1UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
Washington, DC 20549FORM 10-Q
(Mark one) ( X )
(Mark one) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended April 30, 2001
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM..................TO......................... COMMISSION FILE NUMBER:
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the transition period from........................to........................
Commission file number: 0-21969
CIENA CORPORATION
(Exact
(Exact name of registrant as specified in its charter)
DELAWAREDelaware 23-2725311 (State(State or other jurisdiction of (I.R.S.(I.R.S. Employer Identification No.) incorporation or organization)organization)1201 WINTERSON ROAD, LINTHICUM,Winterson Road, Linthicum, MD21090 (Address(Address of Principal Executive Offices) (Zip(Zip Code) (410) 865-8500
(Registrant's
(Registrant’s telephone number, including area code)Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( )
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT FEBRUARY 14,Class Outstanding at May 17, 2001 ----------------------------------- --------------------------------Common stock. $.01$0.01 par value299,141,072326,517,967 Page 1 of
2227 pages2 CIENA CORPORATION INDEX FORM 10-QTABLE OF CONTENTSCIENA CORPORATION
INDEX
FORM 10-Q
PAGE NUMBER PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations
quarters and six months ended April 30, 2000
and April 30, 20013 Consolidated Balance Sheets
October 31, 2000 and April 30, 20014 Consolidated Statements of Cash Flows
six months ended April 30, 2000 and
April 30, 20015 Notes to Consolidated Financial Statements 6 Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 2
3 ITEMItem 1.
FINANCIAL STATEMENTSFinancial StatementsCIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Quarter ended January 31, -------------------------------------- 2000 2001 ------------------ ----------------Revenue......................................................... $ 152,213 $ 351,989 Cost of goods sold.............................................. 87,003 191,837 ------------------ ---------------- Gross profit.................................................. 65,210 160,152 ------------------ ----------------- Operating expenses: Research and development...................................... 29,742 43,511 Selling and marketing......................................... 18,122 29,636 General and administrative.................................... 6,871 11,145 ------------------ ---------------- Total operating expenses.................................... 54,735 84,292 ------------------ ---------------- Income from operations.......................................... 10,475 75,860 Interest and other income (expense), net........................ 3,046 4,296 Interest expense................................................ (96) (87) ------------------ ---------------- Income before income taxes...................................... 13,425 80,069 Provision for income taxes...................................... 4,363 26,823 ------------------ ---------------- Net income...................................................... $ 9,062 $ 53,246 ================== ================ Basic net income per common share............................... $ 0.03 $ 0.19 ================== ================ Diluted net income per common share and dilutive potential common share.................................................. $ 0.03 $ 0.18 ================== ================ Weighted average basic common shares outstanding................ 276,182 287,001 ================== ================ Weighted average basic common and dilutive potential common shares outstanding..................................... 295,806 300,956 ================== ================
(in thousands, except per share data)
(unaudited)
Quarter Ended Six Months Ended April 30, April 30, April 30, April 30, 2000 2001 2000 2001 Revenue $ 185,679 $ 425,396 $ 337,892 $ 777,385 Cost of goods sold 104,205 231,509 191,208 423,346 Gross profit 81,474 193,887 146,684 354,039 Operating expenses: Research and development(exclusive of $0, $1,672, $0, $1,672 deferred stock compensation costs) 29,056 54,344 57,890 96,848 Selling and marketing(exclusive of $0, $491, $0, $491 deferred stock compensation costs) 20,331 38,782 38,453 68,418 General and administrative (exclusive of $0, $572, $0, $572 deferred stock compensation costs) 7,176 16,787 14,047 27,932 Deferred stock compensation costs — 2,735 — 2,735 Amortization of goodwill 799 25,373 1,598 26,271 Amortization of intangible assets 110 1,000 219 1,109 In-process research and development — 45,900 — 45,900 Total operating expenses 57,472 184,921 112,207 269,213 Income from operations 24,002 8,966 34,477 84,826 Interest and other income, net 3,357 20,707 6,403 25,003 Interest expense (89 ) (7,128 ) (185 ) (7,215 ) Income before income taxes 27,270 22,545 40,695 102,614 Provision for income taxes 8,863 73,225 13,226 100,048 Net income (loss) $ 18,407 $ (50,680 ) $ 27,469 $ 2,566 Basic net income (loss) per common share $ 0.07 $ (0.17 ) $ 0.10 $ 0.01 Diluted net income (loss) per common share
and dilutive potential common share$ 0.06 $ (0.17 ) $ 0.09 $ 0.01 Weighted average basic common shares
outstanding280,162 306,329 278,600 296,758 Weighted average basic common and
dilutive potential common shares outstanding299,126 306,329 297,954 310,164 The accompanying notes are an integral part of these consolidated financial statements.
