1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 MARCH 31, 1999 Date of Report (Date of earliest event reported) CIENA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 0-21969 23-2725311 (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) File No.) Identification No.) 1201 WINTERSON ROAD, LINTHICUM, MD 21090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 865-8500 NOT APPLICABLE (Former name or former address, if changed since last report) Exhibit Index on page 37
2 ITEM 5. OTHER EVENTS This current report on Form 8-K/A provides supplemental financial information pertaining to the retroactive effect of the March 31, 1999 business combination of CIENA Corporation and Lightera Networks, Inc., which was accounted for under the pooling of interest method of accounting. SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA The following selected supplemental consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the supplemental consolidated financial statements and the notes thereto included in "Supplemental Financial Statements and Supplementary Data". YEAR ENDED OCTOBER 31,(1) 1994 1995 1996 1997 1998 ----------------- ------------- --------------- ----------------- ---------------- (in thousands except share and per share data) STATEMENT OF OPERATIONS DATA: Revenue ................................. $ 20,890 $ 21,691 $ 88,463 $ 413,215 $ 508,087 Cost of goods sold....................... 15,638 16,185 47,315 166,472 256,014 ---------------- -------------- ---------------- ----------------- ---------------- Gross profit .......................... 5,252 5,506 41,148 246,743 252,073 Operating expenses: Research and development............... 1,287 6,361 8,922 23,308 67,090 Selling and marketing.................. 1,339 1,907 5,641 22,627 46,220 General and administrative............. 2,352 3,034 6,422 11,823 18,515 Purchased research and development... - - - - 9,503 Pirelli litigation..................... - - - 7,500 30,579 Costs of proposed merger............... - - - - 2,548 ---------------- -------------- ---------------- ----------------- ---------------- Total operating expenses................. 4,978 11,302 20,985 65,258 174,455 ---------------- -------------- ---------------- ----------------- ---------------- Income (loss) from operations............ 274 (5,796) 20,163 181,485 77,618 Other income (expense), net.............. (180) 172 653 7,185 12,610 ---------------- -------------- ---------------- ----------------- ---------------- Income (loss) before income taxes........ 94 (5,624) 20,816 188,670 90,228 Provision for income taxes............... 942 824 3,553 72,703 39,115 ---------------- -------------- ---------------- ----------------- ---------------- Net income (loss)........................ $ (848) $ (6,448) $ 17,263 $ 115,967 $ 51,113 ================ ============== ================ ================= ================ Basic net income (loss) per common share $ (0.12) $ (0.51) $ 1.25 $ 1.53 $ 0.46 ================ ============== ================ ================= ================ Diluted net income (loss) per common share and dilutive potential common share.. $ (0.12) $ (0.51) $ 0.19 $ 1.11 $ 0.44 ================ ============== ================ ================= ================ Weighted average basic common shares outstanding......................... 7,317 12,717 13,817 75,802 110,593 ================ ============== ================ ================= ================ Weighted average basic common and dilutive potential common shares outstanding......................... 7,317 12,717 92,407 104,664 117,150 ================ ============== ================ ================= ================ OCTOBER 31, (1) 1994 1995 1996 1997 1998 ----------------- ---------------- ---------------- --------------- ------------- BALANCE SHEET DATA: (in thousands) Cash and cash equivalents............ $ 4,440 $ 8,261 $ 24,040 $ 268,588 $ 239,780 Working capital........................ 5,485 7,221 42,240 333,452 379,257 Total assets.............................. 12,076 17,706 79,676 463,279 587,566 Long-term obligations, excluding current portion........................ 1,901 2,074 3,465 1,885 2,257 Mandatorily redeemable preferred stock 3,492 14,454 40,404 - - Stockholders' equity (deficit)......... (300) (6,662) 10,783 372,414 488,785 (1) The Company has a 52 or 53 week fiscal year which ends on the Saturday nearest to the last day of October in each year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31. Fiscal 1994, 1995, 1997, and 1998 comprised 52 weeks and fiscal 1996 comprised 53 weeks. 1
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Supplemental Consolidated Financial Data" and the Company's supplemental consolidated financial statements and notes thereto included elsewhere in this report on Form 8-K/A. The information in this Form 8-K/A contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, risk factors disclosed in the Company's annual report on Form 10-K for the fiscal year ended October 31, 1998 and risk factors contained in the Company's quarterly reports on Form 10-Q and current reports on Form 8-K files thereafter. The information presented in this report is presented as of October 31, 1998 and has not been updated or changed to reflect any events subsequent to that date, other than the acquisition of Lightera Networks, Inc. OVERVIEW This management discussion and analysis of financial condition and results of operations has been restated to give retroactive effect to the Company's March 1999 acquisition of Lightera Networks, Inc., ("Lightera"), a U.S. company headquartered in Cupertino, California, in a transaction valued at approximately $463.5 million. Lightera is a developer of carrier class optical core switches. Under the terms of the agreement, the Company acquired all of the outstanding shares and stock options of Lightera in exchange for approximately 17.5 million shares of CIENA common stock and 3.1 million stock options of CIENA. The transaction constituted a tax-free reorganization and has been accounted for as a pooling of interest under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Lightera as though it had been a part of CIENA. CIENA Corporation designs, manufactures and sells open architecture, DWDM systems for fiberoptic communications networks, including long-distance and local exchange carriers. CIENA also provides a range of engineering, furnishing and installation services for telecommunications service providers. Fiscal 1998 was a year of dramatic events affecting the Company. Soon after the close of the first fiscal quarter, MCIWorldCom, the Company's largest customer of fiscal 1997, surprised the Company with an announcement of a major change in purchasing practices - a change that meant materially reduced revenue for the Company. This adverse event was followed in the second quarter by the Company's successful, large scale commercial introduction of the Company's industry leading 40-channel MultiWave Sentry 4000. The third quarter included resolution of the Company's longstanding Pirelli SpA ("Pirelli") litigation, which was followed on June 3, 1998 with the announcement of a planned merger with Tellabs, Inc. In the fourth quarter, just prior to consummation of the merger, AT&T advised the Company that it would no longer consider CIENA's long distance DWDM products for deployment in AT&T's network. The planned merger with Tellabs was later terminated on September 14, 1998. The Company's final results for fiscal 1998, its second full year in the DWDM marketplace, show total revenues in excess of $500 million. The Company believes this represents a considerable achievement, particularly given the substantial portion of revenues derived from the sale of its now third-generation DWDM product, the MultiWave Sentry 4000. Nevertheless, the termination of the Tellabs merger represented a setback for the Company. The outlook for fiscal 1999 is challenging. The price discounting offered by competitors striving to catch up to the Company and acquire market share has placed pressure on gross margins and operating profitability. But market demand for high-bandwidth solutions still appears robust, and the Company believes that its product and service quality, manufacturing experience, and proven track record of delivery will enable it to endure the gross margin pressure while it concentrates on efforts to reduce product costs and maximize production efficiencies. The Company intends to continue this strategy in order to preserve and enhance market leadership and eventually build on its installed base with new and additional products. Pursuit of this strategy, in conjunction with increased investments in selling, marketing, and customer service activities, will likely limit the Company's operating profitability over at least the first half of fiscal 1999, and may result in near term operating losses. 2
4 HIGHLIGHTS OF THE FISCAL YEAR 1998 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 costs incurred to date compared to estimated total costs for each contract. Amounts received in excess of revenue recognized are recorded as deferred revenue. For distributor sales where risks of ownership have not transferred, the Company recognizes revenue when the product is shipped to the end user. For the fiscal year ended October 31, 1998, the Company recorded $508.1 million in revenue of which $266.9 million was from sales to Sprint. The Company increased the total number of customers for DWDM systems from five customers in fiscal 1997 to fourteen customers in fiscal 1998. Revenue from sales to WorldCom declined from approximately $184.5 million in fiscal 1997 to an amount less than 10% of the Company's total fiscal 1998 revenue. Substantially all of the revenue recognized from the sales to WorldCom occurred in the Company's first quarter ended January 31, 1998. In addition to Sprint and WorldCom, during the fiscal year ended October 31, 1998 the Company recognized revenue from Cable and Wireless; Hermes; Enron; Racal; Telia of Sweden; TD of France; DTI; GST; and, through the Company's distributor, NISSHO Electronics Corporation ("NISSHO"), sales to Teleway, Japan Telecom and to DDI. The Company also recognized an immaterial amount of revenue from one undisclosed customer. During December 1997 the Company acquired Astracom, an early stage telecommunications company located in Atlanta, Georgia. The employees of Astracom were immediately deployed to assist with the Company's development efforts from its MultiWave Metro product. 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. In February 1998 the Company acquired Alta, a Canadian corporation headquartered near Atlanta, 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 constituted a tax-free reorganization and has been accounted for as a pooling of interest under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Alta as though it had always been a part of CIENA. 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 MultiWave 1600, Sentry and Firefly systems. Deployment and revenue recognition is expected in the first half of calendar 1999, subject to successful completion of ongoing testing. The Bell Atlantic DWDM deployment is expected to mark the first time a RBOC has committed to deployment of DWDM equipment. During April 1998 the Company acquired Terabit, a developer of optical components known as photodetectors or optical receivers. The Company believes the technology currently under development at Terabit may give it a strategic advantage over its competitors. 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. From December 1996 until June 1998, the Company was involved in litigation with Pirelli. On June 1, 1998, the Company announced the resolution of all pending litigation with Pirelli. The terms of the settlement involved the 3
5 dismissal of Pirelli's three lawsuits against the Company that were pending in Delaware, dismissal of the Company's legal proceedings against Pirelli in the United States International Trade Commission, payment to Pirelli of $30.0 million and certain running royalties, a worldwide, non-exclusive cross-license to each party's patent portfolios, and a 5-year moratorium on future litigation between the parties. The Company recorded a charge of approximately $30.6 million for the year ended October 31, 1998, relating to legal fees and the ultimate settlement to Pirelli. The payment of future royalties due to Pirelli is based upon future revenues derived from the licensed technology. The Company does not expect the future royalty payments to have a material impact on the Company's business, financial condition or results of operations. On June 3, 1998 the Company announced an agreement to merge with Tellabs, Inc. ("Tellabs"), a Delaware corporation headquartered in Lisle, Illinois. Tellabs designs, manufactures, markets and services voice and data transport network access systems. Under the terms of the original agreement, all outstanding shares of CIENA stock were to have been exchanged at the ratio of one share of Tellabs common stock for each share of CIENA common stock. On August 21, 1998 the Company was informed by AT&T that AT&T had decided not to pursue further evaluation of CIENA's DWDM systems. Following the impact of the AT&T announcement on the market prices of the common stock of the respective companies, the Company and Tellabs management renegotiated the terms of the merger agreement, and on August 28, 1998 announced an amendment to the original merger agreement which was approved by the respective companys' boards of directors. Under the terms of the agreement as amended, all outstanding shares of CIENA stock were to have been exchanged at the ratio of 0.8 share of Tellabs common stock for each share of CIENA common stock. Subsequent to August 28, 1998, further adverse investor reaction raised serious questions about the ultimate ability to obtain shareholder approval for the merger. An agreement to terminate the merger was announced on September 14, 1998. In June 1998 at the SUPERCOMM trade show in Atlanta, Georgia, the Company demonstrated its MultiWave Metro(TM) ("Metro") DWDM system for metropolitan and local access applications. Metro enables carriers to offer multi-protocol high-bandwidth services economically using their existing network infrastructure. The Metro product is expected to be commercially available by the first quarter of calendar 1999. The Company also demonstrated at the SUPERCOM trade show a 96 channel DWDM system. The 96 channel DWDM system is expected to be commercially available during the first half of calendar 1999. The Company had previously announced that AT&T was evaluating a customized version of its MultiWave 1600 Sentry system. In July 1998 AT&T indicated to the Company that capacity requirements of its network had grown to such extent that the delays in final certification and approval for deployment of the Company's customized 16 channel system would make actual deployment of that system inadvisable, and that AT&T would accordingly shift to an accelerated evaluation of commercially available, higher channel count systems. The Company believed AT&T would evaluate the Company's MultiWave(R) 4000 system positively in this context, particularly because the Company believes it is the only manufacturer in the world with operational 40 channel systems ready for prompt delivery on an "off-the -shelf" basis in substantial manufacturing volumes. However, on August 21, 1998 the Company was informed by AT&T that AT&T had decided not to pursue further evaluation of CIENA's DWDM systems. 