1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM..................TO.........................
COMMISSION FILE NUMBER: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of Principal Executive Offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
920 ELKRIDGE LANDING ROAD, LINTHICUM, MD 21090
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 21, 1998
---------------------------- ---------------------------
Common stock. $.01 par value 101,590,437
Page 1 of 27 pages
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CIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and six months ended April 30, 1997
and April 30, 1998 3
Consolidated Balance Sheets
October 31, 1997 and April 30, 1998 4
Consolidated Statements of Cash Flows
Six months ended April 30, 1997 and
April 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosure About
Market Risk - Not applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
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ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Quarter Ended Six Months Ended
-------------------------- --------------------------
April 30, April 30, April 30, April 30,
1997 1998 1997 1998
--------- --------- --------- ---------
Revenue $ 97,603 $ 142,718 $ 161,276 $ 287,810
Cost of goods sold 40,400 63,915 68,653 122,895
--------- --------- --------- ---------
Gross profit 57,203 78,803 92,623 164,915
--------- --------- --------- ---------
Operating expenses:
Research and development 4,699 16,648 7,749 26,851
Selling and marketing 4,946 11,044 8,016 21,012
General and administrative 2,797 14,448 9,800 18,240
Purchased research and development - 9,503 - 9,503
--------- --------- --------- ---------
Total operating expenses 12,442 51,643 25,565 75,606
--------- --------- --------- ---------
Income from operations 44,761 27,160 67,058 89,309
Interest and other income (expense), net 1,951 3,431 2,382 7,206
Interest expense (105) (81) (234) (165)
--------- --------- --------- ---------
Income before income taxes 46,607 30,510 69,206 96,350
Provision for income taxes 18,127 15,205 26,871 41,347
--------- --------- --------- ---------
Net income $ 28,480 $ 15,305 $ 42,335 $ 55,003
========= ========= ========= =========
Basic net income per common share $ 0.31 $ 0.15 $ 0.80 $ 0.54
========= ========= ========= =========
Diluted net income per common share and dilutive
potential common share $ 0.27 $ 0.14 $ 0.41 $ 0.51
========= ========= ========= =========
Weighted average basic common shares outstanding 92,644 101,350 53,002 100,996
========= ========= ========= =========
Weighted average basic common and dilutive potential
common shares outstanding 105,456 107,560 102,486 107,598
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
October 31, April 30,
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 268,588 $ 174,474
Marketable debt securities - 51,765
Accounts receivable, net 72,336 131,990
Inventories, net 41,109 68,955
Deferred income taxes 9,139 10,335
Prepaid expenses and other 3,093 7,438
--------- ---------
Total current assets 394,265 444,957
Equipment, furniture and fixtures, net 67,618 114,252
Goodwill and other intangible assets, net - 13,436
Other assets 1,396 2,412
--------- ---------
Total assets $ 463,279 $ 575,057
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,760 $ 36,629
Accrued liabilities 32,022 43,451
Income taxes payable 261 2,180
Deferred revenue 2,591 3,576
Other current obligations 1,179 936
--------- ---------
Total current liabilities 60,813 86,772
Deferred income taxes 28,167 30,124
Other long-term obligations 1,885 1,779
--------- ---------
Total liabilities 90,865 118,675
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock - par value $.01; 360,000,000 shares authorized;
100,287,653 and 101,573,933 shares issued and outstanding 1,003 1,016
Additional paid-in capital 245,219 274,408
Notes receivable from stockholders (64) (277)
Translation adjustment (5) (29)
Retained earnings 126,261 181,264
--------- ---------
Total stockholders' equity 372,414 456,382
--------- ---------
Total liabilities and stockholders' equity $ 463,279 $ 575,057
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended April 30,
---------------------------
1997 1998
--------- ---------
Cash flows from operating activities:
Net income $ 42,335 $ 55,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash charges from equity transactions 20 20
Amortization of premiums on marketable debt securities - 164
Effect of Translation Adjustments (13) (24)
Purchased research and development - 9,503
Write down of leasehold improvements 571 -
Depreciation and amortization 3,209 13,925
Allowance for doubtful accounts 492 194
Provision for inventory excess and obsolescence 2,098 1,683
Provision for warranty and other contractual obligations 5,872 6,400
Changes in assets and liabilities:
Increase in accounts receivable (15,187) (59,848)
Increase in prepaid expenses and other (418) (4,345)
Increase in inventories (11,729) (29,529)
Increase in deferred income tax asset (2,607) (1,196)
Increase in other assets (593) (3,664)
Increase in accounts payable and accruals 20,501 16,898
Increase in income taxes payable 6,805 1,919
Increase in deferred income tax liability - 1,957
(Decrease) increase in deferred revenue and other
obligations (3,078) 1,131
--------- ---------
Net cash provided by operating activities 48,278 10,191
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (27,567) (57,979)
Purchases of marketable debt securities - (88,305)
Maturities of marketable debt securities 36,376
Net cash paid for business combination - (2,103)
--------- ---------
Net cash used in investing activities (27,567) (112,011)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable (556) -
Proceeds for issuance of common stock and warrants 122,517 1,316
Tax benefit related to exercise of stock warrants 17,560 6,885
Repayment of other obligations (468) (495)
--------- ---------
Net cash provided by financing activities 139,053 7,706
--------- ---------
Net increase (decrease) in cash and cash equivalents 159,764 (94,114)
Cash and cash equivalents at beginning of period 24,040 268,588
--------- ---------
Cash and cash equivalents at end of period $ 183,804 $ 174,474
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA
Corporation (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, 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 at the date of the interim
balance sheet. Certain information and footnote disclosures normally included in
the annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, 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, 1997 audited consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report for the fiscal year ended
October 31, 1997.
As more fully described in Note 5, the Company acquired ATI Telecom
International Ltd., ("Alta") in February 1998. The acquisition was accounted for
as a pooling of interests, and the historical consolidated financial statements
of the Company for all periods prior to this acquisition have been restated to
include the financial position, results of operations and cash flows of Alta.
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, revenue is deferred until the terms of acceptance are
satisfied. Revenue for installation services is recognized as the services are
performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying balance sheets. For distributor sales where risks of
ownership have not transferred, the Company recognizes revenue when the product
is shipped through to the end user.
Marketable debt securities
The Company has classified its investments in marketable debt
securities as held-to-maturity securities as defined by Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Such investments are recorded at their amortized cost in the
accompanying consolidated balance sheets. As of April 30, 1998 all of the
marketable debt securities are corporate debt securities with contractual
maturities of six months or less.
Goodwill and other intangibles
The Company's goodwill and other intangibles are the result of
external purchases of technology and goodwill and are recorded at the lower of
their cost or the fair market value disbursed in conjunction with the purchase.
The goodwill and other intangibles are amortized over the useful life of the
assets, determined by
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management to be between five and fourteen years, on a straight-line basis. For
the period ended April 30, 1998, the Company recorded goodwill amortization of
approximately $568,000, resulting in accumulated amortization of $947,000 as of
April 30, 1998.
Computation of Basic Net Income per Common Share and Diluted Net Income per
Common and Dilutive Potential Common Share
The following is a reconciliation of the numerators and denominators of
the basic net income per common share ("basic EPS") and diluted net income per
common and dilutive potential common share ("diluted EPS"). Basic EPS is
computed using the weighted average number of common shares outstanding. Diluted
EPS is computed using the weighted average number of common shares outstanding,
stock options and warrants using the treasury stock method and shares issued
upon conversion of all outstanding shares of Mandatorily Redeemable Preferred
Stock. (in thousands except per share amounts)
For the Quarter Ended April 30, 1998
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to
common stockholders $15,305 101,350 $ 0.15
========
EFFECT OF DILUTIVE SECURITIES
Stock options - 6,210
------- -------
DILUTED EPS
Income available to common
stockholders + assumed conversions $15,305 107,560 $ 0.14
======= ======= ========
For the Quarter Ended April 30, 1997
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Income available to
common stockholders $28,480 92,644 $ 0.31
========
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants - 8,652
Conversion of Preferred Stock - 4,160
------- -------
DILUTED EPS
Income available to common
stockholders + assumed conversions $28,480 105,456 $ 0.27
======= ======= ========
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For Six Months Ended April 30, 1998
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to
common stockholders $55,003 100,996 $ 0.54
========
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants - 6,602
------- -------
DILUTED EPS
Income available to common
stockholders + assumed conversions $55,003 107,598 $ 0.51
======= ======= ========
For Six Months Ended April 30, 1997
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Income available to
common stockholders $42,335 53,002 $ 0.80
========
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants - 9,607
Conversion of Preferred Stock - 39,877
------- -------
DILUTED EPS
Income available to common
stockholders + assumed conversions $42,335 102,486 $ 0.41
======= ======= ========
Stock options to purchase 1,070,275 and 709,500 shares of common stock
were outstanding during the quarter ended and six months ended April 30, 1998,
respectively, but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, April 30,
1997 1998
---------- ----------
Raw materials $ 27,716 $ 35,826
Work-in-process 5,679 17,747
Finished goods 15,180 22,891
-------- --------
48,575 76,464
Less reserve for excess and obsolescence (7,466) (7,509)
-------- --------
$ 41,109 $ 68,955
======== ========
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(3) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
October 31, April 30,
1997 1998
----------- -----------
Equipment, furniture and fixtures $ 65,378 $ 116,126
Leasehold improvements 14,019 22,660
--------- ---------
79,397 138,786
Accumulated depreciation and amortization (12,279) (24,794)
Construction-in-progress 500 260
--------- ---------
$ 67,618 $ 114,252
========= =========
(4) ACCRUED LIABILITIES - COMMITMENTS AND CONTINGENCIES
LITIGATION
During the fiscal year ended October 31, 1997 the Company accrued
approximately $7.5 Million for legal and related costs associated with its
involvement in certain litigation. The Company has accrued an additional $10.0
million during the second quarter ending April 30, 1998; $11.1 million of the
total accrual is remaining. 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 in future periods
depending on the course of the legal proceedings. See part ii, item 1, "Legal
Proceedings".
Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
October 31, April 30,
1997 1998
---------- -----------
Warranty and other contractual obligations $12,265 $13,586
Accrued compensation 8,086 9,727
Legal and related costs 4,577 11,597
Consulting and outside services 3,295 2,976
Unbilled construction-in-process and leasehold improvements 1,427 911
Other 2,372 4,654
------- -------
$32,022 $43,451
======= =======
(5) ACQUISITION
Astracom
During December 1997 the Company completed an Agreement and Plan of Merger
with Astracom, Inc. ("Astracom"), an early stage telecommunications company
located in Atlanta, Georgia. The purchase price was approximately $13.1 million
and consisted of the issuance of 169,754 shares of CIENA common stock, the
payment of $2.4 million in cash, and the assumption of certain stock options.
The transaction was recorded using the purchase accounting method with the
purchase price representing approximately $11.4 million in goodwill and other
intangibles, and approximately $1.7 million in net assets assumed. The
amortization period for the intangibles, based on management's estimate of the
useful life of the acquired technology, is five years. The operations of
Astracom are not material to the consolidated financial statements of the
Company, and accordingly, separate pro forma financial information has not been
presented.
ATI Telecom
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On February 19, 1998, the Company acquired ATI Telecom International Ltd.,
("Alta"), a Canadian corporation headquartered in Norcross, Georgia, in a
transaction valued at approximately $52.5 million. Alta provides a range of
engineering, furnishing and installation services for telecommunications service
providers in the areas of transport, switching and wireless communications.