3
4CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
October 31, January 31, 2000 2001 ------------------- --------------ASSETS Current assets: Cash and cash equivalents........................................ $ 143,187 $ 176,725 Marketable debt securities....................................... 95,131 82,958 Accounts receivable, net......................................... 248,950 250,996 Inventories, net................................................. 141,279 207,221 Deferred income taxes............................................ 143,029 166,273 Prepaid expenses and other....................................... 41,438 41,012 ----------------- -------------- Total current assets........................................... 813,014 925,185 Equipment, furniture and fixtures, net............................... 189,231 212,376 Goodwill and other intangible assets, net............................ 9,049 8,851 Other assets......................................................... 15,907 20,740 ----------------- -------------- Total assets..................................................... $ 1,027,201 $ 1,167,152 ================= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................. $ 70,250 $ 82,477 Accrued liabilities.............................................. 84,163 90,412 Income taxes payable............................................. 7,483 7,266 Deferred revenue................................................. 10,731 19,923 Other current obligations........................................ 712 1,082 ----------------- -------------- Total current liabilities...................................... 173,339 201,160 Deferred income taxes............................................ 39,145 39,145 Other long-term obligations...................................... 4,882 4,986 ----------------- -------------- Total liabilities.............................................. 217,366 245,291 ----------------- -------------- 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; 460,000,000 shares authorized; 286,530,631 and 288,115,246 shares issued and outstanding...... 2,865 2,881 Additional paid-in capital....................................... 557,257 615,898 Notes receivable from stockholders............................... (30) - Accumulated other comprehensive income........................... (903) (810) Retained earnings................................................ 250,646 303,892 ------------------- -------------- Total stockholders' equity..................................... 809,835 921,861 ------------------- -------------- Total liabilities and stockholders' equity....................... $ 1,027,201 $ 1,167,152 =================== ============== The accompanying notes are an integral part of these consolidated financial statements.45 CIENA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended January 31, ---------------------------------------- 2000 2001 -------------------- ---------------Cash flows from operating activities: Net income............................................................ $ 9,062 $ 53,246 Adjustments to reconcile net income to net cash Provided by operating activities: Tax benefit related to the exercise of stock options.............. 14,657 50,067 Non-cash charges from equity transactions......................... 10 - Amortization of premiums on marketable debt securities............ 3 - Effect of translation adjustment.................................. 38 (659) Depreciation and amortization..................................... 13,899 20,780 Provision for doubtful accounts................................... 250 - Provision for inventory excess and obsolescence................... 4,476 5,701 Provision for warranty............................................ 2,290 7,811 Changes in assets and liabilities: Increase in accounts receivable.............................. (22,146) (2,046) Increase in prepaid expenses and other....................... (4,557) (5,216) Increase in inventories...................................... (7,477) (71,643) Increase in deferred income tax asset........................ (633) (23,244) Increase in accounts payable and accrued liabilites.......... 4,284 10,665 Decrease in income taxes payable............................. (8,697) (217) (Decrease) increase in deferred revenue...................... (852) 9,192 -------------------- --------------- Net cash provided by operating activities......................... 4,607 54,437 -------------------- --------------- Cash flows from investing activities: Additions to equipment, furniture and fixtures........................ (16,997) (42,166) Maturities of marketable debt securities.............................. 85,450 44,653 Purchases of marketable debt securities............................... (76,702) (32,480) -------------------- --------------- Net cash used in investing activities............................. (8,249) (29,993) -------------------- --------------- Cash flows from financing activities: Net borrowing from other obligations.................................. 46 474 Net proceeds from issuance of common stock ........................... 8,416 8,590 Repayment of notes receivable from stockholders....................... 69 30 -------------------- --------------- Net cash provided by financing activities......................... 8,531 9,094 -------------------- --------------- Net increase in cash and cash equivalents......................... 4,889 33,538 Cash and cash equivalents at beginning of period........................... 143,440 143,187 -------------------- --------------- Cash and cash equivalents at end of period................................... $ 148,329 $ 176,725 ==================== ===============
(in thousands, except share and per share data)
(unaudited)
October 31, April 30, 2000 2001 ASSETS Current assets: Cash and cash equivalents $ 143,187 $ 1,144,212 Short-term investments 95,131 357,163 Accounts receivable, net 248,950 267,011 Inventories, net 141,279 276,020 Deferred income taxes 143,029 142,290 Prepaid expenses and other 41,438 57,035 Total current assets 813,014 2,243,731 Long-term investments — 336,073 Equipment, furniture and fixtures, net 189,231 286,413 Goodwill, net 4,461 2,036,579 Other intangible assets, net 4,588 62,778 Other long term assets 15,907 64,849 Total assets $ 1,027,201 $ 5,030,423 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 70,250 $ 115,410 Accrued liabilities 84,163 128,668 Income taxes payable 7,483 7,231 Deferred revenue 10,731 18,149 Other current obligations 712 1,113 Total current liabilities 173,339 270,571 Deferred income taxes 39,145 39,554 Convertible notes and other long-term obligations 4,882 864,193 Total liabilities 217,366 1,174,318 Commitments and contingencies Stockholders’ equity: Preferred stock – par value $0.01; 20,000,000 shares authorized;
zero shares issued and outstanding— — Common stock – par value $0.01; 980,000,000 shares authorized;
286,530,631 and 326,454,240 shares issued and outstanding2,865 3,265 Additional paid-in capital 557,257 3,703,524 Deferred stock compensation — (95,721 ) Notes receivable from stockholders (30 ) (7,784 ) Accumulated other comprehensive income (loss) (903 ) (391 ) Retained earnings 250,646 253,212 Total stockholders’ equity 809,835 3,856,105 Total liabilities and stockholders’ equity $ 1,027,201 $ 5,030,423 The accompanying notes are an integral part of these consolidated financial statements.