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 210,000 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 68,000 square foot facility also located in Linthicum. During the third quarter of 1998, the Company completed the process of renovating the vacated portions of the 96,000 square foot facility for the purpose of accommodating expanding research and development functions. As of October 31, 1998 the Company and its subsidiaries employed approximately 1,432 persons, which was an increase of 591 persons over the approximate 841 employed on October 31, 1997. 4
6 RESULTS OF OPERATIONS FISCAL YEARS ENDED 1996, 1997 AND 1998 REVENUE. The Company recognized $508.1 million, $413.2 million and $88.5 million in revenue for the years ended October 31, 1998, 1997 and 1996, respectively. Sales to Sprint accounted for $266.9 million (52.5%), $179.4 million (43.4%) and $54.8 million (62.0%), of the Company's revenue during fiscal 1998, 1997 and 1996, respectively. While WorldCom accounted for $184.5 million (44.7%) of the Company's revenue during fiscal 1997, it was not a significant contributor to fiscal 1998 revenues. There were no other customers who accounted for 10% or more of the Company's revenues during fiscal 1998, 1997 and 1996. Revenue derived from foreign sales accounted for approximately 23.0%, 2.8%. and 4.0% of the Company's revenues during fiscal 1998, 1997 and 1996, respectively. The Company expects Sprint's purchases in fiscal 1999 to be focused primarily on filling out installed systems with additional channel cards and therefore substantially below the purchasing volume in either of the last two years. The Company also expects the percentage of fiscal 1999 revenue derived from foreign sales to increase relative to fiscal 1998. Based on overall new bid activity as well as expected deployment plans of existing customers, the Company believes revenue growth in fiscal 1999 over fiscal 1998 is possible, but will be highly dependent on winning new bids for shipments from new and existing customers during the year. Competition of new bids is intense, and there is no assurance the Company will be successful in winning enough new bids and new customers to achieve year over year sequential growth. The Company began shipping MultiWave 1600 systems for field testing in May 1996 with customer acceptance by Sprint occurring in July 1996. For fiscal years 1996 and 1997 all of the Company's DWDM system revenues were derived form the MultiWave 1600 product. During fiscal 1998 the Company began shipments of and recognized revenues from sales of MultiWave Sentry 1600, MultiWave Firefly, and MultiWave Sentry 4000 systems. The amount of revenue recognized from MultiWave 1600 sales declined in fiscal 1998 as compared to fiscal 1997. This decline in MultiWave 1600 sales in fiscal 1998 was offset by revenue recognized from sales of MultiWave Sentry 1600, MultiWave Firefly, and MultiWave Sentry 4000 systems. GROSS PROFIT. Cost of goods sold consists of component costs, direct compensation costs, warranty and other contractual obligations, royalties, license fees, inventory obsolescence costs and overhead related to the Company's manufacturing and engineering, furnishing and installation operations. Gross profit was $252.1 million, $246.7 million and $41.1 million for fiscal years 1998, 1997, and 1996, respectively. Gross margin was 49.6%, 59.7%, and 46.5% for fiscal 1998, 1997, and 1996, respectively. The increase in gross profit from fiscal 1997 to fiscal 1998 was attributable to increased revenues. The decrease in gross margin percentage from fiscal 1997 to fiscal 1998 was largely attributable to lower selling prices. The increase in gross margin percentage from fiscal 1996 to fiscal 1997 was primarily the result of a change in product mix from revenues largely derived from lower margin engineering, furnishing and installation sales to higher margin MultiWave product sales. This year to year increase was also attributable to fixed overhead costs being allocated over a larger revenue base, an improvement in manufacturing efficiencies, and reductions in component costs. The Company's gross margins may be affected by a number of factors, including continued competitive market pricing, lower manufacturing volumes and efficiencies and fluctuations in component costs. During fiscal 1999, the Company expects to face continued pressure on gross margins, primarily as a result of substantial price discounting by competitors seeking to acquire market share. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $67.1 million, $23.3 million, and $8.9 million for fiscal 1998, 1997, and 1996, respectively. The approximate $43.8 million or 188% increase from fiscal 1997 to 1998 and the approximate $14.4 million or 161% increase from fiscal 1996 to fiscal 1997 in research and development expenses related to increased staffing levels, purchases of materials used in development of new or enhanced product prototypes, and outside consulting services in support of certain developments and design efforts. During fiscal 1998, 1997, and 1996 research and development expenses were 13.2%, 5.6%, and 10.1% of revenue, respectively. The Company expects that its research and development expenditures will continue to increase moderately in absolute dollars and perhaps as a percentage of revenue during fiscal 1999 to support the continued development of the various DWDM products, the exploration of new or complementary technologies, and the pursuit of various cost reduction strategies. The Company has expensed research and development costs as incurred. 5
7 SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $46.2 million, $22.6 million, and $5.6 million for fiscal 1998, 1997, and 1996, respectively. The approximate $23.6 million or 104% increase from fiscal 1997 to 1998 and the approximate $17.0 million or 301% increase from fiscal 1996 to fiscal 1997 in selling and marketing expenses was primarily the result of increased staffing levels in the areas of sales, technical assistance and field support, and increases in commissions earned, trade show participation and promotional costs. During fiscal 1998, 1997, and 1996 selling and marketing expenses were 9.1%, 5.5%, and 6.4% of revenue, respectively. The Company anticipates that its selling and marketing expenses may increase in absolute dollars and perhaps as a percentage of revenue during fiscal 1999 as additional personnel are hired and additional offices are opened to allow the Company to pursue new customers and market opportunities. The Company also expects the portion of selling and marketing expenses attributable to technical assistance and field support, specifically in Europe and Asia, will increase as the Company's installed base of operational MultiWave systems increases. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $18.5 million, $11.8 million, and $6.4 million for fiscal 1998, 1997, and 1996, respectively. The approximate $6.7 million or 56.6% increase from fiscal 1997 to 1998 and the approximate $5.4 million or 84.1% increase from fiscal 1996 to fiscal 1997 in general and administrative expenses was primarily the result of increased staffing levels and outside consulting services. During fiscal 1998, 1997 and 1996, general and administrative expenses were 3.6%, 2.9%, and 7.3% of revenue, respectively. The Company believes that its general and administrative expenses will moderately increase in absolute dollars and perhaps as a percentage of revenue during fiscal 1999 as a result of 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 fiscal year 1998. These costs were for the purchase of technology and related assets associated with the acquisition of Terabit during the second quarter of fiscal 1998. PIRELLI LITIGATION. The Pirelli litigation costs of $30.6 million in fiscal 1998 were attributable to a $30.0 million payment made to Pirelli during the third quarter of 1998 and to additional other legal and related costs incurred in connection with the settlement of this litigation. The Pirelli litigation expense in fiscal 1997 was primarily the result of a $7.5 million charge for actual and estimated legal and related costs associated with the litigation. COSTS OF PROPOSED MERGER. The costs of the proposed merger for fiscal 1998 were costs related to the contemplated merger between the Company and Tellabs. These costs include approximately $1.2 million in Securities and Exchange Commission filing fees and approximately $1.3 million in legal, accounting, and other related expenses. OPERATING PROFIT. The Company's operating profit for fiscal 1998, 1997 and 1996 was $77.6 million or 15.3% of revenue, $181.5 million or 43.9% and $20.2 million or 22.8%, respectively. Excluding charges for purchased research and development, Pirelli litigation and costs from the proposed Tellabs merger fiscal 1998 operating profit was $120.2 million or 23.7% of revenue and excluding Pirelli litigation costs in fiscal 1997 operating profit was $189.0 million or 45.7%. The decrease in operating profit and operating margin from fiscal 1997 to fiscal 1998 was due to increased competitive pricing pressures causing a reduction in gross profit margin and increased operating expenses from investments in operating infrastructure. The year to year increases in operating profits from fiscal 1996 to fiscal 1997 was primarily due to the comparable increases in revenues and gross profits derived from the Company's MultiWave systems. If the Company is unable to convert fiscal 1998 investments in operating infrastructure into significant revenue generating relationships, the Company's business, financial condition and results of operations could be materially and adversely affected. OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of interest income earned on the Company's cash, cash equivalents and marketable debt securities, net of interest expense associated with the Company's debt obligations. Other income (expense), net, was $12.6 million, $7.2 million, and $0.7 million for fiscal 1998, 1997, and 1996, respectively. The year to year increase in other income (expense), net, was primarily the result of the investment of the net proceeds of the Company's stock offerings and net earnings. PROVISION FOR INCOME TAXES. During fiscal 1996, the Company received product acceptance from its initial customer and commenced profitable operations, at which time the Company reversed its previously established deferred tax valuation allowance. The provision for income taxes for fiscal 1996 of $3.6 million is net of a tax benefit of approximately $4.6 million related to the reversal of the deferred tax valuation allowance. The Company's provision 6
8 for income taxes was 38.5% of pre-tax earnings, or $72.7 million for fiscal 1997 and was 43.4% of pre-tax earnings, or $39.1 million for fiscal 1998. The increase in the tax rate from fiscal 1997 to fiscal 1998 was primarily the result of charges for purchased research and development expenses recorded in fiscal 1998 and an adjustment to the estimated prior year state income tax liability associated with Alta operations. Purchase research and development charges are not deductible for tax purposes. Exclusive of the effect of these charges, the Company's provision for income taxes was 38.4% of income before income taxes in fiscal 1998. The decrease in tax rate, exclusive of the above charges, for fiscal 1998 compared to fiscal 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 credits derived from research and development activities offset by an increase in non-deductible goodwill amortization expense. 7