Under the terms of the agreement, the Company acquired all of the outstanding
shares of Alta in exchange for 1,000,000 shares of CIENA common stock. The
transaction was accounted for as a pooling of interests. The historical
consolidated financial results of CIENA for prior periods have been restated to
include the financial position and results of operations of Alta. The following
results of operations and selected financial data shows the historical results
of the combined CIENA and Alta for the periods prior to the consummation of the
merger of the two entities:
(in thousands except share and per share data) Quarter
Statement of Operations Data: Ended
Year Ended October 31, January 31,
1995 1996 1997 1998
-------------------------------------------- -----------
Revenue $ 21,691 $ 88,463 $ 413,215 $ 145,092
Cost of goods sold 16,185 47,315 166,472 58,980
--------- --------- --------- ---------
Gross profit 5,506 41,148 246,743 86,112
--------- --------- --------- ---------
Operating expenses:
Research and development 6,361 8,922 23,308 10,203
Selling and marketing 1,907 5,641 22,627 9,968
General and administrative 3,034 6,422 19,323 3,792
--------- --------- --------- ---------
Total operating expenses 11,302 20,985 65,258 23,963
--------- --------- --------- ---------
Income from operations (5,796) 20,163 181,485 62,149
Interest and other income (expense), net 435 1,096 7,593 3,775
Interest expense (263) (443) (408) (84)
--------- --------- --------- ---------
Income before income taxes (5,624) 20,816 188,670 65,840
Provision for income taxes 824 3,553 72,703 26,142
--------- --------- --------- ---------
Net income (loss) $ (6,448) $ 17,263 $ 115,967 $ 39,698
========= ========= ========= =========
Basic net income (loss) per common share $ (0.51) $ 1.25 $ 1.53 $ 0.39
========= ========= ========= =========
Diluted net income (loss) per common share and dilutive
potential common share $ (0.51) $ 0.19 $ 1.11 $ 0.37
========= ========= ========= =========
Weighted average basic common shares outstanding 12,717 13,817 75,802 100,641
========= ========= ========= =========
Weighted average basic common and dilutive potential
common shares outstanding 12,717 92,407 104,664 107,552
========= ========= ========= =========
(in thousands) Quarter
Balance Sheet Data: Ended
Year Ended October 31, January 31,
1995 1996 1997 1998
----------------------------------------------------------
Cash, cash equivalents and marketable debt securities $ 8,261 $ 24,040 $268,588 $288,514
Working capital 7,221 42,240 333,452 364,358
Total assets 17,706 79,676 463,279 551,105
Long-term obligations, excluding current portion 2,074 3,465 1,885 1,942
Mandatorily redeemable preferred stock 14,454 40,404 - -
Stockholders' equity (deficit) (6,662) 10,783 372,414 430,360
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The following table shows the separate historical results of CIENA and
Alta for the periods prior to the consummation of the merger of the two
entities:
(in thousands) Quarter
Ended
Year Ended October 31, January 31,
1995 1996 1997 1998
-------------------------------------------------------------
Revenues:
CIENA $ - $ 54,838 $ 373,827 $ 134,267
Alta 21,691 33,625 39,531 11,349
Intercompany eliminations - - (143) (524)
--------- --------- --------- ---------
Consolidated total, as restated $ 21,691 $ 88,463 $ 413,215 $ 145,092
========= ========= ========= =========
Net Income (loss):
CIENA $ (7,629) $ 14,718 $ 112,945 $ 39,768
Alta 1,181 2,545 3,022 (70)
--------- --------- --------- ---------
Consolidated total, as restated $ (6,448) $ 17,263 $ 115,967 $ 39,698
========= ========= ========= =========
Terabit
During April 1998 the Company completed an Agreement and Plan of
Reorganization with Terabit Technology, Inc. ("Terabit"), a developer of optical
components known as photodetector or optical receivers. Terabit is located in
Santa Barbara, California. The purchase price was approximately $11.5 million
and consisted of the issuance of 134,390 shares of CIENA common stock, the
payment of $1.1 million in cash, and the assumption of certain stock options.
The transaction was recorded using the purchase accounting method with the
purchase price representing approximately $9.5 million in purchased research and
development, 1.8 million in goodwill and other intangibles, and approximately
$0.2 million in net assets assumed. The amortization period for the intangibles,
based on management's estimate of the useful life of the acquired technology, is
five years. The operations of Terabit are not material to the consolidated
financial statements of the Company, and accordingly, separate pro forma
financial information has not been presented.
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 Form 10-K Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors," as filed with the Securities and Exchange Commission
on December 10, 1997, and in a Form 8-K filed on December 29, 1997, a detailed
statement of risks and uncertainties relating to the Company's business. In
addition, set forth below under the heading "Risk Factors" is a further
discussion 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, the absence in this
quarterly report of a complete recitation of or update to all risk factors
identified in the Form 8-K or Form 10-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 Form 8-K
and Form 10-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 for fiberoptic communications networks. CIENA's
DWDM systems alleviate capacity constraints and enable flexible provisioning of
additional bandwidth on high-traffic routes in carriers' networks.
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Revenues for the six months ended April 30, 1998 of $287.8 million were
the result of MultiWave(R) Sentry(TM)("Sentry"), Multiwave 4000 ("4000"), and
Multiwave 1600 ("1600") systems sales, the significant majority of which were to
Sprint Corporation ("Sprint"). The Company also recognized revenues from 1600
sales to LDDS WorldCom ("WorldCom"). Substantially all of the revenue recognized
from the sales to WorldCom occurred in the Company's first quarter ended January
31, 1998. During the first quarter of 1998 the Company received initial product
acceptance and revenue recognition from Sentry systems supplied to Mercury
Communications Limited, a U.K. based subsidiary of Cable and Wireless
Communications Group ("Cable and Wireless"). Additionally, during the first
quarter of 1998, the Company was awarded a second contract with Cable and
Wireless and subsequently received in the second quarter of 1998 product
acceptance and revenue recognition from the Sentry systems supplied under that
contract. Also during the six months ended April 30, 1998 the Company recognized
revenue from sales of 4000 systems to Digital Teleport, Inc. ("DTI") and through
the Company's distributor, NISSHO Electronics Corporation ("NISSHO"), sales of
Sentry systems to Teleway Japan Corporation ("Teleway") and to Japan Telecom
Co., Ltd ("Japan Telecom"). Revenue recognition for the Cable and Wireless,
Teleway and Japan Telecom shipments had been previously deferred until
completion of initial field testing and product acceptance. Revenues for the six
months ended April 30, 1998 also included the Company's initial product
acceptance and revenue recognition from 1600 system sales to GST
Telecommunications, Inc. ("GST"). Revenues received from GST represent the
Company's first sales in the competitive local exchange carrier ("CLEC") market.
In March 1998 the Company announced an agreement to supply Bell Atlantic
with DWDM optical transmission systems. The supply agreement has no minimum
purchase commitments and includes the Company's 1600, Sentry and Multiwave
Firefly(TM) ("Firefly") systems. Firefly is the Company's short distance 24
channel product. Deployment and revenue recognition is expected in the second
half of 1998, subject to successful completion of ongoing testing. The Bell
Atlantic DWDM deployment is expected to mark the first time a regional Bell
operating company ("RBOC") has committed to deployment of the DWDM technology.
In April 1998 the Company signed a one year exclusive contract with Hermes
Europe Railtel ("Hermes") to supply the 4000 system. Deployment and revenue
recognition is expected to occur in the second half of 1998. See "Risk Factors".
In February 1998 the Company completed its acquisition of ATI Telecom
International Ltd., ("Alta"), a provider of telecommunications engineering,
furnishing and installation services, located in Norcross, Georgia. The addition
of Alta provides the Company with the installation experience and extensive
field support capability required to assist customers with equipment deployment.
See Note 5 of Notes to Consolidated Financial Statements.
During the first quarter of 1998 the Company continued its effort to
expand its manufacturing capabilities by leasing an additional facility of
approximately 35,000 square feet located in the Linthicum, Maryland area. This
facility is used for manufacturing and customer service activities. In April
1998 the Company leased an additional manufacturing facility in the Linthicum
area of approximately 57,000 square feet. With the addition of this new facility
the Company has a total of four facilities with approximately 192,500 square
feet that can be used for manufacturing operations. In April 1998 the Company
completed the transfer of its principal executive, sales, and marketing
functions located in Linthicum in a portion of its 96,000 square foot facility
to an approximately 67,000 square foot facility also located in Linthicum.
During the first quarter of 1998, the Company began the process of renovating
the vacated portions of the 96,000 square foot facility for the purpose of
accommodating expanding research and development functions. These renovations
are expected to be completed in the second half of 1998.
As of April 30, 1998 the Company employed 1,247 persons, which
includes 161 persons as a result of the Company's acquisition of Alta. This was
an increase of 406 persons over the 841 persons employed on October 31, 1997.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1997 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
REVENUE. The Company recognized $97.6 million and $142.7 million in
revenue for the second quarters ended April 30, 1997 and 1998, respectively. The
approximate $45.1 million or 46% increase in revenues in the second quarter 1998
compared to the second quarter 1997 was largely the result of increased sales to
Sprint, DTI and Cable and Wireless, offset by a substantial decline in sales to
WorldCom. A majority of the revenues from Sprint and DTI in the Company's second
quarter 1998 was attributed to sales of the Company's 4000 system, the Company's
40 channel version of the Sentry, which was not available for sale in the second
quarter of 1997. The Company expects revenues in the near term to be largely
dependent upon sales to Sprint, several new customers and, depending on the
results of ongoing testing and evaluation, AT&T Corporation ("AT&T"). These
revenues are expected to be derived primarily from sales of the Sentry and 4000,
and to a lesser extent, from Firefly, the Company's short distance 24 channel
product. There are material risks associated with the Company's dependence on
these customers, as well as its transition to multiple product lines. See "Risk
Factors".
GROSS PROFIT. Gross profits were $57.2 million and $78.8 million for
the second quarters ended April 30, 1997 and 1998, respectively. The approximate
$21.6 million or 38% increase in gross profit in the second quarter 1998
compared to the second quarter 1997 was the result of increased revenues in the
second quarter 1998 compared to second quarter 1997. Gross margin as a
percentage of revenues was 58.6% and 55.2% for the second quarters 1997 and
1998, respectively. The decrease in gross margin percentage for the second
quarter 1998 compared to the second quarter 1997 was largely the result of a
reduction in selling price due to increased competition. The Company expects
that gross margins in the near future may decrease primarily due to competitive
market pricing, although the Company's manufacturing efficiencies and
improvements in component costs should moderate the rate and magnitude of any
decrease. The Company's future gross margins will also vary depending on the mix
of product features and configurations sold in a period as well as the extent of
services provided. See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $4.7 million and $16.6 million for the second quarters ended April 30, 1997
and 1998, respectively. During the second quarters 1997 and 1998, research and
development expenses were 4.8% and 11.6% of revenue, respectively. The
approximate $11.9 million or 253% increase in research and development expenses
in the second quarter 1998 compared to the second quarter 1997 was the result of
increases in staffing levels, consumption of prototype materials, utilization of
outside consultants for certain development efforts and higher costs of test
equipment used to develop and test new products and features. The Company
expects that its research and development expenditures will continue to increase
during the remainder of fiscal year 1998 to support the continued development of
the MultiWave products, the exploration of new or complementary technologies,
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
$4.9 million and $11.0 million for the second quarters ended April 30, 1997 and
1998, respectively. During the second quarters 1997 and 1998, selling and
marketing expenses were 5.0% and 7.7% of revenue, respectively. The approximate
$6.1 million or 124% increase in selling and marketing expenses in the second
quarter 1998 compared to the second quarter 1997 was primarily the result of
increased staffing levels in the areas of sales, technical assistance and field
support, and increases in commissions earned, trade show participation,
promotional costs, travel expenditures and rent expense. The Company anticipates
that its selling and marketing expenses will increase during the remainder of
fiscal year 1998 as additional personnel are hired and offices opened,
particularly in support of international market development, to allow the
Company to pursue new market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $2.8 million and $14.4 million for the second quarters ended
April 30, 1997 and 1998, respectively. During the second quarters 1997 and
1998, general and administrative expenses were 2.9% and 10.1% of revenue,
respectively. The approximate $11.6 million or 414% increase in general and
administrative expenses from the second quarter 1997 compared to the second
quarter 1998 was primarily the result of a $10.0 million charge to accrue
estimated legal and related costs associated with pending litigation. See Note
4 of Notes to Consolidated Financial Statements. See Part II, Item 1 "Legal
Proceedings". The remaining increase is primarily the result of increased
staffing levels and outside
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consulting services. The Company believes that its general and administrative
expenses for the remainder of fiscal 1998 will increase due to the expansion of
the Company's administrative staff required to support its expanding operations.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and
development costs were $9.5 million for the second quarter 1998. These costs
were for the purchase of technology associated with the acquisition of Terabit
during the second quarter 1998. See Note 5 of Notes to Consolidated Financial
Statements.
OPERATING MARGINS. The Company's operating margins were $44.8
million and $46.7 million for the second quarters ended April 30, 1997 and 1998,
respectively, exclusive of the effect of charges for purchased research and
development and the estimated legal and related costs accrual. During the second
quarters 1997 and 1998, operating margins were 45.9% and 32.7% of revenue,
respectively, exclusive of the effect of a one-time charge for purchased
research and development and legal and related costs accrual. The Company
expects that its operating margins may decrease as it continues to hire
additional personnel and increase operating expenses to support its business.
The results of operations for the second quarter 1998 are not necessarily
indicative of results to be expected in future periods. See "Risk Factors."