564
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended April 30, 2000 2001 Cash flows from operating activities: Net income $ 27,469 $ 2,566 Adjustments to reconcile net income to net cash Provided by operating activities: Tax benefit related to exercise of stock options 38,695 62,108 Non-cash charges from equity transactions 20 — Effect of accumulated other comprehensive income(loss) (136 ) 43 In-process research and development — 45,900 Depreciation 26,615 42,840 Amortization of goodwill, other intangibles, deferred stock Compensation and debt issuance costs 1,817 30,877 Provision for doubtful accounts 250 — Provision for inventory excess and obsolescence 7,483 14,058 Provision for warranty and other contractual obligations 5,830 17,853 Changes in assets and liabilities: Accounts receivable (53,673 ) (18,061 ) Inventories (35,441 ) (144,181 ) Deferred income tax asset (1,220 ) 37,940 Prepaid income tax (15,735 ) — Prepaid expenses and other (10,805 ) (33,990 ) Accounts payable and accruals 22,360 52,317 Income taxes payable (8,697 ) (252 ) Deferred income tax liability — 409 Deferred revenue and other obligations (1,660 ) 7,418 Net cash provided by operating activities 3,172 117,845 Cash flows from investing activities: Additions to equipment, furniture and fixtures (47,471 ) (134,956 ) Purchases of available-for-sale investments (172,263 ) (763,946 ) Maturities of available-for-sale investments 144,045 165,841 Acquisition of businesses, inclusive of intellectual property and other intangibles, net of cash acquired — 54,101 Minority equity investments (37 ) (8,005 ) Net cash used in investing activities (75,726 ) (686,965 ) Cash flows from financing activities: Net proceeds from (repayment of) other obligations (149 ) 1,894 Proceeds from issuance of convertible subordinated notes — 669,300 Proceeds from issuance of common stock and warrants 19,088 898,921 Repayment of notes receivable from stockholders 179 30 Net cash provided by financing activities 19,118 1,570,145 Net change in cash and cash equivalents (53,436 ) 1,001,025 Cash and cash equivalents at beginning of period 143,440 143,187 Cash and cash equivalents at end of period $ 90,004 $ 1,144,212 The accompanying notes are an integral part of these consolidated financial statements.
5
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(unaudited)(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation (the
"Company" or "CIENA"“Company”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial position of the Company at the date of the interim balance sheet. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with theCompany'sCompany’s October 31, 2000 audited consolidated financial statements and notes thereto included in theCompany'sCompany’s Form 10-K annual report for the fiscal year ended October 31, 2000.Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms specified and where collection is probable. For transactions where CIENA has yet to obtain customer acceptance, revenue is deferred until the terms of acceptance are satisfied. Revenue for installation services is recognized as the services are performed unless the terms of the supply contract combine product acceptance with installation, in which case revenues for installation services are recognized when the terms of acceptance are satisfied and installation is completed. Revenues from installation service fixed price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date compared to estimated total costs for each contract. Amounts received in excess of revenue recognized are included as deferred revenue in the accompanying balance sheets. For transactions involving the sale of software, revenue is recognized in accordance with Statement of Position No. 97-2 (SOP 97-2),
"Software“Software RevenueRecognition"Recognition”, including deferral of revenue recognition in instances where vendor specific objective evidence for undelivered elements is not determinable. For distributor sales where risks of ownership have not transferred, CIENA recognizes revenue when the product is shipped through to the end user.Investments
CIENA’s short-term and long-term investments are classified as available-for-sale as of the April 30, 2001 balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses and declines in value determined to be other than temporary, if any, on available-for-sale securities will be reported in other income or expense as incurred. As of the October 31, 2000 balance sheet date, CIENA’s marketable securities were classified as held-to-maturity securities and were recorded at their amortized cost.
CIENA also has certain other minority equity investments in non-publicly traded companies. These investments are included in other assets on the balance sheet and are generally carried at cost as CIENA owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. As of October 31, 2000 and April 30, 2001, $3.0 and $11.1 million of these investments are included in other long-term assets, respectively. These investments are inherently high risk as the market for technologies or product manufactured by these companies are usually early stage at the time of the investment by CIENA and such markets may never be significant. CIENA could lose its entire investment in certain or all of these companies. CIENA monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. No write-downs were recorded during fiscal 2000 or the six months ended April 30, 2001.
6
Newly Issued Accounting Standards
In September 2000, the FASB issued SFAS No. 140
"Accounting“Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."” SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to the securitization transactions and collateral for fiscal years ending after December 15, 2000. The Companyis reviewingdoes not currently believe that theprovisionsadoption of SFAS No.140. 67140 will have a significant impact on its financial position or results of operations.(2)
INVENTORIES
InventoriesBUSINESS COMBINATIONSOn March 29, 2001, CIENA acquired all of the outstanding capital stock, and assumed the options and warrants of Cyras Systems, Inc. (“Cyras”), a privately held provider of next-generation optical networking systems based in Fremont, California. The purchase price was approximately $2.2 billion and consisted of the issuance of approximately 26.1 million shares of CIENA common stock, the assumption of approximately 1.9 million stock options and the indirect assumption of $150 million principal amount of Cyras’s convertible subordinated indebtedness. Cyras is designing and developing next-generation optical networking solutions for telecommunications carriers. The Cyras K2 product, which has become CIENA’s MetroDirector K2™, will enable carriers of metropolitan area networks to consolidate multiple legacy network elements into a single switching platform.
The transaction was recorded using the purchase accounting method with the allocation of the purchase price summarized below (in thousands):
Tangible assets $ 80,712 Deferred tax asset 37,201 Developed technology 47,700 In-process research and development 45,900 Workforce 11,600 Goodwill 2,058,270 Deferred stock compensation 98,456 Acquisition costs (14,790 ) Other assumed liabilities (19,495 ) Convertible subordinated notes (167,700 ) Employee loans 7,784 Total purchase price $ 2,185,638 The amortization period for the goodwill and intangibles, based on management’s estimate of the useful life of the acquired technology, is three to seven years.
In connection with the Cyras acquisition, the Company recorded a $45.9 million charge in the period ended April 30, 2001 for in-process research and development. This generally represents the estimated value of purchased in-process technology related to Cyras’s K2 product development that had not yet reached technological feasibility and no alternative future use at the time of the acquisition. 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 to in-process K2 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 following unaudited pro forma data summarizes the results of operations for the period indicated as if the Cyras acquisition had been completed as of the beginning of the periods presented. The unaudited pro forma data gives effect to actual operating results prior to the acquisition, adjusted to include the pro forma effect of amortization of intangibles, deferred stock compensation costs, the elimination of the charge for acquired in-process research and development, the tax effects to the pro forma adjustments and the recognition of the tax benefits arising from Cyras’s net operating loss carryforwards. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the periods presented or that may be obtained in the future (in thousands, except per share data).