9 Quarterly Results of Operations The tables below set forth the operating results and percentage of revenue represented by certain items in the Company's statements of operations for each of the eight quarters in the period ended October 31, 1998. This information is unaudited, but in the opinion of the Company reflects all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period. Jan. 31, April 30, Jul. 31, Oct. 31, 1997 1997 1997 1997 ------------ ------------ ------------ ------------ Revenue............................................ $ 63,673 $ 97,603 $121,845 $130,094 Cost of goods sold................................. 28,253 40,400 47,569 50,250 ------------ ------------ ------------ ------------ Gross profit................................. 35,420 57,203 74,276 79,844 ------------ ------------ ------------ ------------ Operating expenses: Research and development...................... 3,050 4,699 7,245 8,314 Selling and marketing......................... 3,070 4,946 6,722 7,889 General and administrative.................... 2,003 2,797 3,241 3,782 Purchased research & development.............. - - - - Pirelli litigation............................ 5,000 - - 2,500 Cost of proposed merger....................... - - - - ------------ ------------ ------------ ------------ Total operating expenses .......................... 13,123 12,442 17,208 22,485 ------------ ------------ ------------ ------------ Income (loss) from operations...................... 22,297 44,761 57,068 57,359 Other income (expense), net........................ 302 1,846 1,426 3,611 ------------ ------------ ------------ ------------ Income (loss) before income taxes.................. 22,599 46,607 58,494 60,970 Provision (benefit) for income taxes............... 8,744 18,127 22,770 23,062 ------------ ------------ ------------ ------------ Net income (loss).................................. $ 13,855 $ 28,480 $ 35,724 $ 37,908 ============ ============ ============ ============ Basic net income (loss) per common share $ 0.97 $ 0.31 $ 0.36 $ 0.38 ============ ============ ============ ============ Diluted net income (loss) per common share and dilutive potential common share $ 0.14 $ 0.27 $ 0.34 $ 0.35 ============ ============ ============ ============ Weighted average basic common share (1) 14,216 92,644 98,021 99,786 ============ ============ ============ ============ Weighted average basic common and dilutive potential common share (1) ... 100,425 105,456 106,296 107,308 ============ ============ ============ ============ Jan. 31, April 30, Jul. 31, Oct. 31, 1998 1998 1998 1998 ------------ ------------ ------------ --------------- Revenue............................................ $145,092 $142,718 $129,116 $91,161 Cost of goods sold................................. 58,980 63,915 70,431 62,688 ------------ ------------ ------------ --------------- Gross profit................................. 86,112 78,803 58,685 28,473 ------------ ------------ ------------ --------------- Operating expenses: Research and development...................... 10,203 16,706 19,963 20,218 Selling and marketing......................... 9,968 11,063 12,620 12,569 General and administrative.................... 3,792 4,519 4,145 6,059 Purchased research & development.............. - 9,503 - - Pirelli litigation............................ - 10,000 20,579 - Cost of proposed merger....................... - - 2,017 531 ------------ ------------ ------------ --------------- Total operating expenses .......................... 23,963 51,791 59,324 39,377 ------------ ------------ ------------ --------------- Income (loss) from operations...................... 62,149 27,012 (639) (10,904) Other income (expense), net........................ 3,691 3,352 2,679 2,888 ------------ ------------ ------------ --------------- Income (loss) before income taxes.................. 65,840 30,364 2,040 (8,016) Provision (benefit) for income taxes............... 26,142 15,154 815 (2,996) ------------ ------------ ------------ --------------- Net income (loss).................................. $ 39,698 $ 15,210 $ 1,225 $ (5,020) ============ ============ ============ =============== Basic net income (loss) per common share $ 0.39 $ 0.14 $ 0.01 $ (0.04) ============ ============ ============ =============== Diluted net income (loss) per common share and dilutive potential common share $ 0.37 $ 0.14 $ 0.01 $ (0.04) ============ ============ ============ =============== Weighted average basic common share (1) 100,641 106,245 115,343 119,486 ============ ============ ============ =============== Weighted average basic common and dilutive potential common share (1) ... 107,552 112,455 121,960 119,486 ============ ============ ============ =============== Jan. 31, Apr. 30, Jul. 31, Oct. 31, 1997 1997 1997 1997 --------------- -------------- -------------- ------------- Revenue......................................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold.............................. 44.4 41.4 39.0 38.6 --------------- -------------- -------------- ------------- Gross profit.............................. 55.6 58.6 61.0 61.4 Operating expenses: Research and development.................. 4.8 4.8 5.9 6.4 Selling and marketing..................... 4.8 5.1 5.5 6.1 General and administrative................ 3.1 2.9 2.7 2.9 Purchased research & development.......... - - - - Pirelli litigation........................ 7.9 - - 1.9 Cost of proposed merger................... - - - - --------------- -------------- -------------- ------------- Total operating expenses........................ 20.6 12.8 14.1 17.3 --------------- -------------- -------------- ------------- Income (loss) from operations................... 35.0 45.8 46.9 44.1 Other income (expense), net..................... 0.5 1.9 1.2 2.8 --------------- -------------- -------------- ------------- Income (loss) before income taxes............... 35.5 47.7 48.1 46.9 Provision (benefit) for income taxes............ 13.7 18.6 18.7 17.7 --------------- -------------- -------------- ------------- Net income (loss)............................... 21.8 % 29.1 % 29.4 % 29.2 % =============== ============== ============== ============= Jan. 31, Apr. 30, Jul. 31, Oct. 31, 1998 1998 1998 1998 ------------- ------------ ------------ ------------- Revenue......................................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold.............................. 40.7 44.8 54.5 68.8 ------------- ------------ ------------ ------------- Gross profit.............................. 59.3 55.2 45.5 31.2 Operating expenses: Research and development.................. 7.0 11.7 15.5 22.2 Selling and marketing..................... 6.9 7.8 9.8 13.8 General and administrative................ 2.6 3.2 3.2 6.6 Purchased research & development.......... - 6.7 - - Pirelli litigation........................ - 7.0 15.9 - Cost of proposed merger................... - - 1.6 0.6 ------------- ------------ ------------ ------------- Total operating expenses......................... 16.5 36.4 46.0 43.2 ------------- ------------ ------------ ------------- Income (loss) from operations................... 42.8 18.8 (0.5) (12.0) Other income (expense), net..................... 2.6 2.3 2.1 3.2 ------------- ------------ ------------ ------------- Income (loss) before income taxes.............. 45.4 21.1 1.6 (8.8) Provision (benefit) for income taxes........... 18.0 10.6 0.6 (3.3) ------------- ------------ ------------ ------------- Net income (loss).............................. 27.4 % 10.5 % 1.0 % (5.5) % ============= ============ ============ ============= (1) The sum of the quarterly earnings per share for fiscal 1997 does not equal the reported annual earnings per share for fiscal 1997 due to the effect of the Company's stock issuances during the year. 8
10 The Company's quarterly operating results have varied and are expected to vary significantly in the future. The Company's detailed discussion of risk factors addresses the many factors that have caused such variation in the past, and may cause similar variations in the future. See "Risk Factors". In addition to those factors, in fiscal 1998, the distraction attendant to the aborted Tellabs merger had a significant, though difficult to quantify impact on the Company's operations in the third and fourth quarter. But apart from the distraction factor, the Company believes the single most significant trend affecting the Company's financial performance is the material effect of very aggressive price discounting by competitors seeking to acquire market share in the increasingly important market for high-capacity solutions. The Company chose in the face of this pressure to continue to build market share in fiscal 1998 at the cost of declining margins. The Company intends to continue this strategy in order to preserve and enhance its market leadership and eventually build on its installed base with new and additional products. Pursuit of this strategy, in conjunction with increased investments in selling, marketing, and customer service activities, will likely limit the Company's operating profitability over at least the first half of fiscal 1999, and may result in near term operating losses. LIQUIDITY AND CAPITAL RESOURCES The Company financed its operations and capital expenditures from inception through fiscal 1996 principally through the sale of Convertible Preferred Stock for proceeds totaling $40.7 million and capital lease financing totaling $4.1 million. The Company completed its initial public offering of Common Stock in February 1997 and realized net proceeds of approximately $121.8 million with an additional $0.6 million received from the exercise of certain outstanding warrants. In July 1997, the Company completed a public offering of Common Stock and realized net proceeds of approximately $52.2 million. During fiscal 1997 and fiscal 1998 the Company also realized approximately $53.1 million and $22.6 million in tax benefits from the exercise of stock options and certain stock warrants, respectively. During fiscal 1998 the Company received approximately $15.5 million from the issuance of stock associated with the initial capitalization of Lightera. As of October 31, 1998, the Company had $239.8 million in cash and cash equivalents and $16.0 million in corporate debt securities with contractual maturities of six months or less. The Company's operating activities used cash of $1.2 million in fiscal 1996 , and provided cash of $85.0 million and $32.7 million for fiscal 1997 and 1998, respectively. The cash used in operations in fiscal 1996 was accounted for primarily by the Company's research and development activities relating to its early development of the MultiWave system. Cash provided by operations in fiscal 1997 and 1998 was principally attributable to net income adjusted for the non-cash charges of depreciation, amortization, provisions for inventory obsolescence and warranty, increases in accounts payable, accrued expenses and income tax payable; offset by increases in accounts receivable and inventories due to increased revenue and to the general increase in business activity. Cash used in investing activities in fiscal 1996, 1997 and 1998 was $11.6 million, $66.8 million and $105.9 million, respectively. Included in investment activities were capital equipment expenditures in fiscal 1996, 1997 and 1998 of $9.9 million, $51.9 million and $76.7 million, respectively. These capital equipment expenditures were primarily for test, manufacturing and computer equipment. The Company expects additional capital equipment expenditures of approximately $50.0 million to be made during fiscal 1999 to support selling and marketing, manufacturing and product development activities. In addition, since its inception the Company's investing activities have included the use of $28.3 million for the construction of leasehold improvements and the Company expects to use an additional $3.0 million of capital during fiscal 1999 in the construction of leasehold improvements for its facilities. The Company believes that its existing cash balance and cash flows expected from future operations will be sufficient to meet the Company's capital requirements for at least the next 18 to 24 months. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Comprehensive Income". SFAS No. 130 becomes effective for the Company's fiscal year 1999 and requires reclassification of earlier financial statements for comparative purposes. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS No. 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total 9
11 comprehensive income be reported in that statement. The Company believes the adoption of SFAS No. 130 will not have a material effect on the consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information". This Statement will change the way public companies report information about segments of their business in annual financial statements and requires them to report selected segment information in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Statement is effective for the Company's fiscal year 1999. The Company believes the adoption of SFAS No. 131 will not have a material effect on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities". This Statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal year ending October 31, 2000. The Company believes the adoption of SFAS No. 133 will not have a material effect on the consolidated financial statements. YEAR 2000 READINESS Many computer systems were not designed to handle any dates beyond the year 1999; accordingly, affected hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company's operations make use of a variety of computer equipment and software. If the computer equipment and software used in the operation of the Company do not correctly recognize data information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company has taken actions to understand the nature and extent of work required, if any, to make its systems, products and infrastructure Year 2000 compliant. Based on internal testing performed to date and completed by the Company, the Company currently believes and warrants to its customers that its products are Year 2000 compliant. However, since all customer situations cannot be anticipated, particularly those involving interaction of the Company's products with third party products, the Company may see an increase in warranty and other claims as a result of the Year 2000 transition. The impact of customer claims, if broader than anticipated, could have a material adverse impact on the Company's results of operations or financial condition. The Company is currently in the process of conducting a comprehensive inventory and evaluation of both information technology ("IT") or software systems and non-IT systems used to run its systems. Non-IT systems typically include embedded technology such as microcontrollers. Examples of the Company's Non-IT systems include certain equipment used for production, research, testing and measurement processes and calibration. As of December 1998 the Company had assessed approximately 80% of the IT and non-IT systems used in its operations with an insignificant amount of those systems having been identified as Year 2000 non-compliant. The Company has begun the process of upgrading or replacing those identified non-compliant systems with completion expected during fiscal 1999. For the Year 2000 non-compliance systems identified to date, the cost of remediation is not considered to be material to the Company's financial condition or operating results. However, if implementation of replacement systems is delayed, or if significant new noncompliance issues are identified, the Company's results of operations or financial condition may be materially adversely affected. The Company changed its main financial, manufacturing and information system to a company-wide Year 2000 compliant enterprise resource planning ("ERP") computer-based system during the fourth quarter of fiscal 1998. The Company estimates that it has spent approximately $4.0 million on its ERP implementation and estimates that it will likely spend $50,000 to $100,000 to address identified Year 2000 issues. The Company expects that it will use cash from operations for Year 2000 remediation and replacement costs. Approximately less than 2% of the information technology budget is expected to be used for remediation. No other information technology projects have been deferred due to the Year 2000 efforts. To date, the Company has not yet employed an independent verification and validation process to assure the reliability of its risk and cost estimates. 10