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $2.0 million and $3.4 million for the second quarters
ended April 30, 1997 and 1998, respectively. The approximate $1.4 million
increase in interest income and other income (expense), net was attributable to
higher invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
were $18.1 million and $15.2 million for the second quarters ended April 30,
1997 and 1998, respectively. During the second quarters 1997 and 1998, the
provision for income taxes were 38.8% and 38.0% of income before income taxes,
respectively, exclusive of the effect of one-time charges for purchased research
and development expenses. Purchased research and development charges are not
deductible for tax purposes. The decline in the income tax rate in second
quarter 1998 compared to second quarter 1997 was the result of a lower combined
effective state income tax expenses, a larger benefit from the Company's Foreign
Sales Corporation and an increase in expected tax credits derived from research
and development activities.
SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
REVENUE. The Company recognized $161.3 million and $287.8 million in
revenue for the six months ended April 30, 1997 and 1998, respectively. The
approximate $126.5 million or 78% increase in revenues in the six months ended
April 30, 1998 compared to the six months ended April 30, 1997 was largely the
result of increased sales to Sprint, Cable and Wireless, DTI, Teleway, and Japan
Telecom offset by a decline in sales to WorldCom. The Company had no sales for
Cable and Wireless , DTI, and Japan Telecom in the first six months of 1997. A
significant portion of the increase in the Company's six month 1998 revenues
compared to six month 1997 revenues was attributed to sales of the Company's
Sentry and 4000 systems, which were not available for sale in the first six
months of 1997. The Company expects revenues, in the near term to be largely
dependent upon sales to Sprint, several new customers and, depending on the
results of ongoing testing and evaluation, AT&T Corporation ("AT&T"). These
revenues are expected to be derived primarily from sales of the Sentry and 4000,
and to a lesser extent, from Firefly, the Company's short distance 24 channel
product. There are material risks associated with the Company's dependence on
these customers, as well as its transition to multiple product lines. See "Risk
Factors".
GROSS PROFIT. Gross profits were $92.6 million and $164.9 million
for the six months ended April 30, 1997 and 1998, respectively. The approximate
$72.3 million or 78% increase in gross profit in the first six months of 1998
compared to the first six months of 1997 was the result of increased revenues
for those periods. Gross margin as a percentage of revenues was 57.4% and 57.3%
for the first six months of 1997 and 1998, respectively. The relative constant
gross margin percentage for the comparable periods was the result of a
combination of factors that increased the gross margin percentage such as
reductions in component costs; increased manufacturing volumes and efficiencies;
reductions in the percentage of significantly lower margin installation service
revenue to total revenues for the periods; offset by a reduction in selling
prices. The Company expects that gross margins in the future may decrease
primarily due to competitive market pricing, although the Company's
manufacturing efficiencies and improvements in component costs should moderate
the rate and magnitude of any decrease. The
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Company's future gross margins may also decrease because of the mix of product
features and configurations sold in a period as well as the extent of services
provided. See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $7.7 million and $26.9 million for the six months ended April 30, 1997 and
1998, respectively. During the first six months of 1997 and 1998, research and
development expenses were 4.8% and 9.3% of revenue, respectively. The
approximate $19.2 million or 249% increase in research and development expenses
in the first six months of 1998 compared to the first six months of 1997 was the
result of increases in staffing levels, consumption of prototype materials,
utilization of outside consultants for certain development efforts and higher
costs of test equipment used to develop and test new products and features. The
Company expects that its research and development expenditures will continue to
increase during the remainder of fiscal year 1998 to support the continued
development of the MultiWave products, the exploration of new or complementary
technologies, 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
$8.0 million and $21.0 million for the six months ended April 30, 1997 and 1998,
respectively. During the first six months of 1997 and 1998, selling and
marketing expenses were 5.0% and 7.3% of revenue, respectively. The approximate
$13.0 million or 163% increase in selling and marketing expenses in the first
six months of 1998 compared to the first six months of 1997 was primarily the
result of increased staffing levels in the areas of sales, technical assistance
and field support, and increases in commissions earned, trade show
participation, promotional costs, travel expenditures and rent expense. The
Company anticipates that its selling and marketing expenses will increase during
the remainder of fiscal year 1998 as additional personnel are hired and offices
opened, particularly in support of international market development, to allow
the Company to pursue new market opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $9.8 million and $18.2 million for the six months ended April 30,
1997 and 1998, respectively. During the first six months of 1997 and 1998,
general and administrative expenses were 6.1% and 6.3% of revenue, respectively.
The approximate $8.6 million or 8.6% increase in general and administrative
expenses in the first six months of 1998 compared to the first six months of
1997 was primarily due to increases in legal and related costs associated with
Pirelli litigation, staffing levels and outside consulting services. The Company
believes that its general and administrative expenses for the remainder of
fiscal 1998 may increase due to the expansion of the Company's administrative
staff required to support its expanding operations.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and
development costs were $9.5 million for the six months ended April 30, 1998.
These costs were for the purchase of technology associated with the acquisition
of Terabit during the second quarter 1998. See Note 5 of Notes to Consolidated
Financial Statements.
OPERATING MARGINS. The Company's operating margins were $67.1
million and $89.3 million for the six months ended April 30, 1997 and 1998,
respectively. During the first six months of 1997 and 1998, operating margins
were 41.6% and 31.0% of revenue, respectively, or 34.3% of revenue for first six
months of 1998 exclusive of the $9.5 million in charges related to purchased
research and development. The Company expects that its operating margins may
decrease as it continues to hire additional personnel and increase operating
expenses to support its business. The results of operations for the six months
ended April 30, 1998 are not necessarily indicative of results to be expected in
future periods. See "Risk Factors."
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $2.4 million and $7.2 million for the six months
ended April 30, 1997 and 1998, respectively. The approximate $4.8 million
increase in interest income and other income (expense), net was attributable to
higher invested cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
was $26.9 million and $41.3 million for the six months ended April 30, 1997 and
1998, respectively. During the first six months of 1997 and 1998, the provision
for income taxes was 38.8% and 38.4% of income before income taxes,
respectively, exclusive of the effect of one-time charges for purchased research
and development expenses recorded in the second quarter of 1998 and an
adjustment to the estimated state income tax liability associated with the Alta
operations recorded in Alta's first quarter of 1998. Purchased research and
development charges are not deductible for tax purposes. The decrease in the
income tax rate, exclusive of one-time charges, for the first six months of 1998
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compared to first six months of 1997 was the result of a lower combined
effective state income tax expense, a larger benefit from the Company's Foreign
Sales Corporation and an increase in expected tax credits derived from research
and development.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company's principal source of liquidity was
its cash and cash equivalents of $174.5 million and its marketable debt
securities of $51.8 million. The Company's marketable debt securities have
maturities no longer than six months.
Cash generated from operations was $10.2 million for the six months
ended April 30, 1998. This amount was principally attributable to net income,
the non-cash charges of depreciation, amortization, provisions for inventory
obsolescence and warranty, purchased research and development, 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 in the six months ended April 30, 1998
included the net purchase of $51.9 million worth of corporate debt securities,
$58.0 million invested in capital expenditures and $2.1 million used in the
acquisition of Astracom and Terabit. Of the amount invested in capital
expenditures, $47.9 million was used for additions to capital equipment and
furniture and the remaining $10.1 million was invested in leasehold
improvements.
The Company expects to use an additional $1.0 million to $5.0 million of
capital during the remainder of fiscal 1998 to complete the construction of
leasehold improvements for its new facilities and the conversion to full
research and development activities of its current 96,000 square foot facility.
The Company believes that its existing cash balance and cash flows
from future operations will be sufficient to meet the Company's capital
requirement for at least the next 18 to 24 months.
YEAR 2000 READINESS
The Company has taken actions to understand the nature and extent of the
work required to make its systems, products and infrastructure Year 2000
compliant. The Company began work this year to change its main financial,
manufacturing and information system to a company-wide Year 2000 compliant
enterprise resource planning ("ERP") computer-based system and expects to have
the ERP system fully installed in the second half of 1998. The Company believes,
based on available information, that it will be able to manage its Year 2000
transition without any material adverse effect on the Company's business,
financial condition and results of operations.
RISK FACTORS
CONCENTRATION OF POTENTIAL CUSTOMERS; DEPENDENCE ON MAJOR CUSTOMERS;
DEVELOPMENT OF AT&T AS MAJOR CUSTOMER. The Company's business, and particularly
the size of its revenue growth potential, has historically been dependent on two
customers, Sprint and WorldCom, and will in the near term continue to be highly
dependent on those two customers, and on the development of AT&T as a major
customer. While the scope of commercial applications of the Company's MultiWave
Metro product (scheduled for general availability in the fall of 1998) is
expected to expand the number of potential customers for the Company, in the
near term, additional potential customers, consisting almost exclusively of long
distance and other telecommunications carriers using fiberoptic networks, are
relatively few in number, and of those, a very small number have revenue
potential comparable to that of Sprint, WorldCom and AT&T. The number of
potential major customers may also decrease if and as customers merge with or
acquire one another. In November 1997, WorldCom and MCI announced an agreement
to merge and in May 1998, SBC and Ameritech also announced an agreement to
merge. The distraction and/or reorganization sometimes attendant to such
mergers could delay, limit or otherwise adversely affect the capital equipment
purchasing patterns of the parties to them, with a corresponding adverse effect
on the Company's sales, even if the customer is otherwise satisfied with the
Company's products and intends to purchase more.
The Company believes WorldCom is very satisfied with the Company's
products, and intends to continue significant purchases; however, WorldCom
informed the Company in February 1998 that its DWDM system
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requirements for 1998 will be substantially reduced, based on a change in
WorldCom's capital equipment acquisition policies. According to information
shared with the Company in February 1998, WorldCom purchased equipment during
1997, based on a policy designed to meet an estimated two years worth of
anticipated network capacity requirements. The new policy calls for purchasing
activity and bandwidth deployment to more closely coincide with just in time
inventory management, which, according to WorldCom, means significant purchasing
from CIENA may resume in the latter part of calendar 1998. Consistent with
WorldCom's announced change in purchasing practices, WorldCom's purchases in the
Company's second quarter were not material.
Although the Company has previously announced a trial evaluation agreement
and a five year agreement to supply 16-channel MultiWave Sentry systems to AT&T,
before AT&T would become a purchasing customer, the Company will have to be
successful in rigorous testing and evaluation which are ongoing. The Company
believes it ultimately 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. Testing is an interactive and dynamic
process which is unpredictable, frequently subject to unanticipated delay, and
not often accelerated. The products under test with AT&T are pilot
production/prototype versions of the 16 channel MultiWave Sentry which are
customized for AT&T requirements, including specific embedded software as well
as element management software ("EMS") designed for AT&T and not used or
currently implemented in the Company's manufactured products. The EMS software
is believed by the Company to be the first of its kind in the DWDM industry, and
represents an important aspect of AT&T's move to a multivendor environment. A
number of unpredictable delays in development have occurred and are attributable
to these sophisticated and complex software requirements, as well as the
prototype nature of the hardware. The Company and AT&T have expended
considerable collaborative and good faith efforts to address and resolve these
delays, but the cumulative effect has been to slow the Company's prospects for
shipping to AT&T by approximately five months, and to forego revenues which
might otherwise have been obtainable during that period. The Company does not
expect shipments to begin until the second half of 1998 (with acceptance and
revenue recognition to follow), and in any event the Company is unable to
predict the volume, duration or timing of any purchases which might ensue from
AT&T. Additionally, AT&T recently announced plans to test and deploy a proposed
80-channel DWDM system being developed by Lucent Technologies, Inc. ("Lucent").
Lucent has announced that this proposed product is expected to be commercially
available worldwide in the fourth quarter. If such a product is in fact
developed, performs as advertised, and is manufacturable by Lucent in volume
quantities by the fourth quarter of this year, and if core demand for bandwidth
is sufficient to prompt widespread market interest in such a product, the
likelihood of significant orders from AT&T for the Company's MultiWave Sentry
system may diminish. See "Competition". The Company currently believes the
impact of Lucent's announcement on AT&T's likely orders for the Company's
systems will not be material; however, Lucent also is believed to have a 16
channel system in testing with AT&T. The extended testing of MultiWave Sentry
has in any event delayed the timing of shipments and revenue recognition from
AT&T, and may have an adverse impact on the relative proportion of 16 channel
DWDM purchases which AT&T allocates between its two announced DWDM vendors,
Lucent and CIENA, and could also lead AT&T to consider other products to replace
the gap caused by the delays. If material delays in reaching successful
conclusion of testing continue, or if AT&T for any reason allocates a materially
lower share of DWDM purchases to the Company in absolute terms or relative to
AT&T's second vendor, the effect could cause substantial swings, and potentially
material and adverse effects, on the Company's quarterly financial condition and
results of operations.