7
Year Ended Six Months Ended October 31, April 30, 2000 2001 Revenue $ 858,750 $ 777,385 Net loss $ (274,330 ) $ (93,999 ) Diluted net loss per common share
and dilutive potential common share$ (0.90 ) $ (0.32 ) (3) CASH , SHORT-TERM AND LONG-TERM INVESTMENTS
Cash, short-term and long-term investments are comprised of the following (in thousands):
April 30, 2001 Gross Gross Unrealized Unrealized Estimated Fair Amortized Cost Gains Loses Value Corporate bonds $ 218,794 $ 512 $ — $ 219,306 Asset backed obligations 39,711 110 — 39,821 Foreign debt securities 8,080 — — 8,080 Commercial Paper 160,037 173 — 160,210 US Obligations 265,443 376 — 265,819 Money market funds 1,144,212 — — 1,144,212 $ 1,836,277 $ 1,171 $ — $ 1,837,448 Included in cash and cash equivalents $ 1,144,212 $ — $ — $ 1,144,212 Included in short-term investments 356,821 342 — 357,163 Included in long-term investments 335,244 829 — 336,073 $ 1,836,277 $ 1,171 $ — $ 1,837,448 As of October 31, 2000 the Company classified its investments as marketable debt securities held-to-maturity defined by Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Such investments were recorded at their amortized cost and had $70,255 of unrealized gains and $32,000 of unrealized loss.
October 31, 2000 Commercial paper $ 90,745 U.S. government obligations 4,386 Money market funds 143,187 $ 238,318 Included in cash and cash equivalents 143,187 Included in short-term investments 95,131 $ 238,318 (4) INVENTORIES
Inventories are comprised of the following (in thousands):
October 31, April 30, 2000 2001 Raw materials $ 52,576 $ 101,740 Work-in-process 48,300 76,669 Finished goods 58,641 122,886 159,517 301,295 Less reserve for excess and obsolescence (18,238 ) (25,275 ) $ 141,279 $ 276,020 8
(5) CONVERTIBLE NOTES PAYABLE
On February 9, 2001, CIENA completed a public offering of 3.75% convertible notes, in an aggregate principal amount of $690 million, due February 1, 2008. Interest is payable on February 1 and August 1 of each year beginning August 1, 2001. The notes may be converted into shares of CIENA’s common stock at any time before their maturity or their prior redemption or repurchase by CIENA. The conversion rate is 9.5808 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. On or after the third business day after February 1, 2004, CIENA has the option to redeem all or a portion of the notes that have not been previously converted at the following redemption prices (expressed as percentage of principle amount):
Redemption Period Price Beginning on the third business day after February 1, 2004 and
ending on January 31,2000 2001 --------------- -------------Raw materials $ 52,576 $ 77,499 Work-in-process 48,300 61,243 Finished goods 58,641 86,957 --------------- ------------- 159,517 225,699 Less reserve for excess2005102.143 % Beginning on February 1, 2005 and obsolescence (18,238) (18,478) --------------- ------------- $ 141,279 $ 207,221 =============== =============ending on January 31, 2006101.607 % Beginning on February 1, 2006 and ending on January 31, 2007 101.071 % Beginning on February 1, 2007 and ending on January 31, 2008 100.536 % (3)In August 2000, Cyras Systems Inc. issued $150 million of 4 1/2% convertible subordinated notes due August 15, 2005. Interest is payable on February 15 and August 15 of each year, beginning February 15, 2001. Ciena indirectly assumed the convertible subordinated notes on March 29, 2001 as a result of its acquisition of Cyras. CIENA recorded the estimated fair value of the notes on the date of the acquisition at $167.7 million. The notes may be converted into shares of CIENA’s common stock at any time before their maturity or their prior redemption or repurchase by CIENA. The conversion rate is 6.9137 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. Cyras Systems LLC is the successor to Cyras Systems Inc. and a wholly owned subsidiary of CIENA. If an IPO of Cyras LLC has not occurred on or before March 31, 2002, CIENA will be obligated to make an offer to repurchase the notes at 118.9% of the principal balance thereof on April 30, 2002. CIENA is accreting the redemption premium over the remaining period to April 30, 2002, such that the carrying value of the notes equals the redemption price at the date of the redemption obligation. Accretion of the redemption premium was $0.9 million during the period ended April 30, 2001.
(6) EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of the basic net income per common share
("(“basicEPS"EPS”) and diluted net income per common and dilutive potential common share("(“dilutedEPS"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,andstock options and warrants using the treasury stock method (in thousands except per share amounts).
