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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997
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)
920 ELKRIDGE LANDING 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 20, 1997
- - ---------------------------------- ------------------------------
Common stock. $.01 par value 98,263,550
Page 1 of 21 pages
Exhibit Index appears on page 19
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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, 1996
and July 31, 1997 3
Consolidated Balance Sheets
October 31, 1996 and July 31, 1997 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 1996 and
July 31, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk - Not applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
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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,
1996 1997 1996 1997
--------- ---------- --------- -----------
Revenue $ 16,923 $ 112,189 $ 16,923 $ 252,791
Cost of goods sold 7,346 40,158 7,346 92,998
--------- ---------- ---------- ------------
Gross profit 9,577 72,031 9,577 159,793
--------- ---------- ---------- ------------
Operating expenses:
Research and development 1,964 7,245 6,183 14,994
Selling and marketing 1,130 6,315 2,321 13,398
General and administrative 1,064 2,630 2,089 11,031
--------- ---------- ---------- ------------
Total operating expenses 4,158 16,190 10,593 39,423
--------- ---------- ---------- ------------
Income (loss) from operations 5,419 55,841 (1,016) 120,370
Interest and other income (expense), net 165 1,528 624 3,888
Interest expense (90) (75) (183) (268)
--------- ---------- ---------- ------------
Income (loss) before income taxes 5,494 57,294 (575) 123,990
Provision (benefit) for income taxes (4,600) 22,345 (4,600) 48,356
--------- ---------- ---------- ------------
Net income $ 10,094 $ 34,949 $ 4,025 $ 75,634
========= ========== ========== ============
Net income per common
and common equivalent share $ 0.10 $ 0.33 $ 0.04 $ 0.74
========= ========== ========== ============
Weighted average common and
common equivalent shares outstanding 99,111 105,296 99,111 102,750
========= ========== ========== ============
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31, July 31,
1996 1997
----------- -----------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,557 $ 244,485
Accounts receivable, net 16,759 57,103
Inventories, net 13,228 29,103
Deferred income taxes 1,834 5,808
Prepaid expenses and other 634 994
------------ ------------
Total current assets 55,012 337,493
Equipment, furniture and fixtures, net 11,863 53,194
Other assets 426 373
------------ ------------
Total assets $ 67,301 $ 391,060
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligations $ 960 $ 987
Current maturities of notes payable 69 -
Accounts payable 6,278 23,294
Accrued liabilities 5,242 29,168
Income taxes payable 3,342 19,483
Deferred revenue 3,265 2,527
------------ ------------
Total current liabilities 19,156 75,459
Capital lease obligations, less current installments 2,186 1,446
Notes payable, less current maturities 487 -
Deferred income taxes - 17,560
Deferred rent 98 678
------------ ------------
Total liabilities 21,927 95,143
Commitments and contingencies - -
Mandatorily redeemable preferred stock - par value $.01,
16,250,000 shares authorized: 14,663,148 and zero
issued and outstanding; 40,404 -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares
authorized; zero shares issued and outstanding - -
Common stock - par value $.01; 180,000,000 shares
authorized; 13,191,585 and 98,258,550 shares issued
and outstanding 132 983
Additional paid-in capital 339 214,785
Notes receivable from stockholders (60) (44)
Retained earnings 4,559 80,193
------------ ------------
Total stockholders' equity 4,970 295,917
------------ ------------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity $ 67,301 $ 391,060
============ ============
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended July 31,
--------------------------------
1996 1997
--------------- -------------
Cash flows from operating activities:
Net income $ 4,025 $ 75,634
Adjustments to reconcile net income to net cash (used in)
provided by operating activites:
Non-cash charges from equity transactions - 31
Write down of leasehold improvements - 571
Depreciation and amortization 746 5,867
Provision for doubtful accounts - 200
Provision for inventory excess and obsolescence 1,606 2,409
Provision for warranty and other contractual obligations 253 11,587
Changes in assets and liabilities:
Increase in accounts receivable (19,088) (40,544)
Increase in prepaid expenses and other (132) (360)
Increase in inventories (12,702) (18,284)
Increase in deferred income taxes (4,600) (3,974)
(Increase) decrease in other assets (49) 53
Increase in accounts payable and accruals 5,731 29,355
Increase in income taxes payable - 16,141
Increase (decrease) in deferred revenue and deferred rent 7,101 (158)
---------------- --------------
Net cash (used in) provided by operating activities (17,109) 78,528
---------------- --------------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (6,462) (47,769)
---------------- --------------
Net cash used in investing activities (6,462) (47,769)
---------------- --------------
Cash flows from financing activities:
Principal borrowings (payments) on notes payable 556 (556)
Net proceeds from issuance of or subscription to mandatorily
redeemable preferred stock 25,950 -