The reduction, delay or cancellation of orders for, or a delay in shipment
of the Company's products to Sprint, or a failure by WorldCom to resume
purchasing at significant levels in the latter part of calendar 1998 , or the
inability to develop AT&T as a significant customer, as well as additional
customers in the telecommunications market, likely would have a material adverse
affect 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. Due to the size and complexity
of the AT&T network, and the uniqueness of AT&T's requirements for the MultiWave
Sentry, the Company has invested and expects over fiscal 1998 to continue to
invest considerable financial, engineering, manufacturing and logistics support
resources in positioning the commercial relationship to be successful. The
Company's acquisition of Alta, an installation services company, is an example
of this risk. This acquisition, closed in the second fiscal quarter of 1998,
has brought approximately 160 installation personnel to the Company, and was
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undertaken in large part to position the Company to be able to service the
installation requirements associated with any AT&T deployment, even though the
Company has no assurance as to the volume, duration or timing of any purchases
which might ensue from AT&T. The Company also intends to invest in developing
significant customer relationships with Bell Atlantic and other RBOCs and CLECs,
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, with the result that the Company's near term growth
in earnings may moderate or even decline, even if revenues increase. If the
Company is unable to convert these investments into significant revenue
generating relationships by the second half of fiscal 1998, the Company's
business, financial condition and results of operations for the year could be
materially and adversely affected.
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. The Company further
believes its MultiWave 1600 is the only commercially deployed and operational
full 16-channel open architecture DWDM system anywhere in the world, and further
believes the demonstrated commercial manufacturability of its MultiWave 4000
system gives the Company's high-capacity product offerings a level of
credibility not possessed by its competitors. 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, Alcatel, Nortel, NEC, Pirelli, Siemens and Ericsson are moving very
aggressively to capture market share in the DWDM market. The Company expects
aggressive competitive moves from industry participants, which have to date
included early announcement of competing or alternative products, and
substantial and increasing price discounting. Such early announcements of
competing products can cause confusion and delay in customer purchasing
decisions, particularly if the announcements are viewed as credible in terms of
both the performance of the announced product, and the time within which it will
be available. For example, Lucent recently announced a proposed high-capacity
DWDM system which it claims will handle 400 Gb/s of capacity per fiber, and
which it further claims will be commercially available worldwide in the fourth
quarter. There can be no assurance that announcements like those of Lucent or
others in the industry will not cause confusion and delay in customer purchasing
decisions. Further, if new products such as that announced by Lucent are in fact
developed, perform as advertised, and are manufacturable in volume quantities by
the fourth quarter of this year, the likelihood of significant orders from AT&T
and other customers for the Company's 16-channel MultiWave Sentry and 40-channel
MultiWave 4000 systems may diminish. The timing of shipments by the Company and
corresponding revenue, if delayed by reason of deferred deployment of MultiWave
Sentry or MultiWave 4000 systems pending evaluation of a competitor's product,
could and likely would cause substantial swings, and potentially material and
adverse effects, on the Company's quarterly financial condition and results of
operations.
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.
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, which may favor larger competitors which
can spread the effect of price discounts in their DWDM product lines across an
array of products and services, and a customer base, which are larger than the
Company's. The Company's customers also generally prefer to have at least two
sources for key network equipment such as DWDM systems, but the Company has
until recently been the only supplier of 16 channel, or greater than 16 channel,
DWDM systems. As competitors catch up with manufacturable DWDM systems which are
realistic alternatives to those supplied by the Company, the Company's customers
may reduce the portion of their DWDM purchases allocated to the Company.
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
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disputes are doubtful. Some of the Company's competitors are also key suppliers
of components for the Company's systems.
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 significantly lower prices for the Company's
products, additional decreases in gross profit margins, and otherwise have a
material adverse effect on its business, financial condition and results of
operations.
DEPENDENCE ON EFFECTIVE TRANSITION TO MULTIPLE PRODUCT LINES. The Company
believes the largest portion of its production capacity for the balance of
fiscal 1998 will be shifted to the MultiWave Sentry, the MultiWave 4000 and, to
a lesser extent, the MultiWave Firefly systems. While much of the manufacturing
process for these systems is identical to that involved in the manufacture of
the MultiWave 1600, there are important differences in raw materials and
components, as well as even more precise performance specifications.
Manufacturing yields in the first several months of production may be adversely
impacted as the transition is made to full production of these new systems.
Additionally, not all of the component suppliers for these new systems have
demonstrated the ability to ramp up their production to keep pace with the
Company's needs, and certain of the new components are critical to system
operation, such as the apparatus for multiplexing and demultiplexing of signals
in the 24-channel Firefly system. One of the Company's planned vendors for this
apparatus has notified the Company that it continues to have difficulty in
achieving overall yield and process stability. The Company is comfortable that
its immediate needs for this component can be met by another vendor, but
neither vendor has yet demonstrated the ability to ramp up as may be necessary
to meet the Company's future needs. Further, the volume of pilot
production/prototype equipment required for AT&T testing, and the need to be
responsive to testing issues and resulting modification requests, consumes
manufacturing resources which would otherwise be available for other products.
The Company must effectively manage all of these risks during the transition in
manufacturing, with a minimum of delay or disruption in product deliveries. The
failure to do so would likely have an adverse effect on the Company's customer
relationships, with attendant risk of adverse effects on the level and timing
of ongoing customer orders, as well as on the development of new customers.
Even if effectively managed, new products like the MultiWave Sentry, MultiWave
4000, MultiWave Firefly, and late in 1998, the MultiWave Metro, are typically
subjected by the customers to lengthier initial acceptance testing periods than
will occur with later shipments. The timing of these lengthier acceptance
periods would affect the timing of revenue recognition for these products,
which may cause substantial differences in quarter to quarter operating
results. These differences could lead to increased volatility in the Company's
stock price, irrespective of the Company's overall performance or actual longer
term prospects. See "Fluctuation in Quarterly and Annual Results".
ANTICIPATING DEMAND FOR BANDWIDTH. The Company's systems enable high
capacity transmission over long distance, and with the introduction of MultiWave
Firefly, certain short-haul portions of, optical communications networks;
however, the Company's customers and target customers determine how much
capacity is required, when it will be deployed, and what equipment
configurations will be used, if any. The Company has encountered a wide variety
of customer views of how much capacity will be needed over what periods of time,
as well as how to convert such capacity into revenue. Those views reflect the
carriers' differing competitive strategies and financial and marketing
resources, and result in widely varying patterns and timing of evaluation,
purchase and deployment of the Company's systems, other DWDM systems or other
capacity solutions. Certain carriers have believed the deployment of large scale
capacity quickly will be a competitive advantage--i.e., they have assumed the
accelerating demand for bandwidth will continue and the capacity will be
utilized quickly. This viewpoint leads to prompt and widespread deployment of
high-channel count DWDM systems. Other carriers have adopted more of a
wait-and-see approach, which dictates a more gradual channel by channel
deployment of higher capacity systems. These views are further influenced by the
pace at which the higher bandwidth available over long distance routes is
distributed or distributable over "the last mile" of the networks, as well as
the willingness of carriers to aggressively lower their charges for services as
a means of accelerating consumption of the higher bandwidth. All of these views
are also subject to abrupt change, as competition and the evolving marketplace
may demand. As an example, WorldCom informed the Company in February 1998 that
its DWDM system requirements for 1998 would be substantially below last year's
purchases of $184.5 million. WorldCom indicated to the Company that last year it
purchased DWDM systems from the Company at a level that contemplated two years'
of capacity requirements, and that this year's purchases would be substantially
reduced because limited to one year's estimate of capacity requirements.
WorldCom's information in February 1998 demonstrated that there
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can be surprises as network operators and their purchasing groups grapple with
unprecedented changes and challenges to network planning.
Under these circumstances, for so long as the Company remains dependent on
two or even three customers, the Company will be vulnerable to significant
quarterly fluctuations, and to difficulty in predicting the direction or
magnitude of future demand for the Company's systems. The Company believes
growth in data communications and in commercial and consumer use of the Internet
remains solid as a market driver of demand for bandwidth, which in turn fuels
demand for DWDM systems and other high-bandwidth solutions. The Company also is
confident that its products are well targeted toward the visible emerging
chokepoints in the networks. The Company is less certain whether it will be able
to accurately anticipate changes in direction or magnitude of near term demand.
Unanticipated reductions in demand would adversely affect the Company's
profitability and, depending on the size of the gap between actual, reduced
demand, and investor expectation of such demand, could result in further stock
price volatility irrespective of the Company's overall competitive position and
long term prospects.
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, 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 and unanticipated fluctuations in the timing of orders
and revenue. The Company has in fact experienced such unanticipated fluctuations
in prior quarters, but any unanticipated reduction in orders from one customer
has previously been offset in part or in whole by unanticipated increases in
orders for other routes with the same customer or in orders from another
customer. In the quarter just completed, the unanticipated reduction in orders
from WorldCom was offset in large part by a significant increase in orders from
Sprint. Unless and until WorldCom resumes purchases at a level comparable to the
prior fiscal year, the Company will continue to need material purchases from one
or more other customers in order to offset the reduction from WorldCom. There
can be no assurance that this historical ability to offset reductions will
continue, and in particular, Sprint is unlikely to continue purchasing at the
rate experienced in the quarter just completed.
Any 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 and not offset by increased purchasing from other customers,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, as is the case with most
manufacturing companies, the Company has manufactured, and from time to time in
the future likely will manufacture finished products on the basis of non-binding
customer forecasts rather than actual purchase orders. However, in contrast to
most manufacturing companies, given the Company's dependence on very few
customers, and the relatively high cost of the Company's DWDM systems, the
financial consequences of mismatches between what is built and what is actually
ordered can be magnified. Long distance carriers may also encounter delays in
their build out of new routes or in their installation of new equipment in
existing routes, with the result that orders for the MultiWave 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 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.
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 competitors introduce new competing
products, customers change purchasing practices, and as the Company develops or
introduces other DWDM products, such as the MultiWave Sentry, MultiWave 4000,
MultiWave Firefly and the MultiWave Metro. Consolidation among the Company's
customers and target
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customers, such as that involved in the WorldCom/MCI merger, and the distraction
and/or reorganization attendant to such consolidation, may also lead to delay or
deferral of purchasing decisions. See "Concentration of Potential Customers;
Dependence on Major Customers; Development of AT&T as Major Customer". Changes
in customers' approaches to bandwidth deployment can also materially impact
purchasing decisions. See "Anticipating Demand for Bandwidth." 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. 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 for any
quarterly period in which material orders are shipped or delayed or not
forthcoming could vary significantly. The Company's expense levels for the next
two quarters are expected to reflect substantially increased investment in
financial, engineering, manufacturing and logistics support resources in
positioning the AT&T, RBOC, international and other potential commercial
relationships to be successful, even though there is no assurance as to the
volume, duration or timing of any purchases which might ensue from AT&T or
others. See "Concentration of Potential Customers; Dependence on Major
Customers; Development of AT&T as Major Customer". Over the near term, this
investment of resources will be evident in increased inventory levels and
operating expenses, and in a rise in the Company's general overhead and expense
structure, with the result that the Company's near term earnings may moderate or
decline, even if revenues increase. In general, quarter-to-quarter sequential
revenue in the first two or three years of operations are likely to vary widely
and therefore may not be reliable indicators of annual performance.
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 841 at October 31, 1997, to 1,247 at April 30, 1998. The
Company's Atlanta, Georgia research and development support organization grew
from 12 personnel at October 31, 1997 to 41 at April 30, 1998. Approximately 160
more employees have joined the Company as a result of the Company's acquisition,
closed during the second fiscal quarter 1998, of Alta , an installation services
provider.
This expansion, and the attendant separation and relocation of various
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, 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, the timely build out of
new facilities, 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. The conversion to full scale production in
fiscal 1998 of the Company's new MultiWave Sentry, MultiWave 4000 and MultiWave
Firefly product lines will also present substantial management and manufacturing
challenges, as the scope of material planning and labor involvement are
different and more expansive than was the case with the Company's original
MultiWave 1600 product line. The assimilation of Alta, and the effective
utilization of its installation services personnel, will also be critical to the
Company's efforts to satisfy its larger customers and, ultimately, to further
ramp up its production and sales volume to those customers.
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 for all product
lines, in anticipation of a level of customer orders that may not be achieved.