Quarter ended January 31, ------------------------------------ 2000 2001 ------------------ --------------Net Income $ 9,062 $ 53,246 ================== ============== Weighted average shares-basic 276,182 287,001 Effect of dilutive securities: Employee stock options and warrants 19,624 13,955 ------------------ -------------- Weighted average shares-diluted 295,806 300,956 ================== ============== Basic EPS $ 0.03 $ 0.19 ================== ============== Diluted EPS $ 0.03 $ 0.18 ================== ==============During:
Quarter ended April 30, 2000 2001 Net income (loss) $ 18,407 $ (50,680 ) Weighted average shares-basic 280,162 306,329 Effect of dilutive securities: Employee stock options and warrants 18,964 — Weighted average shares-diluted 299,126 306,329 Basic EPS $ 0.07 $ (0.17 ) Diluted EPS $ 0.06 $ (0.17 ) 9
Six months ended April 30, 2000 2001 Net income $ 27,469 $ 2,566 Weighted average shares-basic 278,600 296,758 Effect of dilutive securities: Employee stock options and warrants 19,354 13,406 Weighted average shares-diluted 297,954 310,164 Basic EPS $ 0.10 $ 0.01 Diluted EPS $ 0.09 $ 0.01 Stock options to purchase 0.2 million and 26.3 million shares of common stock were outstanding during the
quarterquarters endedJanuary 31,April 30, 2000 andJanuary 31,April 30, 2001,approximately 139,000 and 8,044,000,respectively,weighted shares from employee stock options have been excluded frombut were not included in the computation of diluted EPSbecauseas theoptions' exercise price was greater thaneffect would be anti-dilutive. In addition, stock options to purchase 0.1 million and 9.6 million shares of common stock were outstanding during theaverage market pricesix months ended April 30, 2000 and April 30, 2001, respectively, but were not included in the computation of diluted EPS as thecommon shares. (4)effect would be anti-dilutive.(7) COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Quarter ended January 31, -------------------------------- 2000 2001 ---------------- ---------------Net income $ 9,062 $ 53,246 Change in accumulated translation adjustments 38 93 ---------------- --------------- Total comprehensive income $ 9,100 $ 53,339 ================ ===============78 (5) SUBSEQUENT EVENTS Proposed Acquisition of Cyras Systems, Inc. On December 18, 2000, CIENA entered into an agreement to acquire all of the outstanding capital stock, options and warrants of Cyras Systems, Inc. ("Cyras"), a privately held provider of next-generation optical networking systems based in Fremont, California. As consideration in the acquisition, the Company agreed to issue a total of approximately 27 million shares of CIENA common stock and indirectly assume $150 million principal amount of Cyras's convertible subordinated indebtedness. Cyras is designing and developing next-generation optical networking solutions for telecommunications carriers. The Cyras K2 product, which is in development phase and is not ready for commercial manufacturing or deployment, will enable carriers of metropolitan area networks to consolidate multiple legacy network elements into a single transport and switching platform. CIENA will account for the Cyras acquisition as a purchase. CIENA expects to complete the acquisition in the first calendar quarter of 2001.The Cyras acquisition is subject to customary closing conditions, including regulatory approvals.
Quarter ended April 30, Six months ended April 30, 2000 2001 2000 2001 Net income (loss) $ 18,407 $ (50,680 ) $ 27,469 $ 2,566 Change in unrealized gain on available-for-sale securities, net of tax — 761 — 761 Change in accumulated translation adjustments (174 ) (342 ) (136 ) (249 ) Total comprehensive income (loss) $ 18,233 $ (50,261 ) $ 27,333 $ 3,078 (8) STOCKHOLDERS’S EQUITY
Public Offerings
On February 9, 2001, CIENA completed a public offering of 11,000,000 shares of common stock at a price of $83.50 per share less
underwriters'underwriters’ discounts and commissions.For a period of thirty days from February 5, 2001, the underwriters have the option to purchase up to an additional 1,650,000 shares from CIENA at the initial price of $83.50 to the public, less the underwriting discount. As of February 15, 2001, the underwriters have not exercised this option. Concurrent with the offering of common stock, CIENA completed a public offering of 3.75% convertible notes with an aggregate principal amount of $690 million.Net proceeds fromthesethe publicofferings, exclusive of the underwriters' option to purchase additional common stock, wereoffering was approximately$1.5$0.9 billion, after deducting underwriting discounts, commissions and offering expenses. Pending use of the net proceeds, the Company has invested them in interest bearing, investment grade securities.ITEMItem 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsThisManagement’s Discussion and Analysis of Financial Condition and Results of Operationscontains certain forward-looking statements that involve risks and uncertainties. CIENA has set forth in its Form 10-K Item 7
"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors,"” as filed with the Securities and Exchange Commission on December 7, 2000, a detailed statement of risks and uncertainties relating to theCompany'sCompany’s business. In addition, set forth below under the heading"Risk Factors"“Risk Factors” is a further discussion of certain of those risks as they relate to the period covered by this report, theCompany'sCompany’s near-term outlook with respect thereto, and the forward-looking statements set forth herein. Investors should review this quarterly report in combination with the Form 10-K in order to have a more complete understanding of the principal risks associated with an investment in theCompany'sCompany’s Common Stock.OVERVIEW10
Overview
CIENA is a leader in the rapidly growing intelligent optical networking equipment market. We offer a comprehensive portfolio of products for communications service providers worldwide. Our customers include long-distance carriers, competitive and incumbent local exchange carriers,
Internetinternet service providers, and wireless and wholesale carriers. CIENA offers optical transport and intelligent optical switching systems that enable service providers to provision, manage and deliver high-bandwidth services to their customers.CIENA'sCIENA’s intelligent optical networking products are designed to enable carriers to deliver any time, any size, any priority bandwidth to their customers.On