Proceeds from issuance of common stock and warrants 19 174,878
Tax benefit related to exercise of stock warrants - 17,560
Proceeds from lease financing activities 2,564 -
Principal payments on capital lease obligations (419) (713)
---------------- --------------
Net cash provided by financing activities 28,670 191,169
---------------- --------------
Net increase in cash and cash equivalents 5,099 221,928
Cash and cash equivalents at beginning of period 5,032 22,557
---------------- --------------
Cash and cash equivalents at end of period $ 10,131 $ 244,485
================ ==============
The accompanying notes are an integral part of these financial statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim consolidated financial statements included herein for
CIENA Corporation (the "Company") have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the consolidated financial statements
included in this report reflect all normal recurring adjustments which the
Company considers necessary for the fair presentation of the results of
operations for the interim periods covered and of the financial position of the
Company and its subsidiaries at the date of the interim consolidated 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, the Company 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 the Company's
October 31, 1996 audited financial statements and notes thereto included in the
Company's Form S-1 Registration Statement for its initial public offering of
Common Stock (the "IPO"), declared effective on February 7, 1997.
Principles of Consolidation
During the second quarter ended April 30, 1997, the Company formed
three wholly owned subsidiaries for the purpose of segregating aspects of the
Company's business. The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes product revenue in accordance with the
shipping terms specified. For transactions where the Company has yet to obtain
customer acceptance or has agreements pertaining to installation services,
revenue is deferred until acceptance is received on the underlying transaction.
Revenue for installation services is recognized as the services are performed.
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, the Company recognizes revenue when the
product is shipped through to the end user.
During the nine months ended July 31, 1997, all of the Company's
revenue was attributable to a single product and to three customers.
Computation of Net Income per Share
The weighted average common and common equivalent shares outstanding
and net income per common and common equivalent share are presented on a pro
forma basis for all periods included on the accompanying consolidated
statements of operations, except for the quarter ended July 31, 1997, which is
presented on a historical basis.
Pro forma net income per common and common equivalent share is
computed using the pro forma weighted average number of common and common
equivalent shares outstanding. Pro forma weighted average common and common
equivalent shares include Common Stock, stock options and warrants using the
treasury stock method and shares issued upon conversion of all outstanding
shares of Mandatorily Redeemable Preferred Stock. Pursuant to the requirements
of the Securities and Exchange Commission, Common Stock, stock options,
warrants and convertible Mandatorily Redeemable Preferred Stock issued by the
Company during the twelve months immediately preceding the filing of the
initial registration statement and through the effective date of such
registration statement have been included in the calculation of the pro forma
weighted average shares outstanding using the treasury stock method based on
the IPO price.
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Historical net income per common and common equivalent share is
computed using the weighted average number of common and common equivalent
shares outstanding. Weighted average common and common equivalent shares
outstanding include Common Stock and stock options and warrants using the
treasury stock method.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, July 31,
1996 1997
(audited) (unaudited)
----------------- ----------------
Raw materials $ 8,585 $ 19,238
Work-in-process 3,629 5,679
Finished goods 2,951 7,834
----------------- ----------------
15,165 32,751
Less reserve for excess and obsolescence (1,937) (3,648)
----------------- ----------------
$ 13,228 $ 29,103
================= ================
(3) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
October 31, July 31,
1996 1997
(audited) (unaudited)
---------------- ----------------
Equipment, furniture and fixtures $ 11,647 $ 47,047
Leasehold improvements 1,141 11,219
---------------- ----------------
12,788 58,266
Accumulated depreciation and amortization (1,388) (7,255)
Construction-in-progress 463 2,183
---------------- ----------------
$ 11,863 $ 53,194
================ ================
(4) NOTES PAYABLE
In June 1996, the Company borrowed $556,000 from the Maryland
Economic Development Corporation for the construction of leasehold improvements
and executed promissory notes of $500,000 and $56,000 (collectively the
"Notes") with annual interest rates of 6.63% and 3.00%, respectively. In April
1997, the Company repaid the Notes in full.
(5) ACCRUED LIABILITIES - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
In March 1997, the Company entered into an agreement to lease an
additional facility of approximately 57,000 square feet in Linthicum, Maryland.