Many of the highest cost components in the Company's new products are also those
with the longest lead ordering times. As a result, the importance of effective
coordination between component ordering relative to anticipated customer orders
is increased, and the inability to manage this effectively may result in
increased inventory levels, and potentially, inventory obsolescence,
particularly if there are slips in delivery and final acceptance of the
Company's newest products. Increased inventory levels could also result from any
significant deferral of material purchases from any of the Company's major
customers. This could occur if testing of the Company's products at AT&T is
extended significantly. See "Concentration of Potential Customers; Dependence on
Major Customers; Development of AT&T as Major Customer."
The Company's expansion over the past several quarters has also resulted
in an outgrowing of the Company's information management systems. A major shift
to a new and greatly expanded internal network and information management system
is scheduled for the third quarter of 1998. This shift will impact virtually all
areas
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of the business, including manufacturing, purchasing, accounting, payroll,
documentation and recordkeeping, and could have adverse effects on Company
operations in the near term if not managed effectively.
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
substantially magnified, and the potential exists for additional stock price
volatility if investor expectations do not account for this risk. See "Stock
Price Volatility". Prolonged inability to manage the expansion of the Company's
business would also have a material adverse effect on the Company's longer term
business prospects, 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 in a timely
fashion relative to customer expectations of increasingly short product
development cycles, 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, including
product customization efforts for individual customers such as AT&T, can result
in unanticipated delays. See "Concentration of Potential Customers; Dependence
on Major Customers; Development of AT&T as Major Customer". 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 software
certification process for new telecom equipment used in RBOC networks--a process
traditionally conducted by Bellcore on behalf of the RBOCs--can also result in
unanticipated delays, and has resulted in some delay in the commercial
introduction of MultiWave Firefly. The failure to deliver new and improved
products, or appropriately customized products, in a timely fashion relative to
customer expectations (which expectations can be influenced by competitors'
announcements of competing products), would have a material adverse effect on
the Company's competitive position and financial condition. See "Competition".
The Company is currently facing its first major test in this area, with its
general commitment to the delivery of MultiWave Sentry, MultiWave 4000 and
MultiWave Firefly at various times during this fiscal year. The Company's
performance on this commitment relative to customer expectations will likely
have a material impact on the Company's ability to further solidify its position
in the telecom industry as a credible, long-term supplier of multiple products
and successive next-generation solutions. The Company believes it will be
successful in this effort, but there is no assurance of that, and there will
likely be few objective "leading indicators" of the Company's success or
failure, other than continued purchasing by its customers.
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 and
reports; 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, a declining level of visibility into its
customers' deployment plans over the course of the capital equipment procurement
year, and the lack of reliable data on which to anticipate core demand for high
bandwidth transmission capacity. An example of this uncertainty is evidenced in
the February 1998 communication from WorldCom that its DWDM system requirements
for 1998 would be substantially reduced relative to last year's purchases, due
to a change in its purchasing policies. See "Concentration of Potential
Customers; Dependence on Major Customers; Development of AT&T as Major
Customer".
The WorldCom example indicates that divergence between the Company's
actual or anticipated financial results and published expectations of stock
analysts can occur notwithstanding the Company's efforts to address those
expectations through public announcements and reports. Such divergence will
likely occur from time to time in the future, with resulting stock price
volatility, irrespective of the Company's overall year to year performance or
long term prospects. For so long as the Company remains highly dependent on two
or three customers, and particularly in years, like the current fiscal year,
when substantial majority of purchases by these customers are likely to be
focused on products, such as MultiWave Sentry, MultiWave 4000, and MultiWave
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Firefly, being introduced for the first time, there is substantial risk of
widely varying quarterly results, including the so-called "missed quarter"
relative to investor expectations which do not account for these issues, with
attendant risk of higher volatility in the Company's stock price. See
"Concentration of Potential Customers; Dependence on Major Customers;
Development of AT&T as Major Customer"; "Dependence on Effective Transition to
Multiple Product Lines"; and "Anticipating Demand for Bandwidth".
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PIRELLI LITIGATION
CHRONOLOGICAL SEQUENCE OF 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 (the "First Pirelli
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. In September 1997, Pirelli withdrew another patent from the suit,
leaving three patents at issue in the First Pirelli Lawsuit.
In February 1997, the Company 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 infringed at least two of the Company's
patents. The Company's complaint sought 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. On November 24, 1997, the parties
settled the matter by entry of a Consent Order. Under the Consent Order, Pirelli
has agreed not to import into the United States WDM components and or systems
which infringe the Company's patented in fiber Bragg gratings-based WDM systems.
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. In September
1997, the Company withdrew one of the three patents from the suit. The two
patents which remained at issue related to certain of Pirelli's cable television
equipment, and to certain Pirelli fiberoptic communications equipment announced
by Pirelli in January 1997 as being deployed in a field trial in the MCI
network. As to the second of the two patents, on December 5, 1997, the court
issued an order granting partial summary judgment for Pirelli on the issue of
non-infringement, and denying Pirelli's motion for summary judgment of
invalidity of this patent. The court later amended its ruling to specifically
affirm the validity of this patent. The Company has elected to appeal the
partial summary judgment of non-infringement, and has agreed to dismiss its
other claims, with the right to reassert certain of them, pending the outcome of
the appeal. The appellate decision is not expected until late 1998 at the
earliest.
In the First Pirelli Lawsuit, the so-called "Markman" hearing was
conducted in September 1997. Markman hearings are pre-trial proceedings
typically required in patent infringement litigation, and result in rulings by
the trial judge on certain issues of patent claim construction. These rulings
then become the basis for later jury determination of the infringement claims,
and can be very influential in determining the outcome of the litigation. The
Delaware court's Markman ruling in the First Pirelli Lawsuit was issued in
November. The Company believes the Markman ruling is generally favorable to the
Company's position, and nothing in the ruling, including the ruling as recently
amended in response to Pirelli's motion for reargument, has changed the
Company's view that its MultiWave systems do not infringe any valid claim of the
three remaining Pirelli patents and believes certain of the Pirelli patents
and/or claims are invalid.
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The Company anticipated, and continues to anticipate, that as the
now-consolidated First and Third Pirelli Lawsuits (see below) approach trial,
either or both parties might take actions to amend or add to the patent
infringement claims already pending.
On December 26, 1997, the Company received word that Pirelli filed on
December 23, 1997, a new complaint in U.S. District Court in Delaware, alleging
willful infringement by the Company of two additional U.S. patents held by
Pirelli (the "Second Pirelli Lawsuit"). Further, after the Court ruled in early
January 1998, that Pirelli's attempts to allege infringement against products
other than the MultiWave 1600 were not timely in the First Pirelli Lawsuit, on
January 14, 1998, Pirelli filed a third complaint in Delaware (the "Third
Pirelli Lawsuit"), alleging willful infringement of the same three patents still
at issue in the First Pirelli Lawsuit, but alleging the infringement against
unspecified other products of the Company. The Second Pirelli Lawsuit and the
Third Pirelli Lawsuit seek treble damages, attorneys' fees and costs, as well as
preliminary and permanent injunctive relief against the alleged infringement.
On February 4, 1998, the Company filed its answer to the Third Pirelli
Lawsuit, denying infringement, and stating a counterclaim against the relevant
Pirelli parties for a declaratory judgment finding the Pirelli patents invalid
and/or not infringed.
On February 13, 1998, and based upon the Court's Markman ruling in the
First Pirelli Lawsuit, the Company filed a motion for summary judgment of
non-infringement on two of the three remaining patents in the First Pirelli
Lawsuit, and of invalidity on portions of the third. Pirelli filed a motion for
summary judgment of literal infringement of a single claim of the patent as to
which the Company has filed for summary judgment of invalidity. No hearing date
has been set for argument on the motions for summary judgment. There is no
assurance that Pirelli's motion will not be granted, or that the Company's
motions will result in complete disposition of the First Pirelli Lawsuit. The
Company continues to plan on going to trial in all litigation.
On February 17, 1998, the Company filed its answer to the Second Pirelli
Lawsuit, denying infringement, alleging inequitable conduct on the part of
Pirelli in the prosecution of the two patents, and stating a counterclaim
against the relevant Pirelli parties for a declaratory judgment finding the
Pirelli patents invalid and/or not infringed.
RECENT DEVELOPMENTS IN LITIGATION
Concurrent with the filing of its answer to the Second Pirelli Lawsuit,
the Company filed a motion to consolidate the First, Second and Third Lawsuits
for purposes of trial. This motion was denied by the Court, and consolidation is
presently ordered only with respect to the First and Third Lawsuits. Trial of
the consolidated lawsuit is not expected until late 1998 or early 1999. Trial of
the unconsolidated Second Pirelli Lawsuit is not expected until after conclusion
of the first.
In March 1998, the Company filed an amended answer and counterclaim in the
Second Lawsuit, adding a counterclaim for violation of U.S. antitrust laws. The
Company is investigating the possibility of additional claims against Pirelli.
Also in March 1998, the Company filed a new, second complaint against
Pirelli with the ITC based on the Company's belief that a 32 channel DWDM system
announced by Pirelli infringed a patent newly issued to the Company. The
Company's complaint seeks a ban on the importation by Pirelli into the U.S. of
any infringing 32 channel system, including the system which the Company
understands has passed laboratory testing at Sprint. A formal investigative
proceeding was instituted by the ITC in April 1998.
The Pirelli proceedings have been and will continue to be costly and
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 MultiWave systems. There can be no assurance that such efforts by
Pirelli and others will not disrupt the Company's existing and prospective
customer relationships.
The Company and Pirelli have recently agreed to suspend legal proceedings
for a brief period to pursue settlement discussions. Unless mutually extended,
the suspension will lapse by the end of May 1998 if no
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settlement is reached. There is no assurance a settlement will be reached by the
end of May, and the Company believes that if no settlement is reached within
this time period, the likelihood of resolving the matter before trial will be
significantly reduced. In view of the risks that no settlement will be reached,
and in light of the complexity and likely time-consuming nature of the
litigation, including the new ITC proceeding, and the Company's expanded
antitrust claim and potentially other claims, the Company accrued in the second
fiscal quarter of 1998 an additional $10.0 million for legal fees and expenses,
which is management's current estimate of the legal expenses necessary to carry
the litigation through to resolution on the merits.
There can be no assurance that the Company will be successful in the
Pirelli litigation, and an adverse determination in the Delaware court, either
on a motion for summary judgment or in trial, could result from a finding of
infringement of only one claim of a single patent. An adverse determination in
the litigation could preclude the Company from producing MultiWave systems until
it were able to implement a non-infringing alternative design to any portion of
any system to which such a determination applied. An adverse determination in
the Pirelli litigation could also involve the payment of significant amounts
(including substantially more than the $10.0 million which has been accrued this
quarter for the legal fees and expenses necessary to litigate the dispute to
resolution on the merits), and/or could lead to royalty payments or other terms
in addition to such payments, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
continues to believe, however, that its MultiWave systems do not infringe any
valid claims of any patents held by Pirelli. The Company further believes
certain of the Pirelli patents and/or claims are invalid, and that certain of
the Pirelli patents were obtained through inequitable conduct.
The Company will take all of these factors into account, as well as the
costs and uncertainties associated with litigation in general and patent
infringement litigation in particular, in determining whether and on what terms
a settlement would be acceptable. The Company also believes a settlement which
includes a license to the Pirelli patents may have value in connection with the
design and development of future DWDM products. There is, however, no assurance
that any settlement will be reached. The legal proceedings will resume in June
if settlement is not reached.
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 Kimberlin Parties allege that they were misled into waiving their
right of first refusal, and did not discover that they had been misled until
October 1996.
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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. The Company has moved for summary judgment
on the entire matter, including the Company's counterclaim for rescission. The
Kimberlin Parties have also moved for summary judgment on a portion of the
dispute. A hearing on the Company's and the plaintiff's motions for summary
judgment is currently scheduled for June 15, 1998. The Company believes its
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.