December 19, 2000, we announced an agreement to acquireMarch 29, 2001, CIENA acquired all of the outstanding capital stock, and assumed the options and warrants of Cyras Systems, Inc. (“Cyras”), a privately held provider of next-generation optical networking systems based in Fremont, California.As consideration inThe purchase price was approximately $2.2 billion and consisted of theacquisition, we agreed to issue a totalissuance of approximately2726.1 million shares ofourCIENA common stock, the assumption of approximately 1.9 million stock options andindirectly assumethe indirect assumption of $150 million principal amount ofCyras'sCyras’s convertible subordinated indebtedness. Cyras is designing and developing next-generation optical networking solutions for telecommunications carriers. The Cyras K2 product, which has become CIENA’s MetroDirector K2, is currently available for shipment indevelopment phase and is not ready for commercial manufacturing or deployment,limited quantities. The MetroDirector K2 will enable carriers of metropolitan area networks to consolidate multiple legacy network elements into asingle transport andswitching platform.We will account forAlso as a result of the Cyras acquisitionas a purchase. Wewe expect our operating expenses relating tocomplete the acquisitionresearch and development, sales and marketing, and general and administrative activities to increase inthe first calendar quarter of 2001. The Cyras acquisition is 89 subject to customary closing conditions, including regulatory approvals. See "Risk Factors - Risks Related to the Cyras Acquisition".future periods.On February 9, 2001, we completed a public offering of 11,000,000 shares of common stock at a price of $83.50 per share less
underwriters'underwriters’ discounts and commissions.For a period of thirty days from February 5, 2001, the underwriters have the option to purchase up to an additional 1,650,000 shares from CIENA at the initial price of $83.50 to the public, less the underwriting discount. As of February 15, 2001 the underwriters have not exercised this option.Concurrent with the offering of common stock, CIENA completed a public offering of 3.75% convertible notes with an aggregate principal amount of $690 million. Net proceeds from these public offerings were approximately$1.5$1.6 billion, after deducting underwriting discounts, commissions and offering expenses. Pending our use of the net proceeds, we have invested them in interest bearing, investment grade securities.CIENA has increased the number of optical networking equipment customers from a total of
twenty-fivetwenty-seven customers during the firstquartersix months endedJanuary 31,April 30, 2000 tothirtythirty-nine customers for currentquartersix months endedJanuary 31,April 30, 2001. The Company intends to preserve and enhance its market leadership and eventually build on its installed base with new and additional products. CIENA believes that its product and service quality, manufacturing experience, and proven track record of delivery will enable it to endure competitive pricing pressure while concentrating on efforts to reduce product costs and maximize production efficiencies. See"Risk Factors"“Risk Factors”.As of
January 31,April 30, 2001 CIENA employed3,1933,860 people, which was a net increase of4181,085 persons over the 2,775 employed on October 31, 2000.RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31,Results of Operations
Three Months Ended April 30, 2000
COMPARED TO THREE MONTHS ENDED JANUARY 31,Compared to Three Months Ended April 30, 2001REVENUE.Revenue. CIENA recognized
revenues of $152.2$185.7 million and$352.0$425.4 million in revenue for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. The approximate$199.8$239.7 million or131.2%129.1% increase in revenues in thefirstsecond quarter 2001 compared to thefirstsecond quarter 2000 was the result of an increase in revenues recognized fromthirty differentthirty-three optical networkingequipmentcustomers in the quarter endedJanuary 31,April 30, 2001, as compared totwenty-fivetwenty-two such customers in the same quarter of the prior year. Additionally, during the quarter endedJanuary 31,April 30, 2001, two customers eachof three optical networking equipment customersaccounted forat least10% or more ofCIENA'sCIENA’s quarterly revenue and combined accounted for62.3%51.6% ofCIENA'sCIENA’s quarterly revenue. This compares to the quarter endedJanuary 31,April 30, 2000, whereeach oftwooptical transport equipmentcustomers each accounted forat least10% or more ofthe Company'sour quarterly revenue and combined accounted forapproximately 39.8%63.0% ofthe Company'sour quarterly revenue. Revenues derived from foreign sales accounted for approximately42.0%28.1% and19.4%13.4% of our revenues during the second quarters ended April 30, 2000 and 2001, respectively. The decrease in the percentage of foreign sales to total sales is largely reflective of theCompany'slarge growth in domestic revenuesduring both the first quarters ended January 31, 2000 and January 31, 2001, respectively.while international revenues have remained relatively constant.Revenues during
CIENA's firstCIENA’s second quarter fiscal 2001 were largely attributed to sales of long distance optical transport products such as MultiWave CoreStream™, MultiWave Sentry 4000™, MultiWave Sentry 1600™ systems, and sales of our intelligent optical core switching product MultiWave CoreDirector™. Second quarter fiscal 2001 also had revenue contributions from sales of short distance optical transport products such as our MultiWaveCoreStream systems and channel card additions.Metro™ as well as sales from our network management software LightWorks ON-Center™. This compares toCIENA's firstCIENA’s second quarter fiscal 2000 revenues, which were largely attributed to sales of MultiWave CoreStream, MultiWave Sentry 4000systemsandchannel card additions.MultiWave Sentry 1600 systems. Sales of the MultiWave CoreStream systemsand channel card additionsduring thefirstsecond quarter fiscal 2001 included configurations for both 2.5 gigabits per second("(“Gb/s"s”) and 10.0 Gb/s transmissionrates withrates. The first release of the10.0 Gb/s configurations representingMultiWave CoreDirector became generally available during themajoritythird quarter of fiscal 2000.11
We expect revenues in the near term to be largely dependent upon sales to several existing customers and to be largely derived from continued sales of the MultiWave CoreStream,
revenues. First quarter 2001 revenues also included increased sales ofMultiWaveMetroSentry 4000 and MultiWave CoreDirectorsystems compared tosystems. There are material risks associated with our dependence on these customers, as well as thesales activity forsuccessful ramping up of manufacturing of theseproducts during the first fiscal quarter 2000. GROSS PROFIT.products. See “Risk Factors”.Gross Profit. Cost of goods sold consists of component costs, direct compensation costs, warranty and other contractual obligations, royalties, license fees, inventory obsolescence costs and overhead related to