The lease term is five years with a minimum lease obligation of approximately
$663,000 per year.
Legal and related costs
Included in general and administrative expenses for the nine months
ended July 31, 1997, is an accrual of approximately $5.0 million representing
management's estimate of certain legal and related costs associated with the
Company's defense of certain pending litigation, of which approximately $3.4
million remains as an accrued liability as of July 31, 1997. See Part II, Item
1, "Legal Proceedings".
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Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
October 31, July 31,
1996 1997
(audited) (unaudited)
----------------- ----------------
Warranty and other contractual obligations $ 1,584 $ 11,586
Accrued compensation 2,314 4,515
Unbilled construction-in-process and leasehold improvements 50 3,520
Legal and related costs 300 3,820
Other 994 5,727
----------------- ----------------
$ 5,242 $ 29,168
================= ================
(6) STOCKHOLDERS' EQUITY
The Company completed its IPO of 5,750,000 shares, inclusive of
750,000 shares from the exercise of the underwriters' over-allotment option,
at a price of $23 per share on February 7, 1997. Net proceeds from the
offering were approximately $121.8 million with an additional $0.6 million
received from the exercise of certain outstanding warrants. On July 2, 1997 the
Company completed a public offering of 10,477,216 shares, inclusive of
1,366,594 shares from the exercise of the underwriters' over-allotment option,
at a price of $44 per share less underwriters' discounts and commissions. Of
the 10,477,216 shares sold, 1,252,060 shares were sold by the Company, and
9,225,156 shares by selling stockholders. Net proceeds to the company from the
public offering were approximately $52.2 million. As of July 31, 1997, the
Company's income taxes currently payable for both federal and state purposes
have been reduced by a tax benefit of approximately $17.6 million resulting
from exercises of certain stock warrants which amount has been credited
directly to long-term deferred income taxes.
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PART I. - FINANCIAL INFORMATION (CONTINUED)
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. The Company has set forth in a Form 8-K Report, as
filed with the Securities and Exchange Commission on February 19, 1997, and
updated and amended on August 6, 1997 (the "Updated Form 8-K") a detailed
statement of risks and uncertainties relating to the Company's business. In
addition, set forth below under the heading "Risk Considerations" below is a
further update since August 6, 1997 of certain of those risks as they relate to
the period covered by this report, the Company's near term outlook with respect
thereto, and the forward-looking statements set forth herein; however, because
the Updated Form 8-K was filed just fourteen days prior to the filing of this
quarterly report, the absence in this quarterly report of a complete
recitation of or update to all risk factors identified in the Updated Form 8-K
should not be interpreted as modifying or superseding any such risk factor,
except to the extent set forth below. Investors should review this quarterly
report in combination with the Updated Form 8-K in order to have a more
complete understanding of the principal risks associated with an investment in
the Company's Common Stock.
OVERVIEW
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.
The Company completed its IPO of 5,750,000 shares, inclusive of 750,000
shares from the exercise of the underwriters over-allotment option, at a price
of $23 per share on February 7, 1997. Net proceeds from the offering were
approximately $121.8 million with an additional $0.6 million received from the
exercise of certain outstanding warrants. On July 2, 1997 the Company completed
a public offering of 10,477,216 shares of which 1,252,060 shares were sold by
the company (inclusive of 252,060 shares from the exercise of the underwriters
over-allotment option), at a price of $44 per share less underwriters'
discounts and commissions. Net proceeds to the Company from the public
offering were approximately $52.2 million. The Company has added the net
proceeds from the public offerings and from the exercise of the warrants to
working capital. Pending use of the net proceeds, the Company has invested such
funds in short-term, interest bearing investment grade obligations.
Revenues for the nine months ended July 31, 1997 were $252.8 million and
consisted of MultiWave(TM) 1600 systems sales to Sprint Corporation ("Sprint"),
LDDS WorldCom ("WorldCom") and through the Company's Japanese distributor, to
Teleway Japan Corporation ("Teleway"). During the third quarter of 1997, the
Company also shipped a Multiwave 1600 system to Digital Teleport, Inc. ("DTI")
which upon installation will represent the Company's first deployment of the
MultiWave 1600 as part of a newly built long distance fiberoptic route.