If the Company's motion for summary judgment is denied, the Company
intends to take the matter to trial; if the plaintiff's motion is granted, the
Company intends to appeal. There can be no assurance of the outcome of the
pending motions.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended April 30, 1998, the Company issued an aggregate
of 134,390 shares of Common Stock to the shareholders of Terabit for the
purchase of the Terabit business. These shares were not registered in reliance
on the exemption provided under Section 4(2) of the Securities Act of 1933, as
amended, and Registration D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Registrant was held on March 11,
1998. At the annual meeting, the stockholders voted on the following matters:
Votes Votes Votes
For Against Abstained Non-Votes
---------- ----------- ------------- -------------
Election of two Class 1 Directors
Patrick H. Nettles 83,819,921 153,549
Jon W. Bayless 83,817,546 155,924
To approve the Corporation's 1998 Stock Purchase Plan 64,243,794 19,427,084 185,822 116,770
To amend the Corporation's Third Restated Certifcate of
Incorporation to increase the number of shares of
common stock authorized for issuance thereunder from
180 million shares to 360 million shares 81,068,819 2,799,341 105,310 -
To ratify the selection of Price Waterhouse LLP as
independent public accounts for the corporation 83,917,314 15,940 40,216 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description
10.17 CIENA Corporation Non-qualified Management Deferred
Compensation Plan
11.0 Statement of Computation of Per Share Earnings - see Note 1
of Notes to Consolidated Financial Statements
27.0 Financial Data Schedule (filed only electronically
with the sec)
(b) No reports on Form 8-k were filed during the period ended April 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
DATE: MAY 21, 1998 BY: /S/ Patrick H. Nettles
------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
DATE: MAY 21, 1998 BY: /S/ Joseph R. Chinnici
------------ ----------------------
Joseph R. Chinnici
Senior Vice President, Finance And
Chief Financial Officer
(Principal Financial Officer)
1
Exhibit 10.17
CIENA CORPORATION
NONQUALIFIED
MANAGEMENT DEFERRED COMPENSATION PLAN
EFFECTIVE AS OF JANUARY 1, 1998
2
TABLE OF CONTENTS
ARTICLES PAGE
- -------- ----
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 BASE SALARY . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.03 BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.04 BONUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.05 COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.06 COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.07 COMPANY DISCRETIONARY CONTRIBUTIONS . . . . . . . . . . . . . 2
1.08 DEFERRAL ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . 2
1.09 DEFERRALS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 DEFERRAL ELECTION FORM . . . . . . . . . . . . . . . . . . . . 2
1.11 EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . 2
1.12 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 FORFEITURE . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.14 INVOLUNTARY TERMINATION OF EMPLOYMENT . . . . . . . . . . . . 2
1.15 PARTICIPANT . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.16 PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 PLAN YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 QUARTER . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 RABBI TRUST . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 VALUATION DATE . . . . . . . . . . . . . . . . . . . . . . . . 3
1.22 VESTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.23 VOLUNTARY TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . 3
2. ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . 3
2.01 ELIGIBLE PERSONS . . . . . . . . . . . . . . . . . . . . . . . 3
2.02 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . 3
2.03 DATE OF ENTRY . . . . . . . . . . . . . . . . . . . . . . . . 3
2.04 APPLICATION FOR PARTICIPATION . . . . . . . . . . . . . . . . 4
2.05 LIMITATION ON PARTICIPANTS . . . . . . . . . . . . . . . . . . 4
2.06 REMOVAL FROM PARTICIPATION . . . . . . . . . . . . . . . . . . 4
- i -
3
3. PARTICIPANT DEFERRALS & COMPANY CONTRIBUTIONS . . . . . . . . 4
3.01 PARTICIPANT DEFERRALS . . . . . . . . . . . . . . . . . . . . 4
3.02 COMPANY CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 6
4. INVESTMENT OF DEFERRAL ACCOUNT . . . . . . . . . . . . . . . . 6
4.01 PARTICIPANT ELECTION . . . . . . . . . . . . . . . . . . . . . 6
4.02 CHANGE OF INVESTMENT ELECTION . . . . . . . . . . . . . . . . 6
4.03 INVESTMENT OPTIONS . . . . . . . . . . . . . . . . . . . . . . 6
5. VESTING AND FORFEITURE OF BENEFITS . . . . . . . . . . . . . . 7
5.01 PARTICIPANT DEFERRAL . . . . . . . . . . . . . . . . . . . . . 7
5.02 COMPANY CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 7
6. DEFERRAL ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . 7
6.01 DEFERRAL ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . 7
6.02 QUARTERLY REPORTS . . . . . . . . . . . . . . . . . . . . . . 8
6.03 TITLE TO ASSETS . . . . . . . . . . . . . . . . . . . . . . . 8
6.04 UNFUNDED ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . 8
6.05 NOTICE OF INSOLVENCY . . . . . . . . . . . . . . . . . . . . . 8
6.06 RETURN OR DIVERSION OF ASSETS . . . . . . . . . . . . . . . . 9
6.07 ANNUAL EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 9
7. BENEFIT DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . 9
7.01 IN GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.02 COMMENCEMENT OF BENEFITS . . . . . . . . . . . . . . . . . . . 9
7.03 INVOLUNTARY TERMINATION OF EMPLOYMENT . . . . . . . . . . . . 9
7.04 SCHEDULED IN-SERVICE WITHDRAWALS . . . . . . . . . . . . . . 10
7.05 NONSCHEDULED IN-SERVICE WITHDRAWALS . . . . . . . . . . . . 11
7.06 HARDSHIP DISTRIBUTIONS - WITHDRAWAL OF DEFERRALS . . . . . . 11
7.07 DEATH BENEFITS . . . . . . . . . . . . . . . . . . . . . . . 11
7.08 TAX LIABILITY . . . . . . . . . . . . . . . . . . . . . . . 12
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4
8. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . 12
8.01 RESPONSIBILITIES AND POWERS OF COMMITTEE . . . . . . . . . . 12
8.02 INTERPRETATION OF PLAN . . . . . . . . . . . . . . . . . . . 12
9. APPLICATION FOR BENEFITS AND CLAIMS PROCEDURE . . . . . . . 13
9.01 NOTICE OF DENIAL OF BENEFIT . . . . . . . . . . . . . . . . 13
9.02 APPEALS PROCEDURE . . . . . . . . . . . . . . . . . . . . . 13
10. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 13
10.01 NO ALIENATION OR ASSIGNMENT OF BENEFITS . . . . . . . . . . 13
10.02 NO CONTRACT OF EMPLOYMENT . . . . . . . . . . . . . . . . . 14
10.03 OTHER RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . 14
10.04 HEIRS, ASSIGNS AND SUCCESSORS . . . . . . . . . . . . . . . 14
10.05 AMENDMENT OR TERMINATION . . . . . . . . . . . . . . . . . . 14
10.06 SEVERABILITY OF PROVISIONS . . . . . . . . . . . . . . . . . 14
10.07 CONTROLLING LAW . . . . . . . . . . . . . . . . . . . . . . 14
10.08 GRAMMATICAL CONSTRUCTION . . . . . . . . . . . . . . . . . . 14
10.09 UNAUTHORIZED REPRESENTATIONS . . . . . . . . . . . . . . . . 14
10.10 DESIGNATION OF DEATH BENEFIT BENEFICIARY . . . . . . . . . . 14
10.11 EFFECT OF CHANGE OF CONTROL. . . . . . . . . . . . . . . . . 15
- iii -
5
NONQUALIFIED
MANAGEMENT DEFERRED COMPENSATION PLAN
OF
CIENA CORPORATION
EFFECTIVE: JANUARY 1, 1998
WHEREAS, CIENA Corporation ("CIENA") has decided to establish
a deferred compensation plan for a select group of its key management and
highly compensated employees;
WHEREAS, the purpose of this Plan is to provide eligible
executives with a tax-deferred savings program through their voluntary
deferrals of Base Salary and Bonus and the allocation of Company Discretionary
Contributions.
NOW, THEREFORE, the Nonqualified Management Deferred
Compensation Plan of CIENA Corporation is hereby adopted in accordance with the
following terms and conditions:
ARTICLE 1 - DEFINITIONS
Unless the context or subject matter otherwise requires, the
following definitions shall govern the Plan:
SECTION 1.01 BASE SALARY - the salary established by the
Company which is to be earned by a Participant during a
calendar year.
SECTION 1.02 BENEFICIARY - a person (other than a
Participant) who is entitled to receive benefits under the
Plan because of his designation for such benefits by a
Participant under the provisions of this Plan.
SECTION 1.03 BOARD - the Board of Directors of CIENA
Corporation.
SECTION 1.04 BONUS - incentive compensation provided to a
Participant by the Company each Quarter.
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6
SECTION 1.05 COMMITTEE - the Management Committee
appointed by the Board to administer the Plan.
SECTION 1.06 COMPANY - CIENA Corporation and its
successors.
SECTION 1.07 COMPANY DISCRETIONARY CONTRIBUTIONS - the
contributions made by the Company to the Rabbi Trust pursuant
to the provisions of Section 3.02 of the Plan.
SECTION 1.08 DEFERRAL ACCOUNT - the separate account
established for each Participant pursuant to the provisions of
Article 6 of the Plan, which is credited with Company
Discretionary Contributions and Deferrals made on the
Participant's behalf. To the extent necessary to reflect
different vesting schedules and/or distribution dates, a
Participant's Deferral Account can include multiple
sub-accounts.
SECTION 1.09 DEFERRALS - the portion of a Participant's
Base Salary and Bonus which is deferred and contributed to the
Rabbi Trust by the Company on behalf of a Participant pursuant
to the provisions of Article 3 of the Plan.
SECTION 1.10 DEFERRAL ELECTION FORM - the form designated
by the Company for use by Participants to contribute Deferrals
to the Plan, designate the investment of the Deferral Account,
and select the timing and form of the distribution subject to
Sections 3.01, 7.01 and 7.02. The execution and filing of
this Form with the Committee is subject to Board approval.
The Form may be changed at any time by the Board.
SECTION 1.11 EFFECTIVE DATE - January 1, 1998.
SECTION 1.12 FISCAL YEAR - November 1 - October 31.
SECTION 1.13 FORFEITURE - that portion of a Participant's
Deferral Account which is not Vested.
SECTION 1.14 INVOLUNTARY TERMINATION OF EMPLOYMENT -
events which result in a separation from service with the
Company and which are generally not initiated by a
Participant, including but not limited to a layoff,
disability, or discharge by the Company for any reason.
SECTION 1.15 PARTICIPANT - an employee of the Company who
has been
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7
designated by the Committee for participation in the Plan.
SECTION 1.16 PLAN- this Nonqualified Management Deferred
Compensation Plan and any modification, amendment, extension
or renewal thereof.
SECTION 1.17 PLAN YEAR - the calendar year ending each
December 31.
SECTION 1.18 QUARTER - every three months of the Fiscal
Year.
SECTION 1.19 RABBI TRUST - the grantor trust within the
meaning of Section 671 of the Internal Revenue Code
established pursuant to the Trust Agreement, as amended and
restated, effective as of January 1, 1998, between the Company
and Crestar Bank.
SECTION 1.20 TRUSTEE - means Crestar Bank unless the
Company delegates another person or entity to act as the
trustee pursuant to the Trust Agreement.
SECTION 1.21 VALUATION DATE - the last day of each month.
SECTION 1.22 VESTED - a Participant's nonforfeitable
interest in a portion of his Deferral Account. A
Participant's Vested interest shall be determined in
accordance with the provisions of Article 5 of the Plan.
SECTION 1.23 VOLUNTARY TERMINATION OF EMPLOYMENT - events,
other than those classified as an Involuntary Termination of
Employment, which are initiated by the Participant and which
result in a separation from service with the Company. For
purposes of this Plan, a Participant's death will constitute a
Voluntary Termination of Employment.
ARTICLE 2 - ELIGIBILITY AND PARTICIPATION
SECTION 2.01 ELIGIBLE PERSONS. As of the Effective Date,
eligibility to participate in the Plan is limited to the individuals listed on
Attachment A.
SECTION 2.02 PARTICIPATION. The Committee may designate
additional persons who may participate in the Plan. The Committee must notify
in writing the person of his designation to participate in the Plan.
SECTION 2.03 DATE OF ENTRY. A person listed on
Attachment A shall become a Participant on the Effective Date of this Plan.
Those persons who are
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8
designated to participate in the Plan on or after the Effective Date shall
become a Participant on the date they are notified in writing of their
designation to participate in the Plan.
SECTION 2.04 APPLICATION FOR PARTICIPATION. A person who
is eligible to participate in this Plan must initially complete a Deferral
Election Form and a life insurance application. If a Participant fails to
submit either form in a timely manner, he will be deemed to have elected not to
participate in the Plan and will be ineligible to make Deferrals and receive an
allocation of the Company Discretionary Contributions.
SECTION 2.05 LIMITATION ON PARTICIPANTS. The Committee,
in its sole discretion, may determine who qualifies as a Participant and may
change the criteria at any time. The effective date of any such change shall be
determined by the Committee.
SECTION 2.06 REMOVAL FROM PARTICIPATION. The Committee
may terminate a Participant's participation for any reason. A Participant who
is prospectively terminated from participating in this Plan is ineligible to
make Deferrals or receive an allocation of Company Discretionary Contributions.