the Company'sCIENA’s manufacturing and engineering, furnishing and installation("EF&I")operations. Gross profits were$65.2$81.5 million and$160.2$193.9 million for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. The approximate$94.9$112.4 million or145.6%138.0% increase in gross profit in thefirstsecond quarter 2001 compared to thefirstsecond quarter 2000 was the result of increased revenues and improved grossprofit marginmargins in thefirstsecond quarter 2001 compared tofirstsecond quarter 2000. Gross margin as a percentage ofrevenuesrevenue was42.8%43.9% and45.5%45.6% for thefirstsecond quarters 2000 and 2001, respectively. The increase in grossmargin percentagemargins for thefirstsecond quarter 2001 compared to thefirstsecond quarter 2000 was largely attributable to reductions in product costsfavorable product mixand an increase in productionefficiencies. 910 CIENA'sefficiencies, favorable product mix, partially offset by aggressive price competition resulting in lower selling prices for optical transport systems.Our gross margins may be affected by a number of factors, including
product mix,continued competitive market pricing,outsourcing of manufacturing,product mix, manufacturing volumes and efficiencies,competition for skilled labor,and fluctuations in component costs.Downward pressuresDuring the remainder of fiscal 2001, we expect to face continued pressure onourgross margins,may be further impactedprimarily as a result of substantial price discounting byan increased percentage of revenues from EF&I services or additional service requirements. CIENA will continuecompetitors seeking toconcentrate on efforts to reduce product costsacquire market share. See “Risk Factors.”Research and
maximize production efficiencies and, if successful in these efforts, may be able to improve gross margins in the future. See "Risk Factors." RESEARCH AND DEVELOPMENT EXPENSES.Development Expenses. Research and development expenses (exclusive of stock compensation costs of $0 and $1.7 million) were$29.7$29.1 million and$43.5$54.3 million for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. During thefirstsecond quartersof2000 and 2001, research and development expenses were19.5%15.6% and12.4%12.8% of revenue, respectively. The approximate$13.8$25.3 million or46.3%87.0% increase in research and development expenses in thefirstsecond quarter 2001 compared to thefirstsecond quarter 2000 was the result of increases in staffing levels,usageconsumption of prototypematerials, utilization of outside consultantsparts, depreciation expense, anddepreciation expense. CIENA expectsfacility costs. We expect thatitsour research and development expenditures will continue to increase during the remainder of fiscal year 2001 to support the continued development of optical transport products,for the LightWorks architecture and the potential addition of the Cyras K2 product,intelligent optical core switching products, the explorationand possible purchaseof new or complementary technologies, and the pursuit of various cost reduction strategies.The Company expensesWe expense research and development costs as incurred.SELLING AND MARKETING EXPENSES.Selling and Marketing Expenses. Selling and marketing expenses (exclusive of stock compensation costs of $0 and $0.5 million) were
$18.1$20.3 million and$29.6$38.8 million for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. During thefirstsecond quartersof2000 and 2001, selling and marketing expenses were11.9%10.9% and8.4%9.1% ofrevenues,revenue, respectively. The approximate$11.5$18.5 million or63.5%90.8% increase in selling and marketing expenses in thefirstsecond quarter 2001 compared to thefirstsecond quarter 2000 was primarily the result of increased staffing levels in the areas of sales,marketing,technical assistance and field support, increases in costs associated with tradeshow participation, utilization of outside consultants and depreciationexpense. The Company anticipatesexpense also contributed to the comparable quarter to quarter selling and marketing expense increase. We anticipate thatitsour selling and marketing expenses will increase during the remainder of fiscal year 2001 as additional personnel are hired and offices are opened, particularly in support of international market development, to allowthe Companyus to pursue new market opportunities.The Company also anticipates that its sellingGeneral and
marketing expenses will increase as a result of additional activities associated with the marketing of the Cyras K2 product, assuming the deal closes as expected. GENERAL AND ADMINISTRATIVE EXPENSES.Administrative Expenses. General and administrative expenses (exclusive of stock compensation costs of $0 and $0.6 million) were$6.9$7.2 million and$11.1$16.8 million for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. During thefirstsecond quartersof2000 and 2001, general and administrative expenses were4.5%3.9% and3.2%3.9% of revenue, respectively. The approximate$4.3$9.6 million or62.2%133.9% increase in general and administrative expenses from thefirstsecond quarter 2000 compared to thefirstsecond quarter 2001 was primarily the result of increased staffing levels, utilization of outside consultants andoutside consulting services. The Company believesfacility costs. We believe thatitsour general and administrative expenses for the remainder of fiscal 2001 will increase due to the expansion ofthe Company'sour administrative staff required to supportitsour expandingoperations, including operations associatedoperations.Deferred Stock Compensation Costs. Deferred stock compensation costs were $2.7 million for the second quarter ended April 30, 2001. As part of our acquisition of Cyras we recorded $98.5 million of deferred stock compensation relating to the unvested stock options and restricted stock assumed in the acquisition. Deferred stock compensation is presented as a reduction of stockholder’s equity and is amortized over the remaining vesting period of the applicable options.
Amortization of Goodwill. Amortization of goodwill was $0.8 million and $25.4 million for the second quarters ended April 30, 2000 and 2001, respectively. On March 29, 2001, we acquired Cyras which we accounted for under the purchase method of accounting. Accordingly, we recorded goodwill of $2.1 billion representing the excess of the purchase price paid over the fair value of the net tangible and other intangible assets acquired. The goodwill from the Cyras purchase will be amortized straight-line over a seven-year period.
12
Amortization of Intangible Assets. Amortization of intangible assets was $0.1 million and $1.0 million for the second quarters ended April 30, 2000 and 2001, respectively. As part of our acquisition of Cyras we recorded $59.3 million worth of other intangible assets. The intangible assets from the Cyras purchase will be amortized over a three to seven year period.