Revenue recognition for the DTI shipment has been deferred until completion of
initial field testing and product acceptance. In June 1997, the Company signed
an agreement to supply MultiWave 1600 systems to Mercury Communications Limited
("Mercury"), a U.K. based subsidiary of Cable and Wireless Communications
Group. The agreement calls for delivery and installation over several months
beginning in August 1997. The Company also entered into an agreement with BICC
Cables, plc, to assist the Company in the delivery of service and support to
Mercury in connection with this installation and operation.
In June 1997 the Company announced a next generation version of the
MultiWave 1600 system, the MultiWave Sentry(TM), which includes enhancements
that significantly expand the ability of the MultiWave system to interface with
data communications equipment in addition to other types of transmission
equipment and increase the distance which can be spanned between transmission
terminals. The Company also announced a trial evaluation agreement with AT&T
Corporation ("AT&T"), which calls for the Company to supply six 16-channel
MultiWave Sentry systems for laboratory interoperability testing. In August
1997 the Company reached agreement on a five-year supply contract with AT&T.
The supply agreement does not obligate AT&T to make any minimum purchases from
the Company.
The Company is engaged in continuing efforts to expand its manufacturing
capabilities. In April 1997 the Company moved its non-manufacturing operating
functions to an approximately 96,000 square foot facility near the
Baltimore/Washington International Airport in Linthicum, Maryland. During the
third quarter ended July 1997, the Company completed the process of renovating
the vacated areas of the 50,500 square foot facility in Savage, Maryland for
manufacturing capabilities. In March 1997 the Company signed a lease for an
additional facility of approximately 57,000 square feet located in Linthicum.
As of
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August 1997 approximately two thirds of this facility had been renovated to be
used for additional manufacturing requirements and expanded customer service
operations with the remaining improvements expected to be completed by the
fiscal year end.
The Company expects to add leased non-manufacturing facilities during the
fourth quarter of fiscal 1997 in Atlanta, Georgia and in New Jersey. These
facilities will be used for product development, customer support and other
selling and marketing activities. The Company also expects to lease an
additional non-manufacturing facility of approximately 68,000 square feet in
the Linthicum area, which it will use for expansion over the next two or three
quarters.
As of July 31, 1997 the Company employed 638 persons, which was an increase
of 195 persons over the quarter ended April 30, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
REVENUE. The Company recognized $112.2 million and $16.9 million in
Multiwave 1600 system revenue for the third quarters ended July 31, 1997 and
1996, respectively. The increase in revenues for the third quarter 1997
compared to the third quarter 1996 was the result of expanded Multiwave 1600
systems sales to Sprint and the addition of MultiWave 1600 system sales to
WorldCom.
GROSS PROFIT. Gross profits for the third quarters ended July 31, 1997 and
1996, were $72.0 million and $9.6 million or 64.2% and 56.6% of revenue,
respectively. The approximate $62.4 million increase in gross profits was
largely attributable to higher sales volumes. The improvement in gross margin
was largely due to lower product costs resulting from greater efficiencies
achieved in purchasing and manufacturing activities associated with higher unit
volumes. The Company's gross margins in the future may be affected by a number
of factors, including competitive market pricing, manufacturing volumes and
efficiencies and fluctuations in component costs. The Company's future gross
margins may also be affected by the mix of product features and configurations
sold in a period as well as the extent of services provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $7.2 million and $2.0 million for the third quarters ended July 31, 1997
and 1996, respectively. The increase in research and development expenses was
related to increased staffing levels, purchase of materials used in development
of new or enhanced product prototypes, and outside consulting services in
support of certain development and design efforts. During the third quarters
ended July 31, 1997 and 1996, research and development expenses were 6.5% and
11.6% of revenue, respectively. The Company believes its research and
development expenditures will continue to increase in absolute dollars and
likely as a percentage of revenue during the remainder of fiscal year 1997 to
support the continued development of the MultiWave system, the exploration of
new or complementary technologies, the development and production of new or
enhanced product prototypes, and the pursuit of various cost reduction
strategies. The Company expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $6.3
million and $1.1 million for the third quarters ended July 31, 1997 and 1996,
respectively. The increase was primarily the result of increased staffing
levels in the areas of sales, technical assistance and field support, and
increases in commissions earned, trade show participation and promotional
costs. During the third quarters ended July 31, 1997 and 1996, selling and
marketing expenses were 5.6% and 6.7% of revenue, respectively. The Company
anticipates that its selling and marketing expenses will increase in absolute
dollars and likely as a percentage of revenue during the remainder of fiscal
year 1997 as additional personnel are hired and offices opened to allow the
Company to pursue new market opportunities. The Company also expects the
portion of selling and marketing expenses attributable to technical assistance
and field support will increase as the Company's sales of operational MultiWave
systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2.6 million and $1.1 million for the third quarters ended July 31, 1997
and 1996, respectively. The increase was primarily the result of increased
staffing levels and outside consulting services. During the third quarters
ended July 31, 1997 and 1996, general and administrative expenses were 2.3%
and 6.3% of revenue, respectively. The Company believes that its general and
administrative expenses for the remainder of fiscal 1997 will increase in
absolute dollars during the remainder of fiscal year 1997 due to the expansion
of the Company's administrative staff required to support its expanding
operations and an increase in expenses associated with operating as public
company.