12 The Company is also in the process of contacting its critical suppliers to determine that suppliers' operations and the products and services they provide are Year 2000 compliant. To date, the Company's optical suppliers have represented that they are year 2000 compliant or are in the process of becoming compliant by December 31, 1999. If these suppliers fail to adequately address the Year 2000 issue for the products they provide to the Company, this could have a material adverse impact on the Company's operations and financial results. Contingency plans will be developed if it appears the Company or its key suppliers will not be Year 2000 compliant, and such noncompliance is expected to have a material adverse impact on the Company's operations. 11
13 AUDITED SUPPLEMENTAL FINANCIAL STATMENTS The following is an index to the audited supplemental consolidated financial statements and supplementary data : PAGE NUMBER ------ Report of Independent Accountants...................................................13 Supplemental Consolidated Balance Sheets............................................14 Supplemental Consolidated Statements of Operations..................................15 Supplemental Consolidated Statements of Changes in Stockholders' Equity (Deficit)...16 Supplemental Consolidated Statements of Cash Flows..................................17 Notes to Supplemental Consolidated Financial Statements.............................18 12
14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of CIENA Corporation In our opinion, the accompanying supplemental consolidated balance sheets and the related supplemental consolidated statements of operations, of cash flows and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of CIENA Corporation and subsidiaries at October 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 2, in March 1999 CIENA Corporation merged with Lightera Networks, Inc. in a transaction accounted for as a pooling of interests. The accompanying supplemental consolidated financial statements give retroactive effect to the merger of CIENA Corporation with Lightera Networks, Inc. PricewaterhouseCoopers LLP McLean, VA November 25, 1998, except as to Note 2 "Lightera", which is as of March 31, 1999 13
15 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) October 31, ----------------------------------- 1997 1998 ----------------- ---------------- ASSETS Current assets: Cash and cash equivalents......................................................... $ 268,588 $ 239,780 Marketable debt securities........................................................ - 15,993 Accounts receivable (net of allowance of $722 and $1,528)......................... 72,336 85,472 Inventories, net.................................................................. 41,109 70,908 Deferred income taxes............................................................. 9,139 16,421 Prepaid income taxes.............................................................. - 8,558 Prepaid expenses and other........................................................ 3,093 4,524 ----------------- ---------------- Total current assets........................................................... 394,265 441,656 Equipment, furniture and fixtures, net................................................ 67,618 124,792 Goodwill and other intangible assets, net............................................. 5 16,270 Other assets.......................................................................... 1,391 4,848 ----------------- ---------------- Total assets...................................................................... $ 463,279 $ 587,566 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................. $ 24,760 $ 25,925 Accrued liabilities............................................................... 32,022 34,437 Income taxes payable.............................................................. 261 - Deferred revenue.................................................................. 2,591 1,084 Other current obligations......................................................... 1,179 953 ----------------- ---------------- Total current liabilities...................................................... 60,813 62,399 Deferred income taxes............................................................. 28,167 34,125 Other long-term obligations....................................................... 1,885 2,257 ----------------- ---------------- Total liabilities.............................................................. 90,865 98,781 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 119,817,209 shares issued and outstanding....................... 1,003 1,198 Additional paid-in capital........................................................ 245,219 310,888 Notes receivable from stockholders................................................ (64) (568) Cumulative translation adjustment................................................. (5) (107) Retained earnings................................................................. 126,261 177,374 ---------------- ---------------- Total stockholders' equity..................................................... 372,414 488,785 ================= ================ Total liabilities and stockholders' equity........................................ $ 463,279 $ 587,566 ================= ================ The accompanying notes are an integral part of these supplemental consolidated financial statements. 14
16 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended October 31, 1996 1997 1998 ------------------ ---------------- ---------------- Revenue.................................................. $ 88,463 $ 413,215 $ 508,087 Cost of goods sold....................................... 47,315 166,472 256,014 ------------------ ---------------- ---------------- Gross profit...................................... 41,148 246,743 252,073 Operating expenses: Research and development.......................... 8,922 23,308 67,090 Selling and marketing............................. 5,641 22,627 46,220 General and administrative........................ 6,422 11,823 18,515 Purchased research and development................ - - 9,503 Pirelli litigation ............................... - 7,500 30,579 Cost of proposed merger........................... - - 2,548 ------------------ ---------------- ---------------- Total operating expenses................... 20,985 65,258 174,455 ------------------ ---------------- ---------------- Income from operations................................... 20,163 181,485 77,618 Interest and other income (expense), net................. 1,096 7,593 12,886 Interest expense......................................... (443) (408) (276) ------------------ ---------------- ---------------- Income before income taxes............................... 20,816 188,670 90,228 Provision for income taxes............................... 3,553 72,703 39,115 ------------------ ---------------- ---------------- Net income .............................................. $ 17,263 $ 115,967 $ 51,113 ================== ================ ================ Basic net income per common share...................... $ 1.25 $ 1.53 $ 0.46 ================== ================ ================ Diluted net income per common share and dilutive potential common share................... $ 0.19 $ 1.11 $ 0.44 ================== ================ ================ Weighted average basic common shares outstanding... 13,817 75,802 110,593 ================== ================ ================ Weighted average basic common and dilutive potential common shares outstanding............... 92,407 104,664 117,150 ================== ================ ================ The accompanying notes are an integral part of these supplemental consolidated financial statements. - -------------------------------------------------------------------------------- 15
17 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS) NOTES COMMON STOCK ADDITIONAL RECEIVABLE ------------------------------------- PAID-IN- FROM SHARES AMOUNT CAPITAL STOCKHOLDERS ------------------ ------------------ ------------------ ----------------- BALANCE AT OCTOBER 31, 1995........... 12,935,415 129 178 - Exercise of warrants.................. 676,425 7 - Exercise of stock options............. 579,745 6 71 (60) Compensation cost of stock options............................. - - 2 - Issuance of warrant for settlement of certain equity rights.............................. - - 156 - Net income............................ - - - - ------------------ ------------------ ------------------ ----------------- BALANCE OF OCTOBER 31, 1996........... 14,191,585 142 407 (60) Issuance of common stock, net of issuance costs............... 7,002,060 70 173,947 - Conversion of Preferred Stock............................... 74,815,740 748 40,256 - Exercise of warrants.................. 666,086 7 - - Exercise of stock options............. 3,612,182 36 859 (73) Tax benefit from the exercise of stock options....................... - - 29,709 - Repayment of receivables from stockholders................... - - - 69 Translation adjustment................ - - - - Compensation cost of stock options............................. - - 41 - Net income............................ - - - - ------------------ ------------------ ------------------ ----------------- BALANCE AT OCTOBER 31, 1997........... 100,287,653 1,003 245,219 (64) Purchase acquisitions, net of transaction costs................... 304,144 3 20,817 - Issuance of common stock, net of issuance costs...................... 16,577,505 166 15,727 (211) Exercise of stock options............. 2,647,907 26 6,215 (392) Tax benefit from the exercise of stock options....................... - - 22,634 - Repayment of receivables from stockholders........................ - - - 99 Translation adjustment................ - - - - Issuance of warrants for technology rights.............................. - - 235 - Compensation cost of stock options............................... - - 41 - Net income............................ - - - - ------------------ ------------------ ------------------ ------------------ BALANCE AT OCTOBER 31, 1998........... 119,817,209 $ 1,198 $ 310,888 $ (568) ================== ================== ================== ================== TOTAL CUMULATIVE RETAINED STOCKHOLDERS' TRANSLATION EARNINGS EQUITY ADJUSTMENT (DEFICIT) (DEFICIT) ------------------ ---------------- ------------------ BALANCE AT OCTOBER 31, 1995........... - (6,969) (6,662) Exercise of warrants.................. - - 7 Exercise of stock options............. - - 17 Compensation cost of stock options............................. - - 2 Issuance of warrant for settlement of certain equity rights.............................. - - 156 Net income............................ - 17,263 17,263 ------------------ ---------------- ------------------ BALANCE OF OCTOBER 31, 1996........... - 10,294 10,783 Issuance of common stock, net of issuance costs............... - - 174,017 Conversion of Preferred Stock............................... - - 41,004 Exercise of warrants.................. - - 7 Exercise of stock options............. - - 822 Tax benefit from the exercise of stock options....................... - - 29,709 Repayment of receivables from stockholders................... - - 69 Translation adjustment................ (5) - (5) Compensation cost of stock options............................. - - 41 Net income............................ - 115,967 115,967 ------------------ ---------------- ------------------ BALANCE AT OCTOBER 31, 1997........... (5) 126,261 372,414 Purchase acquisitions, net of transaction costs................... - - 20,820 Issuance of common stock, net of issuance costs...................... - - 15,682 Exercise of stock options............. - - 5,849 Tax benefit from the exercise of stock options....................... - - 22,634 Repayment of receivables from stockholders........................ - - 99 Translation adjustment................ (102) - (102) Issuance of warrants for technology rights.............................. - - 235 Compensation cost of stock options............................... - - 41 Net income............................ - 51,113 51,113 ------------------ ---------------- ------------------ BALANCE AT OCTOBER 31, 1998........... $ (107) $ 177,374 $ 488,785 ================== ================ ================== The accompanying notes are an integral part of these supplemental consolidated financial statements. 16