ARTICLE 3 - PARTICIPANT DEFERRALS AND COMPANY CONTRIBUTIONS
SECTION 3.01 PARTICIPANT DEFERRALS. As set forth more
fully below, a Participant may defer a portion of his annual Base Salary which
would otherwise be earned and payable for the Plan Year, and/or Bonus, which
would otherwise be earned and payable for the first Quarter of the Fiscal Year
after the Effective Date of this Plan and each subsequent 12-month period,
respectively, by executing a Deferral Election Form pursuant to this Section.
Subject to the rules set forth by the Committee, the minimum Deferral is five
thousand dollars ($5,000) and, subject to the limitations set forth below, the
maximum Deferral is one hundred percent (100%) of the Participant's annual Base
Salary and Bonus. No deferral election shall reduce a Participant's
compensation below the amount necessary to satisfy the following obligations:
applicable employment taxes (e.g., FICA/Medicare) on amounts deferred;
withholding requirements of an employer-sponsored benefit plan; or income tax
withholding for compensation that cannot be deferred.
(a) SALARY DEFERRAL CONTRIBUTION.
(i) SUBMISSION OF DEFERRAL ELECTION FORM. Each
Participant who wishes to participate in the Plan and defer a portion of his
Base Salary must submit a Deferral Election Form to the Committee no later than
December 15 of the Plan Year preceding the Plan Year with respect to which the
election is to be initially effective. The
- 4 -
9
Deferral Election Form, once properly completed and submitted to the
Committee, shall be effective as of the first pay period of the following Plan
Year. In the case of a person who becomes a Participant for the first time
(including all Participants listed on Attachment A) after the Effective Date,
the Deferral Election Form must be filed with the Committee no later than thirty
(30) days after he becomes eligible to participate in the Plan. However, such
election shall be prospective and shall apply only to Base Salary earned after
the election is made. Unless a Participant files a new Deferral Election Form
by December 15th of any subsequent Plan Year, the existing Deferral Election
Form shall remain effective for subsequent Plan Years.
(ii) MODIFICATION OF SALARY DEFERRAL CONTRIBUTION.
An election under Section 3.01(a) may only be increased, decreased, or
terminated by filing a new Deferral Election Form by December 15th of the Plan
Year (or First Plan Year, if applicable) prior to the effective date of the
change. Any such modification will become effective as of the first pay period
of the following Plan Year. If a Participant has terminated his deferral
election with respect to Base Salary, no further deferrals of Base Salary shall
be permitted until the next Plan Year.
(iii) DEFERRAL PERIOD. The Deferral Election Form
will establish the deferral period for the Base Salary. The deferral period
shall begin on the first day of the Plan Year with respect to which the
Deferral Election Form is filed (or, in the case of Participants becoming
eligible mid-year, on the first day of a pay period following the filing of a
Deferral Election Form). The deferral period shall end as determined under
Article 7. The Participant may designate different deferral periods for the
Base Salary contributed in each Plan Year by filing a separate Deferral
Election Form in accordance with Section 3.01(a)(i).
(b) BONUS DEFERRAL CONTRIBUTION.
(i) SUBMISSION OF DEFERRAL ELECTION FORM. Each
Participant who wishes to participate in the Plan must submit a Deferral
Election Form to the Committee no later than December 15 of each Plan Year.
The Deferral Election Form, once properly completed and submitted to the
Committee, shall be effective for the Bonus earned between February 1, 1998 and
January 31, 1999. In the case of a person who becomes a Participant after the
Effective Date, the Deferral Election Form must be filed with the Committee no
later than thirty (30) days after he becomes eligible to participate in the
Plan. The Deferral Election Form with respect to the Bonus is effective for one
12-moth period only. A Participant must file a new Deferral Election Form by
December 15th of each Plan Year in order to defer the Bonus which is earned
during the subsequent 12-month period commencing each February 1.
- 5 -
10
(ii) DEFERRAL PERIOD. The Deferral Election Form
will establish the deferral period for the Bonus. The deferral period shall
begin each February 1 (or, in the case of Participants becoming eligible
mid-year, the first day of a pay period following the filing of a Deferral
Election Form). The deferral period shall end as determined under Article 7.
The Participant may designate different deferral periods by filing a separate
Deferral Election Form for each Bonus in accordance with Section 3.01(b)(i).
SECTION 3.02 COMPANY CONTRIBUTIONS. The Company, in its
sole and absolute discretion, may make a Company Discretionary Contribution to
the Rabbi Trust. The Contribution may be made on an annual basis commencing
with and including the Company's current Fiscal Year. The Company shall
determine the amount of the discretionary contribution, which Participants are
eligible to share in the allocation of the Company contribution, and how the
contribution will be allocated among the Participants' Deferral Accounts, and
the timing and form in which amounts attributable to the contribution will be
distributed under Section 7.01 and 7.02.
ARTICLE 4 - INVESTMENT OF DEFERRAL ACCOUNT
SECTION 4.01 PARTICIPANT ELECTION. The Committee may (but
is not required to) invest the funds reflected in the Deferral Account of a
Participant in accordance with the Participant's direction. The Participant
may elect to have a specified percentage invested in one or more investment
fund(s) as set forth on Attachment B provided that the specified percentage is
in whole numbers, the minimum designation is ten percent (10%) and the sum of
the percentages allocated does not exceed one hundred percent (100%). The
Participant agrees on behalf of himself and his Beneficiary to assume all risks
in connection with any decrease in the value of funds which are invested or
which continue to be invested in accordance with the provisions of the Plan.
SECTION 4.02 CHANGE OF INVESTMENT ELECTION. Subject to
any restrictions imposed by the underlying investment, a Participant may
transfer all or a portion of his Deferral Account among the investments then
allowed by the Plan not more frequently than once every thirty (30) days by
providing the Committee with such completed forms as the Committee may require.
Any such election shall be effective within thirty (30) days after receipt of
such completed forms by the Committee or as soon as administratively feasible
thereafter. Any change in the investment of a Participant's Deferral Account
is applicable to both future elective Deferrals and existing assets in the
Deferral Account.
SECTION 4.03 INVESTMENT OPTIONS. In addition to those
investment funds listed on Attachment B, any funds credited to the Deferral
Account may be kept in cash
- 6 -
11
or invested and reinvested in mutual funds, stocks, bonds, securities,
insurance contracts, or any other assets as may be selected by the Committee.
The Company may add, delete or otherwise alter the investments allowed under
this Plan at any time without the necessity of a Plan amendment.
ARTICLE 5 - VESTING AND FORFEITURE OF BENEFITS
SECTION 5.01 PARTICIPANT DEFERRAL. Each Participant will
be Vested in the amounts in his Deferral Account attributable to Deferrals at
all times.
SECTION 5.02 COMPANY CONTRIBUTIONS. Each Participant will
be Vested in the amounts in his Deferral Account attributable to Company
Discretionary Contributions upon the earlier of: (i) the date the Participant
satisfies the vesting schedule established by the Company at the time the
Company's Discretionary Contribution is allocated to the Participant's Deferral
Account; (ii) the date the Participant reaches age sixty (60) provided the
Participant is still employed by the Company; or (iii) December 31st of the
tenth Plan Year in which the Participant has maintained a balance at all times
in his Deferral Account in the Plan. Notwithstanding the above, if a
Participant dies while in the employ of the Company, all amounts credited to
the Participant's Deferral Account will be Vested.
ARTICLE 6 - DEFERRAL ACCOUNTS
SECTION 6.01 DEFERRAL ACCOUNTS. The Committee shall
establish and maintain a Deferral Account for each Participant under the Plan.
Each Participant's Deferral Account shall be further divided into separate
subaccounts ("investment fund subaccounts"), each of which corresponds to an
investment fund elected by the Participant pursuant to Section 4.01. A
Participant's Deferral Account shall be credited as follows:
(a) As of each Valuation Date, the Committee shall credit
the investment fund sub-accounts of the Participant's Deferral Account with an
amount equal to the Deferrals contributed by the Participant during each pay
period ending in that month in accordance with the Participant's elections
under Section 4.01; that is, the portion of the Participant's Deferrals that
the Participant has elected to be deemed to be invested in a certain type of
investment fund shall be credited to the investment fund sub-account
corresponding to that investment fund.
In addition, the Committee shall credit the investment fund
sub-accounts of the Participant's Deferral Account with an amount equal to any
Company Discretionary Contributions made during that month in accordance with
the Participant's elections
- 7 -
12
under Section 4.01.
(b) As of each Valuation Date, each investment fund
sub-account of a Participant's Deferral Account shall be credited with earnings
or losses in an amount equal to that determined by multiplying the balance
credited to such investment fund subaccount as of the prior Valuation Date by
the interest rate for the corresponding fund selected by the Company.
(c) In the event that a Participant elects for a given
Plan Year's Deferral to have a scheduled withdrawal date pursuant to Section
7.04, all amounts attributed to the Deferrals for such Plan Year shall be
accounted for in a manner which allows separate accounting for the Deferrals
and investment gains and losses associated with such Plan Year's Deferrals.
SECTION 6.02 QUARTERLY REPORTS. The Committee shall
advise each Participant of his Deferral Account at least quarterly.
SECTION 6.03 TITLE TO ASSETS. Title to and beneficial
ownership of any assets which the Company has designated to pay the deferred
compensation benefits hereunder shall at all times be subject to the general
creditors of the Company, and a Participant shall have no property rights in
those assets.
SECTION 6.04 UNFUNDED ARRANGEMENT. In conjunction with
the establishment of this Plan, the Company has established a Rabbi Trust in
respect of its obligations under the Plan. To the extent that any person
acquires a right to receive benefits under this Plan, such right shall be no
greater than the right of any unsecured general creditor of the Company. It is
the intention of the Company that this Rabbi Trust shall not affect the status
of the Plan as an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees for purposes of Title I of the Employee Retirement Income Security
Act of 1974.
SECTION 6.05 NOTICE OF INSOLVENCY. The Committee must
inform the Trustee in writing of the Company's insolvency, as defined in the
Trust Agreement. Upon receipt of this information regarding the Company's
insolvency, the Trustee must discontinue payments of deferred obligations and
must hold assets for the benefit of the Company's general creditors. If the
Trustee receives other written notice of the Company's insolvency, the Trustee
must notify the Committee in writing which shall confirm or refute such
determination within 30 calendar days. If the Trustee does not receive a
response from the Committee within said period, the Trustee must suspend all
Participant or Beneficiary related payments and deliver trust assets to satisfy
the claims of the Company's general creditors as directed by a court of
competent
- 8 -
13
jurisdiction.
SECTION 6.06 RETURN OR DIVERSION OF ASSETS. Except as
permitted by the terms of the Trust Agreement, the Company has no right to
direct the Trustee to return or divert trust assets before payment of all Plan
benefits to the Participant or Beneficiary except (i) if necessary to discharge
the claims of creditors, or (ii) if benefits have been forfeited.
SECTION 6.07 ANNUAL EXPENSES. The Company will be
responsible for paying the annual expenses of operating this Plan which will
include, but not be limited to, funding the Plan benefits, the administrative
fees, separately stated fees for investment allocations and fees based on the
amount of assets in the Plan. The annual expenses of the Plan will not be
deducted from the assets of the Plan.
ARTICLE 7 - BENEFIT DISTRIBUTIONS
SECTION 7.01 IN GENERAL. A Participant who is eligible to
receive benefits under the Plan, unless they are forfeited in accordance with
Article 5, shall have the obligation satisfied by the assets of the Rabbi
Trust. The terms and conditions of such benefit payments are set forth in this
Article. Distributions pursuant to Section 7.04 (other than paragraph
7.04(b)), 7.05, and 7.06 shall be made as soon as administratively feasible
after the requested distribution is approved by the Committee. All other
distributions will commence as soon as administratively feasible after the
first day of the month following the end of the quarter containing the
separation from service date.
SECTION 7.02 COMMENCEMENT OF BENEFITS. The amount in a
Participant's Deferral Account shall be paid to the Participant at the time
elected on the Deferral Election Form when Deferrals are initially made or, in
the case of amounts attributable to Company discretionary contributions, at the
time prescribed by the Company under Section 3.02.
(a) IN GENERAL. The Deferral Election Form shall permit
Participants to direct payments to commence upon the earlier of a Voluntary
Termination of Employment or on a scheduled withdrawal date pursuant to Section
7.04.
(b) INVOLUNTARY TERMINATION OF EMPLOYMENT.
Notwithstanding any other provision of this Article 7, upon a Participant's
Involuntary Termination of Employment, the Participant will receive an
immediate distribution of benefits from his Deferral Account in one (1) lump
sum payment.