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OPERATING MARGINS. The Company's operating margin for the third quarters
ended July 31, 1997 and 1996, were $55.8 million and $5.4 million or 49.8% and
32.0% of revenue, respectively. The Company expects that its operating margins
will decrease as it continues to hire additional personnel and increase
operating expenses to support its business.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other income
increased to $1.5 million for the third quarter ended July 31, 1997 from $0.1
million for the same period in 1996. The net increase was attributable to
higher invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
39% of pretax earnings, or $22.3 million for the third quarter ended July 31,
1997. During the third quarter ended July 31, 1996, a valuation allowance that
had been recorded to offset the Company's deferred tax assets, including the
possible future benefit from the realization of tax operating loss carry
forwards, was reversed resulting in a $4.6 million tax benefit for the quarter.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
REVENUE. The Company recognized $252.8 million and $16.9 million in
Multiwave 1600 system revenue for the nine months ended July 31, 1997 and 1996,
respectively. The Company began shipping the MultiWave 1600 system for field
testing in May 1996 with customer acceptance by Sprint occurring in July 1996.
The MultiWave 1600 system began carrying live traffic in the Sprint network in
October 1996, and the field trials in the WorldCom and Teleway networks were
successfully completed in December 1996 and March 1997, respectively. Revenues
for the nine months ended July 31, 1997 were the result of Multiwave 1600
systems sales to Sprint as well as the initial product acceptance and revenue
recognition of Multiwave 1600 systems shipped to WorldCom and Teleway. All of
the revenues for the nine months ended July 31, 1996 were attributable to
Multiwave 1600 systems sales to Sprint.
GROSS PROFIT. Gross profits for the nine months ended July 31, 1997 and
1996, were $159.8 million and $9.6 million or 63.2% and 56.6% of revenue,
respectively. The approximate $150.2 million increase in gross profits was
largely attributable to higher sales volumes. The improvement in gross margin
was largely due to lower product costs resulting from greater efficiencies
achieved in purchasing and manufacturing activities associated with higher unit
volumes. The Company's gross margins in the future may be affected by a number
of factors, including competitive market pricing, manufacturing volumes and
efficiencies and fluctuations in component costs. The Company's future gross
margins may also be affected by the mix of product features and configurations
sold in a period as well as the extent of services provided.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$15.0 million and $6.2 million for the nine months ended July 31, 1997 and
1996, respectively. The approximate $8.8 million or 143% increase in research
and development expenses from the nine months ended July 31, 1996 to the nine
months ended July 31, 1997 was related to increased staffing levels, purchase
of materials used in development of new or enhanced product prototypes, and
outside consulting services in support of certain development and design
efforts. During the nine months ended July 31, 1997 and 1996, research and
development expenses were 5.9% and 36.5% of revenue, respectively. The Company
expects that its research and development expenditures will continue to
increase in absolute dollars and likely as a percentage of revenue during the
remainder of fiscal year 1997 to support the continued development of the
MultiWave system, the exploration of new or complementary technologies, the
development and production of new or enhanced product prototypes, and the
pursuit of various cost reduction strategies. The Company has expensed research
and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $13.4
million and $2.3 million for the nine months ended July 31, 1997 and 1996,
respectively. The approximate $11.1 million or 477% increase was primarily the
result of increased staffing levels in the areas of sales, technical assistance
and field support, and increases in commissions earned, trade show
participation and promotional costs. During the nine months ended July 31,
1997 and 1996, selling and marketing expenses were 5.3% and 13.7% of revenue,
respectively. The Company anticipates that its selling and marketing expenses
will increase in absolute dollars and likely as a percentage of revenue during
the remainder of fiscal year 1997 as additional personnel are hired and offices
opened to allow the Company to pursue new market opportunities. The Company
also expects the portion of selling and marketing expenses attributable to
technical assistance and field support will increase as the Company's sales of
operational MultiWave systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $11.0 million and $2.1 million for the nine months ended July 31, 1997 and
1996, respectively. The approximate $8.9 million increase for the nine months
ended July 31, 1997 was primarily the result of a $5.0 million charge to accrue
estimated legal and related costs associated with pending litigation, of which
$1.6 million has been paid as of July 31, 1997. See Part II, Item 1 "Legal
Proceedings". The
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remaining increase was primarily the result of increased staffing levels and
outside consulting services . During the nine months ended July 31, 1997 and
1996, general and administrative expenses were 4.4% and 12.3% of revenue,
respectively. The Company believes that its general and administrative
expenses for the remainder of fiscal 1997 will increase from the $6.0 million
level ($11.0 million less the $5.0 million estimated legal and related costs
accrual) incurred in the nine months ended July 31, 1997 due to the expansion
of the Company's administrative staff required to support its expanding
operations and an increase in expenses associated with operating as public
company.