18 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED OCTOBER 31, --------------------------------------------------- 1996 1997 1998 ----------------- ---------------- ---------------- Cash flows from operating activities: Net income ................................................................ $ 17,263 $ 115,967 $ 51,113 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Non-cash charges from equity transactions.............................. 158 41 276 Amortization of premiums on marketable debt securities - - 464 Effect of translation adjustment - (5) (102) Purchased research and development - - 9,503 Write down of leasehold improvements and equipment..................... 883 923 1,605 Depreciation and amortization.......................................... 1,082 10,251 33,344 Provision for doubtful accounts........................................ 76 489 806 Provision for inventory excess and obsolescence........................ 1,937 7,585 9,617 Provision for warranty and other contractual obligations............... 1,584 11,866 10,523 Changes in assets and liabilities: Increase in accounts receivable...................................... (20,601) (46,309) (13,707) Increase in inventories.............................................. (15,165) (35,466) (39,416) Increase in deferred income tax assets............................... (1,834) (7,305) (7,282) Increase in prepaid income taxes - - (8,558) Increase in prepaid expenses and other assets........................ (1,009) (2,403) (11,708) Increase (decrease) in accounts payable and accrued expenses......... 7,259 30,311 (7,959) Increase (decrease) in income taxes payable.......................... 3,801 (3,701) (261) Increase in deferred income tax liabilities.......................... - 4,793 5,958 Increase (decrease) in deferred revenue and other obligations 3,386 (2,007) (1,507) ----------------- ---------------- ---------------- Net cash (used in) provided by operating activities.................. (1,180) 85,030 32,709 ----------------- ---------------- ---------------- Cash flows from investing activities: Additions to equipment, furniture and fixtures........................... (11,558) (66,820) (87,864) Purchase of marketable debt securities................................... - - (93,869) Maturities of marketable debt securities ................................ - - 77,876 Net cash paid for business combinations.................................. - - (2,070) ----------------- ---------------- ---------------- Net cash used in investing activities................................ (11,558) (66,820) (105,927) ----------------- ---------------- ---------------- Cash flows from financing activities: Net proceeds from (repayment of) other obligations....................... 2,543 (2,260) 146 Net proceeds from issuance of or subscription to mandatorily redeemable preferred stock............................... 25,950 - - Net proceeds from issuance of common stock .............................. 24 175,446 21,531 Tax benefit related to exercise of stock options and warrants............ - 53,083 22,634 Repayment of notes receivable from stockholders.......................... - 69 99 ----------------- ---------------- ---------------- Net cash provided by financing activities............................ 28,517 226,338 44,410 ----------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents................. 15,779 244,548 (28,808) Cash and cash equivalents at beginning of period............................. 8,261 24,040 268,588 ================= ================ ================ Cash and cash equivalents at end of period................................... $ 24,040 $ 268,588 $ 239,780 ================= ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.............................................................. $ 419 $ 405 $ 265 ================= ================ ================ Income taxes.......................................................... $ 1,830 $ 26,999 $ 30,203 ================= ================ ================ SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Issuance of common stock for notes receivable from stockholders........... $ 60 $ 73 624 ================= ================ ================ The accompanying notes are an integral part of these supplemental consolidated financial statements. 17
19 CIENA CORPORATION NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Description of Business CIENA Corporation (the "Company" or "CIENA") designs, manufactures and sells open architecture, dense wavelength division multiplexing ("DWDM") systems for fiberoptic communications networks, including long-distance and local exchange carriers. CIENA also provides a range of engineering, furnishing and installation services for telecommunications service providers. Principles of Consolidation During March 1999 the Company completed a merger with Lightera Networks, Inc. ("Lightera") a U.S. company headquartered in Cupertino, California. The transaction constituted a tax-free reorganization and has been accounted for as a pooling of interest under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Lightera as though it had been a part of CIENA. The Company has ten wholly owned U.S. and international subsidiaries which have been consolidated in the accompanying financial statements. During the fiscal year ended October 31, 1998, the Company completed a merger with ATI Telecom International Ltd., ("Alta"). The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Alta as though it had been a part of CIENA. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. See Note 2. Fiscal Year The Company has a 52 or 53 week fiscal year which ends on the Saturday nearest to the last day of October in each year (October 31, 1998; November 1, 1997; and November 2, 1996). For purposes of financial statement presentation, each fiscal year is described as having ended on October 31. Fiscal 1998 and 1997 comprised 52 weeks and fiscal 1996 comprised 53 weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, together with amounts disclosed in the related notes to the financial statements. Actual results could differ from the recorded estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. 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. All of the marketable debt securities are corporate debt securities with contractual maturities of six months or less and have $60,000 and $9,000 of unrealized gain and unrealized loss, respectively, as of October 31, 1998. 18
20 Inventories Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. The Company records a provision for excess and obsolete inventory whenever such an impairment has been identified. Equipment, Furniture and Fixtures Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are computed using the straight-line method over useful lives of 2-5 years for equipment, furniture and fixtures and of 6-10 years for leasehold improvements. Goodwill The Company has recorded goodwill from two purchase transactions. See Note 2. It is the Company's policy to continually assess the carrying amount of its goodwill to determine if there has been an impairment to its carrying value. The Company would record any such impairment when identified. Concentrations Substantially all of the Company's cash and cash equivalents are custodied at four major U.S. financial institutions. The majority of the Company's cash equivalents include U.S. Government Federal Agency Securities, short term marketable securities, and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and, therefore, bear minimal risk. Historically, the Company has relied on a limited number of customers for a substantial portion of its revenue. In terms of total revenue, the Company's largest two customers have been Sprint and WorldCom. While there were no revenues derived from WorldCom in fiscal 1996, Sprint accounted for 62% of the Company's fiscal 1996 revenues and both Sprint and WorldCom combined accounted for greater than 88% of the Company's 1997 fiscal revenues. WorldCom accounted for less than 10% and Sprint accounted for approximately 53% of the Company's fiscal 1998 revenues. The Company expects that a significant portion of its future revenue will continue to be generated by a limited number of customers. The loss of any one of these customers or any substantial reduction in orders by any one of these customers could materially adversely affect the Company's financial condition or operating results. Additionally, the Company's access to certain raw materials is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could impact future results. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company maintains an allowance for potential losses when identified and has not incurred any significant losses to date. As of October 31, 1997, Sprint and WorldCom accounted for 84% of the trade accounts receivable. Sprint and three other customers comprise of 10%, 11%, 25% and 26% of the trade accounts receivable respectively as of October 31, 1998. 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 costs incurred to date compared to estimated total costs for each contract. Amounts received in excess of revenue recognized are recorded as deferred revenue. For distributor sales where risks of ownership have not transferred, the Company recognizes revenue when the product is shipped through to the end user. Revenue-Related Accruals The Company provides for the estimated costs to fulfill customer warranty and other contractual obligations upon the recognition of the related revenue. Such reserves are determined based upon actual warranty cost experience, 19
21 estimates of component failure rates, and management's industry experience. The Company's contractual sales arrangements generally do not permit the right of return of product by the customer after the product has been accepted. Research and Development The Company charges all research and development costs to expense as incurred. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than the enactment of changes in tax laws or rates. Tax savings resulting from deductions associated with stock options and certain stock warrants are credited directly to additional paid in capital when realization of such benefit is fully assured and to deferred tax liabilities prior to such point. See Note 8. Foreign Currency Translation The majority of the Company's foreign branches and subsidiaries use the U.S. dollar as their functional currency as the U.S. parent exclusively funds the branches and subsidiaries' operations with U.S. dollars. For those subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are recorded directly to a separate component of shareholders' equity. Where the U.S. dollar is the functional currency, translation adjustments are recorded in other income. The net gain (loss) on foreign currency remeasurement and exchange rate changes for fiscal 1996, 1997, and 1998 was immaterial for separate financial statement presentation . Computation of Basic Net Income per Common Share and Diluted Net Income per Common and Dilutive Potential Common Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 simplifies the earnings per share (EPS) computation and replaces the presentation of primary EPS with a presentation of basic EPS. This statement also requires dual presentation of basic and diluted EPS on the face of the income statement for entities with a complex capital structure and requires a reconciliation of the numerator and denominator used for the basic and diluted EPS computations. The Company has implemented SFAS No. 128 in fiscal 1998, as required. Accordingly, all prior period EPS data has been restated. See Note 6. Software Development Costs Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established and prior to the date the product is generally available for sale. The capitalized cost is then amortized over the estimated product life. The Company defines technological feasibility as being attained at the time a working model is completed. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Accounting for Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation", which is effective for the Company's consolidated financial statements for fiscal years 1996, 1997, and 1998. SFAS No. 123 allows companies to either account for stock-based compensation under the new provisions of SFAS No. 123 or using the intrinsic value method provided by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees", 20
