberlin Parties amended their complaint in May 1997, alleging
that the same facts and conduct with respect to the private placement of Series
C Preferred Stock represent a violation of federal insider trading laws.
The number of shares to be purchased by each party to the Series C
Preferred Stock financing was communicated in writing to the Kimberlin Parties
in December 1995 prior to the Series C closing. Further, as permitted under
the Series B Preferred Stock Purchase Agreement, the Series C Preferred Stock
Purchase Agreement expressly stated that all rights of first refusal referred
to in the lawsuit were waived. The required number of Series B investors,
including the Kimberlin Parties, signed the Series C Preferred Stock Purchase
Agreement containing that waiver. In July 1996, the Kimberlin Parties
reaffirmed to the Company in writing that their beneficial ownership of shares
did not include any shares which they have subsequently claimed in the lawsuit
they were entitled to purchase.
The Company believes that the Kimberlin Parties' claims, brought as
the Company's IPO was being prepared, and the amended claims, are without merit
and intends to defend itself
- 15 -
8
vigorously. Discovery proceedings are now ongoing and are expected to be
completed by August 15, 1997.
Dependence on Suppliers. Suppliers in the specialized, high
technology sector of the optical communications industry are generally not as
plentiful or, in some case, as reliable, as suppliers in more mature
industries. The Company is dependent on a limited number of suppliers for
components of the MultiWave system as well as equipment used to manufacture the
MultiWave system. The MultiWave system has over 600 components, and certain
key optical and electronic components are currently available only from a sole
source, where the Company has identified other suppliers for the component.
While alternative suppliers have been identified for certain other key optical
and electronic components, those alternative sources have not been qualified by
the Company. The Company has to date conducted its business with suppliers
through the issuance of conventional purchase orders against the Company's
forecasted requirements. The Company is seeking to negotiate long term supply
agreements with key suppliers, but currently has only a few such agreements.
The Company has from time to time experienced minor delays in the receipt of
key components, and has noticed a lengthening of lead times in the ordering of
certain 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 the company's business,
financial condition and results of operations. In addition, the Company's
strategy to have portions of its product assembled and, in certain cases,
tested by third parties involves certain risks, including the potential absence
of adequate capacity, the unavailability of or interruptions in access to
certain process technologies, and reduced control over delivery schedules,
manufacturing yields, quality and costs. In the event that any significant
supplier or subcontractor were to become unable or unwilling to continue to
manufacture and/or test the Company's systems in required volumes, the Company
would have to identify and qualify acceptable replacements. This process could
also be lengthy and no assurance can be given that any additional sources would
become available to the Company on a timely basis. A key item of equipment,
the E-2000 Diamond connector, which is used to manufacture a portion of the
MultiWave system, is available only from a sole source--the Diamond Company. A
delay or reduction in component or equipment shipments, an increase in
component or equipment costs or a delay or increase in costs in the assembly
and testing of products by third party subcontractors could materially and
adversely affect the Company's business, financial condition and results of
operations.
New Product Development Delays. The Company's ability to anticipate
changes in technology, industry standards, customer requirements and product
offerings and to develop and introduce new and enhanced products will be
significant factors in the Company's ability to remain a market leader in the
deployment of DWDM systems. The complexity of the technology involved in
product development efforts in the DWDM field can result in unanticipated
delays. The failure in the future to deliver new and improved products in a
timely fashion relative to customer expectations could have a material adverse
effect on the Company's competitive position.
Competitors as Suppliers. Certain of the Company's component
suppliers are both primary sources for such components and major competitors in
the market for system equipment. For example, the Company buys certain key
components from Lucent, Alcatel, Nortel, NEC and Siemens, each of which offers
optical communications systems and equipment which are competitive with the
Company's DWDM systems. Lucent is the sole source of two integrated circuits
and is one of two suppliers of Erbium-doped fiber. Alcatel and Nortel are
suppliers of lasers used in the MultiWave system. NEC is a supplier of certain
testing equipment. The Company's business, financial condition and results of
operations could be materially and adversely affected if these supply
relationships were to decline in reliability or otherwise change in any manner
adverse to the Company. Although the Company has not experienced to date any
decline in reliability among these vendors, this risk factor increases in
importance given the Company's expansion efforts, new product development
efforts, and the increasingly competitive environment in which the Company
operates.