OPERATING MARGINS. The Company's operating margin for the nine months ended
July 31, 1997 was $120.4 million compared to a loss of $1.0 million for the
nine months ended July 31, 1996, or 47.6% and (6.0)% of revenue, respectively.
The Company expects that its operating margins will decrease as it continues to
hire additional personnel and increase operating expenses to support its
business.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other income
increased to $3.6 million for the nine months ended July 31, 1997 from $0.4
million for the same period in 1996. The net increase was attributable to
higher invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
39% of pretax earnings, or $48.4 million for the nine months ended July 31,
1997. During the nine months ended July 31, 1996, a valuation allowance that
had been recorded to offset the Company's deferred tax assets, including the
possible future benefit from the realization of tax operating loss carry
forwards, was reversed resulting in a $4.6 million tax benefit for the period.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company's principal source of liquidity was its cash
and cash equivalents of $244.5 million, which increased by $221.9 million from
October 31, 1996. In November 1996, the Company established an unsecured $15.0
million bank revolving line of credit. Borrowings under this line bear interest
at the bank's prime rate. As of July 31, 1997, there were no borrowings
outstanding under the line of credit.
Cash generated from operations was $78.5 million for the nine months ended
July 31, 1997. This amount was principally attributable to net income adjusted
for the non-cash charges of depreciation, amortization, provisions for
inventory obsolescence and warranty, increases in accounts payable, accrued
expenses and income tax payable; offset by increases in accounts receivable and
inventory due to increased revenue and to the general increase in business
activity.
Investment activities during the nine months ended July 31, 1997 were for
capital expenditures of $47.8 million. Capital equipment expenditures in the
first nine months of fiscal 1997 totaled $35.4 million and were primarily for
test, manufacturing and computer equipment. In addition, during the first nine
months of fiscal 1997 the Company used $12.4 million for the construction of
leasehold improvements associated with its manufacturing and non-manufacturing
facilities in Savage and Linthicum, Maryland. In March 1997 the Company signed
a lease for an additional facility of approximately 57,000 square feet located
in Linthicum, Maryland. As of June 1997 approximately two thirds of this
facility had been renovated to be used for additional manufacturing
requirements and expanded customer service operations. The Company intends to
add additional leased non-manufacturing facilities and office space during the
fourth quarter of fiscal 1997 and expects to spend up to an additional $4.0
million to $7.0 million to complete the improvements of its facilities during
the fourth quarter of fiscal 1997.
Cash generated from financing activities during the nine months ended July
31, 1997 was $191.2 million. This amount was primarily the result of the net
proceeds from the Company's February 7, 1997 IPO of approximately $121.8
million, the net proceeds from the Company's July 2, 1997 public offering of
approximately $52.2 million, and a $17.6 million tax benefit related to the
exercise of stock warrants.
The Company believes that the net proceeds from the February 7, 1997 IPO
and the July 2, 1997 public offering, combined with its existing cash balance,
its line of credit and cash flows expected from future operations, will be
sufficient to meet the Company's capital requirements for at least the next 18
to 24 months.
NEWLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 simplifies the earnings per share (EPS) computation and
replaces the presentation of primary EPS with a presentation of basic EPS.