22 but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company has elected to continue to account for its stock based compensation in accordance with the provisions of APB No. 25 and present the pro forma disclosures required by SFAS No. 123. See Note 7. Newly Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Comprehensive Income". SFAS No. 130 becomes effective for the Company's fiscal year 1999 and requires reclassification of earlier financial statements for comparative purposes. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS No. 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. The Company believes the adoption of SFAS No. 130 will not have a material effect on the consolidated financial statements. Also in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information". This Statement will change the way public companies report information about segments of their business in annual financial statements and requires them to report selected segment information in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Statement is effective for the Company's fiscal year 1999. The Company believes the adoption of SFAS No. 131 will not have a material effect on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities". This Statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for the Company's fiscal year ending October 31, 2000. The Company believes the adoption of SFAS No. 133 will not have a material effect on the consolidated financial statements. Reclassification Certain prior year amounts have been reclassified to conform to current year consolidated financial statement presentation. (2) BUSINESS COMBINATIONS Lightera During March 1999 the Company completed a merger with Lightera, a U.S. company headquartered in Cupertino, California, in a transaction valued at approximately $463.5 million. Lightera is a developer of carrier class optical core switches for fiberoptic communications networks. Under the terms of the agreement, the Company acquired all of the outstanding shares and stock options of Lightera in exchange for approximately 17.5 million shares of CIENA common stock and 3.1 million of CIENA stock options. The transaction constituted a tax-free reorganization and has been accounted for as a pooling of interest under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Lightera as though it had been a part of CIENA. 21
23 The following table shows the separate historical results of CIENA and Lightera for the periods prior to the consummation of the merger of the two entities. No financial information has been presented for the fiscal years ended 1997 and 1996 as Lightera did not commence operations until April 1998. (in thousands) Year Ended October 31, 1998 ----------------------- Revenues: CIENA $ 508,087 Lightera - Intercompany eliminations - ----------------------- Consolidated revenues $ 508,087 ======================= Net Income (loss): CIENA $ 53,194 Lightera (2,081) ----------------------- Consolidated net income $ 51,113 ======================= 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. Alta On February 19, 1998 the Company completed a merger with ATI Telecom International Ltd., ("Alta"), a Canadian corporation headquartered near Atlanta, 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 exchanged 1,000,000 shares of its common stock for all the common stock of Alta. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Alta as though it had been a part of CIENA. Prior to the merger, Alta's year ended on December 31. In recording the business combination, Alta's prior period financial statements have been restated to conform to CIENA's fiscal year end. All intercompany transactions between CIENA and Alta have been eliminated in consolidation. Certain reclassifications were made to Alta financial statements to conform to CIENA's presentation. No material adjustments were made to conform to CIENA's accounting policies. 22
24 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) Year Ended October 31, ------------------------------------------- 1996 1997 --------------------- -------------------- Revenues: CIENA $ 54,838 $ 373,827 Alta 33,625 39,531 Intercompany eliminations - (143) --------------------- -------------------- Consolidated revenues $ 88,463 $ 413,215 ===================== ==================== Net Income (loss): CIENA $ 14,718 $ 112,945 Alta 2,545 3,022 --------------------- -------------------- Consolidated net income $ 17,263 $ 115,967 ===================== ==================== 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 photodetectors 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. In connection with the Terabit acquisition, the Company recorded a $9.5 million charge in the year ended October 31, 1998 for purchased research and development. This generally represents the estimated value of purchased in-process technology related to Terabit's avalanche photodiodes (APD) that have not yet reached technological feasibility and have no alternative future use. The amount of purchase price allocated to in-process research and development was determined using the discounted cash flow method. This method consisted of estimating future net cash flows attributable in-process APD technology for a discrete projection period and discounting the net cash flows back to their present value. The discount rate includes a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process technology. The estimated revenue associated with the APD technology future net cash flows assumed a five year compound annual growth rate of between 5% to 43%. The revenue growth rates were developed considering, among other things, the current and expected industry trends and acceptance of the technologies in historical growth rates for similar industry products. Management's estimates or projections were based upon an estimated period of ten years with revenues reaching a peak in 2002 and declining through 2008. The estimated net cash flows were discounted to present value at a rate of return which considers the relative risk of achieving the net cash flows and the time value of money. A 30% was used to effect the risk associated with Terabits APD technology. This rate is higher than the Company's normal discount rate due to inherent uncertainties surrounding the successful development of purchase in-process technology, the useful life of the technology, and the profitability levels of such technology. The resulting net cash flows from the APD project was based on management's estimates of revenues, cost of sales, research and development costs, selling general and administrative costs, and income taxes associated with the project. 23
25 (3) INVENTORIES Inventories are comprised of the following (in thousands): October 31, ---------------------------------------- 1997 1998 ---------------- ------------------ Raw materials................................... $ 27,716 $ 43,268 Work-in-process................................. 5,679 8,592 Finished goods.................................. 15,180 30,202 ---------------- ------------------ 48,575 82,062 Reserve for excess and obsolescence.......... (7,466) (11,154) ---------------- ------------------ $ 41,109 $ 70,908 ================ ================== The following is a table depicting the activity in the Company's reserve for excess and obsolescence (in thousands): October 31, ---------------------------------------- 1997 1998 ------------------- ----------------- Beginning balance............................... $ 1,937 $ 7,466 Provision charged to operations................. 7,585 9,617 Amounts written off to reserve.................. (2,056) (5,929) ------------------- ----------------- Ending balance.................................. $ 7,466 $ 11,154 =================== ================= (4) EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures are comprised of the following (in thousands): October 31, ----------------------------------------- 1997 1998 ------------------- ------------------ Equipment, furniture and fixtures.................. $ 65,444 $ 140,586 Leasehold improvements............................. 13,953 24,076 ------------------- ------------------ 79,397 164,662 Accumulated depreciation and amortization........ (12,279) (41,222) Construction-in-progress........................... 500 1,352 ------------------- ------------------ $ 67,618 $ 124,792 =================== ================== (5) ACCRUED LIABILITIES Accrued liabilities are comprised of the following (in thousands): October 31, ----------------------------------------- 1997 1998 ------------------- ------------------- Warranty and other contractual obligations......... $ 12,205 $ 17,256 Accrued compensation............................... 8,284 9,229 Legal and related costs............................ 4,577 542 Consulting and outside services.................... 3,219 2,837 Unbilled construction-in-process and leasehold improvements.................................. 1,427 - Other.............................................. 2,310 4,573 ------------------- ------------------- $ 32,022 $ 34,437 =================== =================== 24
26 (6) EARNINGS PER SHARE CALCULATION The following is a reconciliation of the numerators and denominators of the basic net income per common share ("basic EPS") and diluted net income per common and dilutive potential common share ("diluted EPS"). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, stock options and warrants using the treasury stock method and shares issued upon conversion of all outstanding shares of Mandatorily Redeemable Preferred Stock (in thousands except per share amounts). October 31, ---------------------------------------------------------------- 1996 1997 1998 ------------------ ------------------ ------------------ Net Income.................................. $ 17,263 $ 115,967 $ 51,113 ================== ================== ================== Weighted average shares-basic............ 13,817 75,802 110,593 ------------------ ------------------ ------------------ Effect of dilutive securities: Employee stock options and warrants. 8,533 8,774 6,557 Conversion of preferred stock.......... 70,057 20,088 - ------------------ ------------------ ------------------ Weighted average shares-diluted.......... 92,407 104,664 117,150 ================== ================== ================== Basic EPS................................... $ 1.25 $ 1.53 $ 0.46 ================== ================== ================== Diluted EPS................................. $ 0.19 $ 1.11 $ 0.44 ================== ================== ================== (7) STOCKHOLDERS' EQUITY Stockholder Rights Plan In December 1997, the Company's Board of Directors adopted a Stockholder Rights Plan. This plan is designed to deter any potential coercive or unfair takeover tactics in the event of an unsolicited takeover attempt. It is not intended to prevent a takeover of the Company on terms that are favorable and fair to all shareholders and will not interfere with a merger approved by the Board of Directors. Each right entitles shareholders to buy a "unit" equal to one one-thousandth of a share of Preferred Stock of the Company. The rights will be exercisable only if a person or a group acquires or announces a tender or exchange offer to acquire 15% or more of the Company's common stock or if the Company enters into certain other business combination transactions not approved by the Board of Directors. In the event the rights become exercisable, the rights plan allows for CIENA shareholders to acquire stock of the surviving corporation, whether or not CIENA is the surviving corporation, having a value twice that of the exercise price of the Rights. The Rights were distributed to shareholders of record in January 1998. The Rights will expire December 2007 and are redeemable for $.001 per right at the approval of the Company's Board of Directors. Public Offerings In February 1997, the Company successfully completed its initial public offering of Common Stock. The Company sold 5,750,000 shares, inclusive of 750,000 shares from the exercise of the underwriters over-allotment option, at a price of $23 per share. Net proceeds from the offering were approximately $121,800,000 with an additional $600,000 received from the exercise of 300,000 shares of outstanding Convertible Preferred Stock warrants. In July 1997 the Company completed a public offering of 10,477,216 shares of Common Stock of which 1,252,060 shares were sold by the Company inclusive of 252,060 shares from the exercise of the underwriters over-allotment option, at a price of $44 per share. Net proceeds to the Company from the public offering were approximately $52,200,000. 25
27 Other Offerings In March 1998, Lightera issued a total of 5,000,768 shares of stock to the founders of Lightera in exchange for certain technology rights and notes receivables totaling $211,000. In March 1998, Lightera also sold 7,104,086 shares of stock in exchange for net proceeds of approximately $9,356,000. In July 1998, Lightera sold 3,489,079 shares of stock in exchange for net proceeds of approximately $6,074,000. Stock Incentive Plans The Company has an Amended and Restated 1994 Stock Option Plan (the "1994 Plan"). Under the 1994 Plan, 20,050,000 shares of the Company's authorized but unissued Common Stock are reserved for options issuable to employees. Certain of these options are immediately exercisable upon grant, and both the options and the shares issuable upon exercise of the options generally vest to the employee over a four year period. The Company has the right to repurchase any exercised and non-vested shares at the original purchase price from the employees upon termination of employment. In June 1996 the Company approved the 1996 Outside Directors Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, 750,000 shares of the Company's authorized but unissued Common Stock are reserved for options issuable to outside members of the Company's Board of Directors. These options vest to the director over periods from one to three years, depending on the type of option granted, and are exercisable once vested. Under the 1994 Plan and the 1996 Plan, options may be incentive stock options or non-qualified options, and the exercise price for each option shall be established by the Board of Directors provided, however, that the exercise price per share shall not be not less than the fair market value for incentive stock options and not less than 85% of fair market value for non-qualified stock options. As a result of the Company's merger with Lightera, the Company assumed the Lightera 1998 Stock Option Plan ("the 1998 Plan"). The 1998 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 1998 Plan may be either incentive stock options or nonstatutory stock options. Incentive stock options, ("ISO"), may be granted only to Company employees (including officers and directors who are also employees). Nonstatutory stock options ("NSO") may be granted to Company employees and consultants. The Company has reserved 2,933,923 shares of Common Stock for issuance under the 1998 Plan. Options under the 1998 Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (I) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (II) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. Options exercised are immediately subject to a repurchase right held by the Company which lapse over a maximum period of five years at such times and under such conditions as determined by the Board of Directors. To date, options granted generally vest over four years. Following is a summary of the Company's stock option activity: Shares Weighted Average (in thousands) Exercise Price -------------------------------------------------- Balance at October 31, 1995.......................... 6,941 $ 0.03 Granted.............................................. 5,901 1.85 Exercised............................................ (579) 0.14 Canceled............................................. (1,180) 0.18 -------------------- Balance at October 31, 1996.......................... 11,083 0.97 Granted.............................................. 1,737 32.81 Exercised............................................ (3,612) 0.27 Canceled............................................. (98) 0.52 -------------------- Balance at October 31, 1997.......................... 9,110 7.33 Granted.............................................. 6,377 19.10 Exercised............................................ (2,648) 2.40 Canceled............................................. (3,340) 40.12 -------------------- Balance at October 31, 1998.......................... 9,499 4.84 ==================== 26