- 16 -
9
Limited Operating History; History of Losses. The Company was
founded in November 1992 and introduced its MultiWave 1600 system in field
trials in May 1996. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company, its product and prospects can
be based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets and companies experiencing rapid expansion in their operations. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
management and other employees, continue to upgrade its technologies and
commercialize products and services which incorporate such technologies and
achieve market acceptance for its MultiWave system. There can be no assurance
that the Company will be successful in addressing such risks. The Company
incurred net losses in each quarter from inception through the second quarter
of fiscal 1996. While the Company reported net income for fiscal 1996 and the
first three quarters of 1997, there can be no assurance that the Company will
sustain profitability.
Dependence on Key Personnel. The Company's success will also depend
in large part upon its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel, particularly those skilled and
experienced with optical communications equipment. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in retaining its existing key personnel and in attracting and
retaining the personnel it requires. Failure to attract and retain key
personnel will have a material adverse effect on the Company's business,
financial condition and results of operations.
Shares Eligible for Sale on and after August 7, 1997. Approximately
52,700,000 shares of the Company's Common Stock are subject to lock-up
agreements entered into at the time of the Company's initial public offering
(the "IPO Lock-up Agreements") which expire on August 7, 1997, and
approximately 17,500,000 shares are subject to lock-up agreements which expire
October 1, 1997. Substantially all shares held by stockholders that are
parties to the IPO Lock-Up Agreements will be freed from lock-up restrictions
on August 7, 1997 and will be freely tradeable without restriction or
registration under the Securities Act, except for any shares held by
"affiliates" of the Company as that term is defined under Rule 144 under the
Securities Act. Substantially all remaining locked up shares of the Company
will be freed from lock-up restrictions on October 1, 1997, except for shares
held by affiliates of the Company. The Underwriters for the Company's July
1997 public offering may release any or all of the shares from lock-up
agreements prior to October 1, 1997. In addition, approximately 1,100,000
vested shares and 1,200,000 shares issuable upon the exercise of vested options
are eligible to be sold under the Company's Registration Statement on Form S-8
beginning August 7, 1997.
The owners of all locked up shares have experienced substantial
appreciation in the value of their shares relative to the price paid for them.
In the event all or a significant portion of these stockholders elect to sell
their shares, the price of the Company's stock could materially decline,
irrespective of the Company's operating performance.
Stock Price Volatility. The Company's Common Stock price has
experienced substantial price volatility, and is likely to continue to do so.
Such volatility can arise as a result of any divergence between the Company's
actual or anticipated financial results and published expectations of analysts
and as a result of announcements by the Company and its competitors. Such
divergence is likely to occur from time to time, particularly in light of the
Company's dependence on a small number of existing and potential customers,
long and unpredictable sales cycles and customer purchasing programs,
fluctuating quarterly results, the absence of unconditional minimum purchase
commitments from any customer, and a declining level of visibility into its
customers' deployment plans over the course of the capital equipment
procurement year. In addition, the market prices of the common stock of many
technology companies have experienced extreme price and volume fluctuations
while trending downward in the recent stock market, and the Company's stock
price may be similarly impacted, irrespective of the Company's operating
performance.
- 17 -
10
Control by Existing Stockholders. As of August 6, 1997, the
Company's officers, directors and their affiliates beneficially own
approximately 40% of the Company's outstanding shares. As a result, these
stockholders, if acting together, would be able effectively to control
substantially all matters requiring approval by the stockholders of the
Company, including the election of directors. This ability may have the effect
of delaying or preventing a change in control of the Company, or causing a
change in the control of the Company which may not be favored by the Company's
other stockholders.
Effect of Certain Charter, Bylaw and Other Provisions. Certain
provisions of the Company's Third Amended and Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), and bylaws and
certain other contractual provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares
of the Company's Common Stock. Certain of these provisions allow the Company
to issued preferred stock with rights senior to those of the Common Stock
without any further vote or action by the stockholders, provide for a
classified board of directors, eliminate the right of the stockholders to call
a special meeting of stockholders, eliminate the right of stockholders to act
by written consent, and impose various procedural and other requirements which
could make it difficult for stockholders to effect certain corporate actions.
- 18 -