SECTION 7.03 DISTRIBUTION FORM. The distribution form is
elected on the
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14
Deferral Election Form when Deferrals are initially contributed or, in the case
of amounts attributable to Company discretionary contributions, in the form
prescribed by the Company under Section 3.02. The distribution form can be
changed by giving the Committee written notice at least one year in advance of
the distribution date, on a form supplied by the Committee.
(a) NORMAL FORM OF DISTRIBUTION. The normal form of
distribution is forty (40) Quarterly installments.
(b) OPTIONAL FORMS OF DISTRIBUTION. Participants who
properly complete and submit a Deferral Election Form in accordance with
Article 3 may elect to receive their distribution of benefits in one (1) lump
sum payment or in twenty (20) or sixty (60) Quarterly installments.
(c) DISTRIBUTION OF SMALL BENEFITS. If the Participant's
Deferral Account is twenty-five thousand dollars ($25,000) or less, a
distribution for any reason shall be made in the form of a lump-sum payment.
SECTION 7.04 SCHEDULED IN-SERVICE WITHDRAWALS. In order
to select a scheduled withdrawal date, a Participant must complete a Deferral
Election Form and elect a distribution date which is at least four (4) years
from the date the deferral period commenced. A Participant can make separate
elections with regard to the Deferrals contributed in each Plan Year.
(a) ELECTION TO EXTEND SCHEDULED WITHDRAWAL. Subject to
the consent of the Committee, a Participant may elect to postpone the scheduled
withdrawal date specified on a Deferral Election Form (or the date specified by
the Company under Section 3.02) by filing with the Committee a subsequent
Deferral Election Form specifying a later scheduled withdrawal date. Such an
election to postpone the scheduled withdrawal date must be made at least one
year prior to the scheduled withdrawal date. The extension of the scheduled
withdrawal date may be made in one-year increments.
(b) TERMINATION OF EMPLOYMENT PRIOR TO SCHEDULED
WITHDRAWAL DATE. In the event of a Voluntary Termination of Employment prior
to distribution of a scheduled withdrawal, benefit payments shall commence as
soon as administratively feasible after the first day of the month following
the end of the quarter containing the separation from service date. A
Participant can make a separate election on the Deferral Election Form as to
the form of payment upon Voluntary Termination of Employment prior to a
scheduled withdrawal. The distribution form can be changed by giving the
Committee written notice at least one year in advance of the distribution date,
on a form supplied by the Committee.
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15
SECTION 7.05 NONSCHEDULED IN-SERVICE WITHDRAWALS. A
Participant may request to receive the benefits in his Deferral Account in the
form of a lump sum payment at any time. Subject to the approval of the
Committee, a Participant who elects this type of benefit distribution will
receive ninety percent (90%) of the Vested benefits in his Deferral Account and
will forfeit the remaining ten-percent (10%). As a result of such
non-scheduled in-service withdrawal, the Participant will be ineligible to
participate in the Plan for purposes of making Deferrals or receiving Company
Discretionary Contributions for the duration of the Plan Year in which he
received the lump sum payment and for the following Plan Year.
SECTION 7.06 HARDSHIP DISTRIBUTIONS - WITHDRAWAL OF
DEFERRALS. Upon application, the Committee may, when in its sole discretion, it
determines that a Participant has incurred a hardship, permit such Participant
to withdraw all or part of the amounts in his Deferral Account. While such a
determination shall be within the discretion of the Committee, a hardship
withdrawal request shall only be considered upon satisfactory demonstration
that the Participant has incurred an immediate financial need arising out of
events beyond the control of the Participant.
SECTION 7.07 DEATH BENEFITS.
(a) DEATH BEFORE SEPARATION FROM SERVICE. In the event
that a Participant incurs a Voluntary Termination of Employment because of
death, his Beneficiary shall be entitled to receive a death benefit which shall
equal the value of the Participant's Deferrals and Company Discretionary
Contributions in the Participant's Deferral Account, as of the Valuation Date
immediately preceding the distribution date, plus the proceeds of any insurance
policy held on the life of the deceased Participant, but subject to the terms
of any Split Dollar Life Insurance Agreement then in effect.
(i) The portion of the death benefit attributable
to the Participant's Deferrals and the Company Discretionary Contributions in
the Participant's Deferral Account shall be paid in accordance with the
distribution form selected by the Participant (but subject to 7.03(c)).
(ii) The portion of the death benefit attributable
to any life insurance policy shall only be paid if the insurance company agrees
that the Participant is insurable and shall be subject to all conditions and
exceptions set forth in the applicable insurance policy. Notwithstanding the
provision of this Plan or any other document to the contrary, the Company shall
not have any obligation to pay the Participant or his or her Beneficiary any
death benefit except the Participant's Deferrals and Company Discretionary
Contributions in the Participant's Account; the portion of the death benefit
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16
attributable to life insurance shall be payable solely from the proceeds of the
life insurance policy, if any. Furthermore, the Company is not obligated to
maintain the policy; no death benefit attributable to life insurance shall be
payable hereunder if the Company has discontinued the policy for the
Participant. In addition, no policy shall be allocated to any Account. In the
event a Participant dies while the life insurance policy is in effect but
before the Split Dollar Life Insurance Agreement has been executed, the
proceeds of the life insurance policy will be paid into the Rabbi Trust. The
Company shall pay to the Participant's Beneficiary the death benefit set forth
in Section 3(a) of the Split-Dollar Life Insurance Agreement as if the
agreement had been effective at death.
(b) DEATH AFTER SEPARATION FROM SERVICE. In the event
that a Participant who is in pay status after incurring a Voluntary Termination
of Employment dies, his Beneficiary shall be entitled to receive the remaining
installment payments, if any, from the Participant's Deferral Account as they
become due. Payment of benefits under this Section shall be made in the form
of payment selected by the Participant.
SECTION 7.08 TAX LIABILITY. In the event the Plan is
required to distribute benefits to any Participant in compliance with a change
in the law, the Participant shall bear all tax consequences associated with the
premature payment of his Deferral Account. Notwithstanding the above, the
Participant will be responsible for all taxes in conjunction with the deferral
or distribution of his benefits.
ARTICLE 8 - ADMINISTRATION
SECTION 8.01 RESPONSIBILITIES AND POWERS OF COMMITTEE.
The Committee shall be the agent for service of legal process regarding any
litigation arising out of the operation and administration of the Plan. The
Committee may act in one or more fiduciary capacities with respect to the Plan
and may allocate to others certain aspects of the responsibilities for the
operation and administration of the Plan, including the employment of advisors
and the delegation of any fiduciary or ministerial duties or functions to
appropriate individuals. The Committee shall also have the power to manage and
control the investment of plan assets, and to establish and revise rules and
procedures relating to the administration of the Plan.
SECTION 8.02 INTERPRETATION OF PLAN. The Committee shall,
subject to the requirements of the law, be the sole judge of the standard of
proof required in any case and the application and interpretation of this Plan,
and decisions of the Committee shall be final and binding on all parties. The
Committee shall have the exclusive right and discretionary authority to
construe the terms of the Plan, to resolve any ambiguities, and to determine
any questions which may arise with the Plan's application or administration,
including but not limited to, determination of eligibility for benefits.
Whenever in the
- 12 -
17
Plan the Committee is given discretionary powers, the Committee shall exercise
such powers in a uniform and non-discriminatory manner. The Committee shall
process a claim for benefits as speedily as is feasible, consistent with the
need for adequate information and proof necessary to establish the
Participant's benefit rights and to commence payment of benefits.
ARTICLE 9 - APPLICATION FOR BENEFITS AND CLAIMS PROCEDURE
SECTION 9.01 NOTICE OF DENIAL OF BENEFIT. In the event
that a request for distribution of benefits is denied in whole or in part, a
Participant whose request for benefits has been denied shall be notified of
such denial in writing by the Committee. The denial notice shall specify the
reason or reasons for the denial, make specific references to pertinent Plan
provisions, describe any additional material or information necessary for the
Participant to perfect the claim, and shall advise the Participant of the
procedure for the appeal of such denial.
SECTION 9.02 APPEALS PROCEDURE. All appeals shall be made
in accordance with the following procedure:
(a) The Participant or his duly authorized representative
shall file with the Committee a request to appeal the denial within sixty (60)
days of notification by the Committee of the claim denial. The request shall
be made in writing, and shall set forth all of the facts upon which the appeal
is based. Appeals not timely filed shall be barred.
(b) The Committee shall consider the merits of the
Participant's written presentations, the merits of any facts or evidence in
support of the denial of benefits, and such other facts and circumstances as it
shall deem relevant.
(c) Within one hundred and twenty (120) days after a request
for review has been received, the Committee shall render a decision upon the
appealed claim which shall be in writing and shall include specific reasons for
the decision and specific references to the pertinent Plan provisions on which
the decision was based. The decision rendered by the Committee shall be
binding on all parties.
ARTICLE 10 - GENERAL PROVISIONS
SECTION 10.01 NO ALIENATION OR ASSIGNMENT OF BENEFITS.
Payments of benefits under this Plan to any Participant shall not be subject to
any claim of any creditor of such Participant, and, in particular, to the
fullest extent permitted by law, all such
- 13 -
18
payments shall be free from attachment, garnishments, trustee's process, or any
other legal or equitable process available to any creditor of such Participant.
No Participant shall have the right to alienate, anticipate, commute, pledge,
encumber, assign, sell, or transfer any potential payment of benefits
hereunder.
SECTION 10.02 NO CONTRACT OF EMPLOYMENT. Nothing contained
herein shall be construed as conferring upon a Participant the right to
continue in the employ of the Company.
SECTION 10.03 OTHER RETIREMENT PLANS. Any compensation
deferred under this Plan shall not be deemed salary or other compensation to a
Participant for the purpose of computing benefits to which he may be entitled
under any benefit plan of the Company, provided it is permissible to do so
under the plan.
SECTION 10.04 HEIRS, ASSIGNS AND SUCCESSORS. This agreement
is binding upon and inures to the benefit of the Company, its successors and
assigns and the Participant and his heirs, executors, administrators and legal
representatives.
SECTION 10.05 AMENDMENT OR TERMINATION. The Board retains
the right to amend this Plan, with retroactive effect if necessary, or
terminate this Plan, at any time, as determined by the Board.
SECTION 10.06 SEVERABILITY OF PROVISIONS. If any provision
of this Plan shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provisions hereof, and this Plan
shall be construed and enforced as if such provisions had not been included.
SECTION 10.07 CONTROLLING LAW. This Plan shall be construed
in accordance with and governed by the laws of the State of Maryland.
SECTION 10.08 GRAMMATICAL CONSTRUCTION. Pronouns or other
words indicating the masculine gender shall be deemed to include the feminine
gender, and singular words shall include the plural in all cases where such
meaning would be appropriate.
SECTION 10.9 UNAUTHORIZED REPRESENTATIONS. The Company shall
not be bound by the representations of any person, other than the Committee,
regarding eligibility for benefits under the Plan or any other matter relating
to the Plan.
SECTION 10.10 DESIGNATION OF DEATH BENEFIT BENEFICIARY. Each
Participant may designate any person or persons (primarily or contingently) as
his
- 14 -
19
Beneficiary to whom his Plan benefits shall be paid if he dies prior to receipt
of all such benefits. Such Beneficiary designation shall be effective only if
in writing on forms provided by the Committee and if such form is delivered to
the Committee during the lifetime of the Participant. If a Participant has a
spouse, an election to name a primary designated Beneficiary other than or in
addition to the spouse shall be ineffective unless the Participant's spouse
consents in writing on form provided by the Committee to such designation.
SECTION 10.11 EFFECT OF CHANGE OF CONTROL.
Notwithstanding the provisions of Section 6.04 above, following a Change in
Control (as defined in the 1994 Ciena Corporation Incentive Stock Option Plan,
as amended), in no event may the Company amend the Plan in any manner that
adversely affects the benefits under the Plan or to remove the trustee of the
trust established pursuant to Section 1.19 above.
IN WITNESS WHEREOF, the Company has caused this Plan to be
executed by its duly authorized officers who have set their hands and affixed
the corporate seal hereto as of this 20th day of April, 1998 effective the day
first above written.
ATTEST: CIENA CORPORATION
By: /s/ Eric Georgatos (Seal) By: /s/ Patrick H. Nettles (Seal)
------------------- -----------------------
, Secretary , President
- 15 -
5
1,000
3-MOS
OCT-31-1998
FEB-01-1998
APR-30-1998
174,474
51,765
132,558
568
68,955
444,957
139,046
24,794
575,057
86,772
0
0
0
1,016
455,366
575,057
142,718
142,718
63,915
63,915
51,643
0
81
30,510
15,205
15,305
0
0
0
15,305
0.15
0.14
EPS Primary is same as EPS Basic.