28 During September 1998, the Company cancelled and re-issued outstanding employee stock options with exercise prices in excess of the fair market value, except those options held by outside directors and officers of the Company. A total of 2,905,116 options with an average exercise price of $42.87 were cancelled and reissued at $12.38 per share. At October 31, 1998 approximately 292,000 shares of Common Stock subject to repurchase by the Company had been issued upon the exercise of options and approximately 2.2 million of the total outstanding options were vested and not subject to repurchase by the Company upon exercise. The following table summarizes information with respect to stock options outstanding at October 31, 1998: Options Not Subject to Options Outstanding Repurchase Upon Exercise ------------------------------------------------------------ ---------------------------------- Weighted Average Number Remaining Weighted Weighted Range of Outstanding Contractual Average Number Average Exercise at Oct. 31, Life Exercise at Oct. 31, Exercise Price 1998 (Years) Price 1998 Price - ------------------------ ----------------- --------------------- ----------------- --------------- ----------------- $ 0.02 - $ 0.03 1,048,678 6.23 $ 0.03 878,524 $ 0.03 $ 0.06 - $ 1.66 2,765,437 8.82 $ 0.41 375,006 $ 0.78 $ 2.25 - $ 4.34 2,648,482 7.66 $ 2.48 450,455 $ 2.54 $ 4.40 - $ 11.56 189,216 8.56 $ 6.55 47,818 $ 6.15 $ 12.38 - $ 12.38 2,761,977 8.93 $ 12.38 419,150 $ 12.38 $ 12.56 - $ 43.25 85,675 9.57 $ 32.40 - $ - ----------------- --------------- $ 0.02 - $ 43.25 9,499,465 8.24 $ 5.83 2,170,953 $ 3.19 ================= =============== Pro forma Stock-Based Compensation The Company has elected to continue to follow the provisions of APB No. 25 for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in fiscal years 1996, 1997, and 1998 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share for fiscal years 1996, 1997, and 1998 would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts): October 31, --------------------------------------------------------------- 1996 1997 1998 ------------------- ------------------ ------------------- Net income applicable to common stockholders - as reported................................. $ 17,263 $ 115,967 $ 51,113 =================== ================== =================== Net income applicable to common stockholders - pro forma................................... $ 16,770 $ 110,404 $ 26,230 =================== ================== =================== Basic net income per share - as reported......... $ 1.25 $ 1.53 $ 0.46 =================== ================== =================== Basic net income per share - pro forma........... $ 1.21 $ 1.46 $ 0.24 =================== ================== =================== Diluted net income per share - as reported....... $ 0.19 $ 1.11 $ 0.44 =================== ================== =================== Diluted net income per share - pro forma......... $ 0.18 $ 1.05 $ 0.22 =================== ================== =================== The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. The aggregate fair value and weighted average fair value of each option granted in fiscal years 1996, 1997 and 1998 were approximately $6.7 million, $33.6 million, $73.2 million and $1.14, $19.33, and $15.17 respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions for fiscal years 1996, 1997, and 1998: October 31, -------------------------------------------------------- 1996 1997 1998 ----------------- ----------------- ---------------- Expected volatility 60% 60% 109% Risk-free interest rate 6.1% 5.8% 4.4% Expected life 3 yrs. 3 yrs. 3yrs. Expected dividend yield 0% 0% 0% 27
29 (8) INCOME TAXES Income before income taxes and the provision for income taxes consists of the following (in thousands): October 31, ------------------------------------------------------------- 1996 1997 1998 -------------------- -------------------- ---------------- Income before income taxes......................... $ 20,816 $ 188,670 90,228 ==================== ==================== ================ Provision for income taxes: Current: Federal............................................... $ 4,483 $ 67,744 39,780 State................................................. 694 7,373 4,444 Foreign............................................... 210 98 40 -------------------- -------------------- ---------------- Total current.................................. 5,387 75,215 44,264 -------------------- -------------------- ---------------- Deferred: Federal............................................... (1,690) (2,015) (4,496) State................................................. (144) (497) (653) Foreign............................................... - - - -------------------- -------------------- ---------------- Total deferred................................. (1,834) (2,512) (5,149) -------------------- -------------------- ---------------- Provision for income taxes........................... $ 3,553 $ 72,703 39,115 ==================== ==================== ================ The tax provision reconciles to the amount computed by multiplying income before income taxes by the U.S. federal statutory rate of 35% as follows: October 31, -------------------------------------------------------------- 1996 1997 1998 ----------------- ----------------- ------------------ Provision at statutory rate........................ 35.0 % 35.0 % 35.0 % Reversal of valuation allowance.................... (20.0) - - Non-deductible purchased research and development - - 3.9 State taxes, net of federal benefit................ 2.7 2.6 3.9 Research and development credit.................... - - (3.7) Other.............................................. (0.6) 0.9 4.2 ----------------- ----------------- ------------------ 17.1 % 38.5 % 43.3 % ================= ================= ================== The significant components of deferred tax assets and liabilities were as follows (in thousands): October 31, ----------------------------------------------- 1997 1998 ---------------------- -------------------- Deferred tax assets: Reserves and accrued liabilities..................... $ 9,281 $ 14,611 Other................................................ - 690 Net operating loss and credit carry forward........ 1,555 2,682 ---------------------- -------------------- Gross deferred tax assets........................... 10,836 17,983 Valuation allowance................................. (1,697) (1,562) ---------------------- -------------------- Net current deferred tax asset.................. $ 9,139 $ 16,421 ====================== ==================== Deferred tax liabilities: Equipment leases..................................... $ 3,985 $ 7,978 Services............................................. 19,389 21,594 Depreciation and other............................... 4,793 4,553 ---------------------- -------------------- Deferred long term tax liabilities............... $ 28,167 $ 34,125 ====================== ==================== 28
30 As of October 31, 1998 the Company assumed net operating loss carry forwards of approximately $7.6 million through its acquisitions of Lightera and Alta. The net operating loss carry forwards begin expiring in fiscal 2002. The income tax provisions do not reflect the tax savings resulting from deductions associated with the Company's stock option plans or the exercise of certain stock warrants. Tax benefits of approximately $29.7 million and $23.4 million in fiscal 1997, and $22.6 million and $3.6 million in fiscal 1998, from exercises of stock options and certain stock warrants were credited directly to additional paid-in-capital and to long-term deferred income taxes, respectively. (9) EMPLOYEE BENEFIT PLANS Employee 401(k) Plan In January 1995, the Company adopted a 401(k) defined contribution profit sharing plan. The plan covers all full-time employees who are at least 21 years of age, have completed three months of service and are not covered by a collective bargaining agreement where retirement benefits are subject to good faith bargaining. Participants may contribute up to 15% of pre-tax compensation, subject to certain limitations. The Company may make discretionary annual profit sharing contributions of up to the lesser of $30,000 or 25% of each participant's compensation. In fiscal 1997 the Company revised the plan to include an employer matching contribution equal to 100% of the first 3% of participating employee contributions, with a five year vesting plan applicable to the Company's contribution. The Company has made no profit sharing contributions to date. During fiscal 1997 and 1998 the Company made matching contributions of approximately $0.3 million and $1.1 million, respectively. Employee Stock Purchase Plan In March 1998, the shareholders approved the Corporation's 1998 Stock Purchase Plan ("the Purchase Plan") under which 2.5 million shares of common stock have been reserved for issuance. Eligible employees may purchase a limited number of shares of the Company's stock at 85% of the market value at certain plan-defined dates, the first of which occurs in March 1999. As of October 31, 1998 no shares had been issued from the Purchase Plan. (10) COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company has certain minimum obligations under noncancelable operating leases expiring on various dates through 2006 for equipment and facilities. Future annual minimum rental commitments under noncancelable operating leases at October 31, 1998 are as follows (in thousands): Fiscal year ending October 31, ------------------------------ 1999...................................................... $ 6,208 2000...................................................... 6,003 2001...................................................... 5,577 2002...................................................... 4,411 2003...................................................... 3,050 Thereafter................................................ 10,358 ------------------ $ 35,607 ================== Rental expense for fiscal 1996, 1997 and 1998 was approximately $717,000, $2,652,000 and $5,820,000, respectively. Litigation Class Action Litigation. A class action complaint was filed on August 26, 1998 in U.S. District Court for the District of Maryland entitled Witkin et.al v. CIENA Corporation et. al (Case No. Y-98-2946). Several other complaints, substantially similar in content, have been filed. These cases were consolidated by court order on November 30, 1998. The complaint alleges that CIENA and certain officers and directors violated certain provisions of the federal securities laws, including Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, by 29