This statement also requires dual presentation of basic and
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13
diluted EPS on the face of the income statement for entities with a complex
capital structure and requires a reconciliation of the numerator and
denominator used for the basic and diluted EPS computation. The Company is not
required to implement SFAS No. 128 until Fiscal 1998; however, if implemented
in the current period, the weighted average shares outstanding for basic EPS
and the resulting EPS would be 97,021,000 and $.36 for the quarter ended July
31, 1997, 67,643,000 and $1.12 for the nine months ended July 31,
1997,13,055,000 and $.77 for the quarter ended July 31, 1996 and 12,688,000 and
$.32 for the nine months ended July 31, 1996. Diluted EPS under SFAS No. 128
will be the same as currently presented.
RISK CONSIDERATIONS
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 and
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 purchase 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 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.
Additionally, the size and complexity of the Company's potential customers,
and the typically long and unpredictable sales cycles associated with them,
require the Company to make considerable early investments in account
management personnel, product customization efforts in both engineering and
manufacturing, and in some cases, facilities in proximity to the customer's
locations, without assurance of future revenues. For example, due to the size
and complexity of the AT&T network, the Company has invested and expects over
the next two quarters to continue to invest considerable financial,
engineering, manufacturing and logistics support resources in positioning the
commercial relationship to be successful, but has done so and will continue to
do so without any assurance as to the volume, duration or timing of any
purchases which might ensue from AT&T. The Company intends to make similar
investments in developing customer relationships with the regional Bell
operating companies, as well as internationally. Over the near term, this
investment of resources will be evident in increased operating expenses and in
a rise in the Company's general overhead structure. If the Company is unable
to convert these investments into significant revenue generating relationships
during 1998, the Company's business, financial condition and results of
operations could be materially and adversely affected.
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 638 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 in Maryland by the end of May 1997. The Company intends to
lease additional space in the Maryland area to accommodate the Company's
overall growth, and also intends to establish a development center in Atlanta,
Georgia. This expansion, and the attendant separation and relocation of
various functions to different facilities, has placed strains on the material,
financial and
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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, who are among the most demanding customers in the world in terms of
requirements 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. Further, as the Company's base of
customers expands, particularly internationally, the number and breadth of
expertise of Company personnel needed to manage and, ultimately, satisfy the
unique requirements of each customer also increases. The Company also
continues to increase its flow of materials, optical assembly, final assembly
and final component module and system test functions, as well as the size of
its sales and marketing organization, 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, and customer account management
personnel added, 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.
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. Quarter-to-quarter growth rates are
currently expected to moderate over the next two quarters.
LONG AND UNPREDICTABLE SALES CYCLES. 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 detailed 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 MultiWave 1600 systems, could result in material
fluctuations in the timing of orders and revenue, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LEGAL PROCEEDINGS. See Part II, "Legal Proceedings" for disclosure
concerning recent developments in certain litigation proceedings to which the
Company is a party.
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
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15
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, including product customization efforts for
individual customers, can result in unanticipated delays. The qualification
and ramping up of new suppliers for new or customized products requires
extensive planning and can result in unanticipated delays which affect the
Company's ability to deliver such products in a timely fashion. The failure in
the future to deliver new and improved products, or appropriately customized
products, in a timely fashion relative to customer expectations could have a
material adverse effect on the Company's competitive position.
STOCK PRICE ISSUES
SHARES ELIGIBLE FOR SALE ON AND AFTER AUGUST 7, 1997. Approximately
52,700,000 shares of the Company's Common Stock were subject to lock-up
agreements entered into at the time of the Company's initial public offering
(the "IPO Lock-up Agreements") which expired on August 7, 1997, and
approximately 17,500,000 shares are subject to lock-up agreements which will
expire October 2, 1997. Substantially all shares held by stockholders that
were parties to the IPO Lock-Up Agreements were freed from lock-up restrictions
on August 7, 1997 and are 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 2, 1997, except for shares held by affiliates
of the Company. In addition, approximately 1,100,000 vested shares and
1,200,000 shares issuable upon the exercise of vested options were 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 then current operating performance or its
long-term prospects.
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. The Company
attempts to address this possible divergence through its public announcements;
however, the degree of specificity the Company can offer in such announcements,
and the likelihood that any forward-looking statements made by the Company will
prove correct in actual results, can and will vary, due primarily to the
uncertainties associated with the Company's dependence on a small number of
existing and potential customers, long and unpredictable sales cycles and
customer purchasing programs, 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. Such divergence may therefore occur from time to time, with
resulting stock price volatility, irrespective of the Company's overall year to
year performance or long term prospects. 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 or long term prospects.
PART II. OTHER INFORMATION
ITEM 1. 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, 1998, 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
15
16
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 in December 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 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 later in the fiscal year 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.