31 making false statements, failing to disclose material information and taking other actions intending to artificially inflate and maintain the market price of CIENA's common stock during the Class Period of May 21, 1998 to September 14, 1998, inclusive. The plaintiffs seek designation of the suit as a class action on behalf of all persons who purchased shares of CIENA's common stock during the Class Period and the awarding of compensatory damages in an amount to be determined at trial and attorneys' fees. The proceedings are at an early stage. No discovery has been taken, and no prediction can be made as to its outcome. The Company believes the suit is without merit and intends to defend itself vigorously. Kimberlin Litigation. On September 9, 1998 the U.S. District Court for the Southern District of New York granted summary judgment with respect to federal securities law claims brought against the Company and certain of its individual directors by investor Kevin Kimberlin and related parties, finding "no violations" of federal securities laws in the Company's or directors' conduct. The Court also dismissed all related state law claims without prejudice, declining to exercise jurisdiction over these claims. The remaining state law claims, as well as the Company's counterclaim against the Kimberlin-related parties, were fully and finally resolved in October 1998 by agreement of the parties. Pirelli Litigation. On June 1, 1998 the Company resolved the long-standing litigation with Pirelli S.p.A. The terms of the settlement involve dismissal of Pirelli's three lawsuits against CIENA previously pending in Delaware, dismissal of CIENA's legal proceedings against Pirelli in the United States International Trade Commission, a worldwide, non-exclusive cross-license to each party's patent portfolios, a five-year moratorium on future litigation between the parties. As a result of the settlement, CIENA recorded a charge for the fiscal year ended October 31, 1998 of $30.6 million relating to the Pirelli settlement and associated legal fees. (11) FOREIGN SALES The Company has sales and marketing operations outside the United States in Canada, The United Kingdom, Belgium, France, Japan, China and the Philippines. The Company has distributor or marketing representative arrangements covering Austria, Germany, Italy and Switzerland in Europe, and the Republic of Korea and Japan in Asia. The Company also has representatives in Mexico and Brazil. Included in revenues are export sales of approximately $3.5 million, $11.7 million, and $117.1 million in fiscal years 1996, 1997 and 1998, respectively. (12) SUBSEQUENT EVENTS (UNAUDITED) On March 15, 1999 the Company signed an Agreement and Plan of Merger with Omnia Communications Inc. ("Omnia"),a U.S. company located in Marlborough, Massachusetts, in a transaction valued at approximately $429 million. Omnia is a developer of carrier class optical access solutions for fiberoptic communications networks. Under the terms of the agreement, the Company will acquire all of the outstanding shares of Omnia in exchange for approximately 16 million shares of CIENA common stock. The transaction is intended to constitute a tax-free reorganization and will be accounted for as a pooling of interest under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented will be restated to include the combined results of operations, financial position and cash flows of Omnia as though it had been a part of CIENA.The operations of Omnia are not material to the consolidated financial statements of the of the Company, and accordingly, separate pro forma financial information has not been presented. 30
32 (13) ADDITIONAL SUPPLEMENTAL DATA (UNAUDITED) The historical consolidated financial results of CIENA for prior periods have been restated to include the financial position and results of operations of Lightera. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments which the Company considers necessary for the Fair Presentations of the results of operations for the interim period covered and of the financial position of the Company at the date of the interim balance sheet. The following unaudited supplemental consolidated balance sheet, supplemental consolidated statements of operations, and of cash flows show the historical results of the combined CIENA and Lightera for the period ending January 31, 1999 which was prior to the consummation of the merger of the two entities: CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Quarter ended January 31, ---------------------- 1999 ---------------------- Revenue........................................................... $ 100,417 Cost of goods sold................................................ 65,778 ---------------------- Gross profit.................................................... 34,639 ---------------------- Operating expenses: Research and development........................................ 19,783 Selling and marketing........................................... 12,874 General and administrative...................................... 4,762 ---------------------- Total operating expenses.................................... 37,419 ---------------------- Loss from operations.............................................. (2,780) Interest and other income (expense), net........................ 3,262 Interest expense.................................................. (74) ---------------------- Income before income taxes........................................ 408 Provision for income taxes........................................ 125 ---------------------- Net income........................................................ $ 283 ====================== Basic net income per common share.............................. $ - ====================== Diluted net income per common share and dilutive potential common share......................................................... $ - ====================== Weighted average basic common shares outstanding........ 120,176 ====================== Weighted average basic common and dilutive potential common shares outstanding....................................... 126,580 ====================== 31
33 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) January 31, 1999 ---------------- ASSETS Current assets: Cash and cash equivalents..................................................... $ 205,990 Marketable debt securities.................................................... 89,702 Accounts receivable, net...................................................... 80,257 Inventories, net.............................................................. 58,571 Deferred income taxes......................................................... 12,645 Prepaid income taxes.......................................................... - Prepaid expenses and other.................................................... 9,822 ---------------- Total current assets....................................................... 456,987 Equipment, furniture and fixtures, net........................................... 126,516 Goodwill and other intangible assets, net........................................ 15,361 Other assets..................................................................... 4,785 ---------------- Total assets.................................................................. $ 603,649 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 31,669 Accrued liabilities........................................................... 37,583 Income taxes payable.......................................................... 2,079 Deferred revenue.............................................................. 785 Other current obligations..................................................... 1,389 ---------------- Total current liabilities.................................................. 73,505 Deferred income taxes......................................................... 34,314 Other long-term obligations................................................... 3,546 ---------------- Total liabilities.......................................................... 111,365 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; 120,889,814 shares issued and outstanding..... 1,209 Additional paid-in capital.................................................... 314,234 Notes receivable from stockholders............................................ (708) Cumulative translation adjustment............................................. (108) Retained earnings............................................................. 177,657 ---------------- Total stockholders' equity................................................. 492,284 ================ Total liabilities and stockholders' equity.................................... $ 603,649 ================ 32
34 CIENA CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended January 31, -------------- 1999 ------------- Cash flows from operating activities: Net income........................................................................ $ 283 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash charges from equity transactions....................................... 10 Amortization of premiums on marketable debt securities.......................... 42 Effect of translation adjustment................................................ (1) Depreciation and amortization................................................... 11,511 Provision for inventory excess and obsolescence................................. 1,533 Provision for warranty and other contractual obligations........................ 2,218 Changes in assets and liabilities: Decrease in accounts receivable............................................... 5,215 Increase in prepaid expenses and other........................................ (5,238) Decrease in inventories....................................................... 10,804 Decrease in deferred income tax asset......................................... 3,776 Decrease in prepaid income taxes.............................................. 8,558 Decrease in other assets...................................................... 62 Increase in accounts payable and accruals..................................... 6,671 Increase in income taxes payable.............................................. 2,079 Increase in deferred income tax liability..................................... 189 Decrease in deferred revenue and other obligations (299) ------------- Net cash provided by operating activities....................................... 47,413 ------------- Cash flows from investing activities: Additions to equipment, furniture and fixtures.................................... (12,326) Purchases of marketable debt securities........................................... (73,809) ------------- Net cash used in investing activities........................................... (86,135) ------------- Cash flows from financing activities: Net proceeds from other obligations............................................... 1,726 Net proceeds for issuance of common stock......................................... 278 Tax benefit related to exercise of stock options.................................. 2,928 ------------- Net cash provided by financing activities..................................... 4,932 ------------- Net decrease in cash and cash equivalents..................................... (33,790) Cash and cash equivalents at beginning of period..................................... 239,780 ------------- Cash and cash equivalents at end of period........................................... $ 205,990 ============= The accompanying notes are an integral part of these consolidated financial statements.
35 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SIGNIFICANT ACCOUNTING POLICIES Interim Supplemental Financial Statements The interim supplemental financial statements included herein for CIENA Corporation (the "Company") have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the supplemental 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, 1998 audited supplemental consolidated financial statements and notes thereto included in the Company's Current Report on Form 8-K/A filed on April 5, 1999. 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 costs incurred to date compared to estimated total costs for each contract. Amounts received in excess of revenue recognized are recorded as deferred revenue. For distributor sales where risks of ownership have not transferred, the Company recognizes revenue when the product is shipped through to the end user. (2) INVENTORIES Inventories are comprised of the following (in thousands): October 31, January 31, 1998 1999 ------------- ----------- Raw materials $ 43,268 $ 36,373 Work-in-process 8,592 9,066 Finished goods 30,202 26,514 ------------- ----------- 82,062 71,953 Less reserve for excess and obsolescence (11,154) (13,382) ------------- ----------- $ 70,908 $ 58,571 ============= =========== 34
36 (3) EARNINGS PER SHARE CALCULATION The following is a reconciliation of the numerators and denominators of the basic net income per common share ("basic EPS") and diluted net income per common and dilutive potential common share ("diluted EPS"). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, and stock options using the treasury stock method. (in thousands except per share amounts). Quarter ended January 31, -------------------------- 1998 1999 ------------ ----------- Net Income...................... $ 39,698 $ 283 ============ ============ Weighted average shares-basic... 100,641 120,176 ------------ ------------ Effect of dilutive securities: Employee stock options..... 6,911 6,404 ------------ ------------ Weighted average shares-diluted. 107,552 126,580 ============ ============ Basic EPS...................... $ 0.39 $ 0.00 ============ ============ Diluted EPS.................... $ 0.37 $ 0.00 ============ ============ During the quarter ended January 31, 1999 approximately 1,548,000 anti-diluted weighted shares from employee stock options have been excluded from the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. (4) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No.130), "Comprehensive Income". SFAS No.130 became effective for the Company's fiscal year 1999. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components: however, the adoption of this statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and loses on certain securities be shown in the financial statements. The Company's accumulated other comprehensive income is comprised entirely of accumulated foreign currency translation adjustments and is shown as a separate amount on the Company's Consolidated Balance Sheets. During the first quarter of fiscal 1998 and 1999, total comprehensive income, which includes net income and changes in foreign currency translation adjustments, amounted to $39,666,000 and $282,000, respectively. 35
37 ITEM 7. FINANCIAL STATEMENT AND EXHIBITS Exhibit Description ------- ----------------------------------------------------- 23.3 Consent of Independent Accountants 27.1 Restated Financial Data Schedule (files only electronically with the SEC) 33
38 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: April 5, 1999 By:/s/Joseph R. Chinnici --------------------- Joseph R. Chinnici Sr. Vice President, Finance and Chief Financial Officer (Principal Financial Officer) 37
1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-217, No. 333-52467) of CIENA Corporation of our report dated November 25, 1998, except as to Note 2 "Lightera" which is as of March 31, 1999 appearing in this current report on Form 8-K/A. PricewaterhouseCoopers LLP McLean, VA March 31, 1999