As the Delaware, ITC and Virginia proceedings converge toward trials, the
Company expects pre-trial motions, including motions for summary judgment, will
be filed by both parties with a view to narrowing or disposing of one or more
of the claims in one or more of the proceedings. The Company believes that
rulings on such motions, whether made by CIENA or Pirelli, may but most likely
will not result in complete disposition of all litigation, and continues to
plan on going to trial in all litigation. The Company also anticipates that as
the proceedings converge toward trials, either or both parties may take actions
to amend or add to the patent infringement claims already pending. The Company
continues to believe that its MultiWave system does not infringe any valid
patents held by Pirelli.
In both the Delaware litigation and the Virginia litigation, briefing for
so-called "Markman" hearings is likely to proceed during the fourth fiscal
quarter, with the actual hearings to be scheduled at the discretion of the
judges. Markman hearings are pre-trial proceedings required in all patent
infringement litigation, and will result in rulings by the trial judges on
certain issues of patent claim construction. These rulings then become the
basis for later jury determination of the infringement claims. There is no
assurance that the rulings will support the Company's position in the
litigation, and even if they do support the Company's position, the Company
does not believe such rulings would result in complete disposition of any of
the litigation.
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
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17
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 vigorously. Discovery proceedings are now completed,
and the Company expects to move for summary judgment on the matter. The
Company believes the motion for summary judgment should be granted, but there
is no assurance of that outcome. If the motion is not granted the Company
intends to proceed to trial. No assurance can be given that this lawsuit will
not result in an adverse effect on the Company's business, financial condition
and results of operation.
ITEM 2. CHANGE IN SECURITIES
During the quarter ended July 31, 1997,and prior to the May 14, 1997
effective date of the Form S-8 with the Securities and Exchange Commission in
connection with the registration of Common Stock issuable upon exercise of
options granted pursuant to the Company's 1994 Amended and Restated Stock
Option Plan ("the Plan") and the 1996 Outside Directors Stock Option Plan, the
Company issued an aggregate of 3,125 shares of Common Stock in connection with
the exercise of stock options by optionees under the Plan and received an
aggregate of $2,875.00 in payment of the exercise prices of these options. The
shares sold in connection with those exercised prior to the effective
registration of the Plan were not registered in reliance on the exemption
provided under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following are annexed as Exhibits:
Exhibit
Number Description
------- -----------
11.0 Statement of Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed August 6, 1997.
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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 20, 1997 By: /s/ Patrick H. Nettles
--------------- ----------------------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: August 20,1997 By: /s/ Joseph R. Chinnici
-------------- ----------------------------------
Joseph R. Chinnici
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit Number Description Page
11.0 Statements Regarding Computation of Per Share
Earnings for the three and nine months ended July 31,
1997 and three and nine months ended July 31, 1996 20
27.0 Financial Data Schedule 21
19
1
CIENA CORPORATION
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Three months ended Nine months ended
July 31, July 31, July 31, July 31,
1996 1997 1996 1997
------------- -------------- --------------- --------------
Net income $10,094,000 $ 34,949,000 $ 4,025,000 $ 75,634,000
============= ============== =============== ==============
Weighted average shares of common
stock outstanding 13,055,000 23,705,000 12,688,000 20,277,000
Weighted average effect of convertible
preferred stock on as-if-converted
basis 73,316,000 73,316,000 69,842,000 73,316,000
Weighted average effect of common
stock equivalents 10,911,000 8,275,000 9,525,000 8,498,000
Staff Accounting Bulletin No. 83
issuances and grants:
Common shares issued within one
year of initial filing 137,000 - 504,000 623,000
Common stock equivalents issued within
one year of initial filing 1,692,000 - 3,078,000 36,000
Convertible preferred stock issued within
one year of initial filing - - 3,474,000 -
------------- -------------- --------------- --------------
99,111,000 105,296,000 99,111,000 102,750,000
============= ============== =============== ==============
Net income per common
and common equivalent share $ 0.10 $ 0.33 $ 0.04 $ 0.74
============= ============== =============== ==============
20
5
1,000
3-MOS
OCT-31-1997
MAY-01-1997
JUL-31-1997
244,485
0
57,103
200
29,103
337,493
60,449
7,255
391,060
75,459
0
0
0
983
294,934
295,917
112,189
112,189
40,158
40,158
16,190
0
75
57,294
22,345
34,949
0
0
0
34,949
0.33
0.33