In-Process Research and Development. In connection with the Cyras acquisition, the Company recorded a $45.9 million charge in the period ended April 30, 2001 for in-process research and development. This generally represents the estimated value of purchased in-process technology related to Cyras’s K2 product
assumingdevelopment that had not yet reached technological feasibility and had no alternative future use at thedeal closes as expected. INTEREST AND OTHER INCOME (EXPENSE), NET.time of the acquisition. 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 K2 technology for a discrete projection period and discounting the net cash flows back to their present value.Interest and Other Income, Net. Interest income and other income (expense), net were
$3.0$3.4 million and$4.3$20.7 million for thefirstsecond quarters endedJanuary 31,April 30, 2000 and 2001, respectively. The approximate$1.3$17.4 millionor 41.0%increase in interest income and other income,(expense),net waslargelyattributable to higherinvestedcashbalances. We expect our interestandother income to increase during fiscal 2001 due to expected higher invested cashinvestment balances, resulting from our equity and debt offerings during February 2001. Other expense in thenet proceeds received from oursecond quarter of fiscal 2001 also includes amortization of debt issuance costs attributable to the convertible notes.Interest Expense. Interest expense was $0.1 million and $7.1 million for the second quarters ended April 30, 2000 and 2001, respectively. Interest expense in the second quarter of fiscal 2000 was primarily related to capital lease obligations. Interest expense in the second quarter of fiscal 2001 consists of accrued interest associated with the convertible notes issued in February
9, 2001 completed public offerings. PROVISION FOR INCOME TAXES. CIENA'sand the accretion of the redemption premium that is associated with the convertible subordinated notes assumed as part of the Cyras acquisition.Provision for Income Taxes. CIENA’s provision for income taxes
was $4.4were $8.9 million and$26.8$73.2 million for the second quarters ended April 30, 2000 and 2001, respectively. During the second quarters 2000 and 2001, the provision for income taxes were 32.5% and 324.8% of income before income taxes, respectively. The increase in the tax rate in the second quarter ended April 30, 2001 was the result of a change in the expected FY 2001 income tax rate from what was used in the first quarter ended January 31, 2001. The cumulative affect of this change in rate was recorded in the second quarter ended April 30, 2001. Under the tax code, expenses recorded for the amortization of certain intangible assets (such as goodwill, deferred stock compensation and in-process research and development) are not deductible for tax purposes. As a result of the Cyras acquisition, we have recorded a significant amount of intangible asset amortization. Since these expenses are not deductible for tax purposes, these expenses result in an increase in the CIENA’s effective tax rate. Exclusive of these charges, CIENA’s effective income tax rate would have been 33.5% for the quarter ended April 30, 2001.Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 2001
Revenue. CIENA recognized $337.9 million and $777.4 million in revenue for the six months ended April 30, 2000 and 2001, respectively. The approximate $439.5 million or 130.1% increase in revenues in the six months ended April 30, 2001 compared to the six months ended April 30, 2000 was the result of an increase in revenues recognized from thirty-nine optical networking customers in the six months ended April 30, 2001, as compared to twenty-seven such customers in the same period of the prior year. Additionally, during the six months ended April 30, 2001, two optical transport equipment customers each accounted for 10% or more of CIENA’s revenue and combined accounted for 51.4% of CIENA’s revenue. This compares to the six months ended April 30, 2000 where three customers each accounted for 10% or more of CIENA’s revenue and combined accounted for approximately 54.0% of CIENA’s revenue. Revenues derived from foreign sales accounted for approximately 34.4% and 16.1% of CIENA’s revenues during the six months ended April 30, 2000 and 2001, respectively. The decrease in the percentage of foreign sales to total sales is largely reflective of the large growth in domestic revenues while international revenues have remained relatively constant.
Revenues during CIENA’s six months ended April 30, 2001 were largely attributed to sales of long distance optical transport products such as MultiWave CoreStream, MultiWave Sentry 4000, MultiWave Sentry 1600 systems, and sales of our intelligent optical core switching product MultiWave CoreDirector. Revenues during the six months ended April 30, 2001 also had revenue contributions from sales of short distance optical transport products such as our MultiWave Metro as well as sales from our network management software, LightWorks ON-Center. This compares to CIENA’s six months ended April 30, 2000, which were largely attributed to sales of MultiWave CoreStream, MultiWave Sentry 4000 and MultiWave Sentry 1600 systems. Sales of the MultiWave CoreStream systems during the six months ended April 30, 2001 included
13
configurations for both 2.5 gigabits per second (“Gb/s”) and 10.0 Gb/s transmission rates. The first release of the MultiWave CoreDirector became generally available during the third quarter of fiscal 2000.
Gross Profit. Gross profits were $146.7 million and $354.0 million for the six months ended April 30, 2000 and 2001, respectively. The approximate $207.4 million or 141.4% increase in gross profit in the first six months of 2001 compared to the first six months of 2000 was the result of increased revenues and improved gross margins during the first six months of 2001. Gross margin as a percentage of revenues was 43.4% and 45.5% for the first six months of 2000 and 2001, respectively. The increase in gross margins during the first six months of 2001 compared to the first six months of 2000 was largely attributable to reductions in product costs and an increase in production efficiencies, favorable product mix, partially offset by aggressive price competition resulting in lower selling prices for optical transport systems.
CIENA’s gross margins may be affected by a number of factors, including continued competitive market pricing, product mix, manufacturing volumes and efficiencies, and fluctuations in component costs. During the remainder of fiscal 2001, CIENA expects to face continued pressure on gross margins, primarily as a result of substantial price discounting by competitors seeking to acquire market share. See “Risk Factors”.
Research and Development Expenses. Research and development expenses (exclusive of stock compensation costs of $0 and $1.7 million) were $57.9 million and $96.8 million for the six months ended April 30, 2000 and 2001, respectively. During the first
quarterssix months of 2000 and 2001, research and development expenses were 17.1% and 12.5% of revenue, respectively. The approximate $38.9 million or 67.3% increase in research and development expenses in the first six months of 2001 compared to the first six months of 2000 was the result of increases in staffing levels, consumption of prototype materials, depreciation expense, and utilization of outside consultants for certain development. CIENA expenses research and development costs as incurred.Selling and Marketing Expenses. Selling and marketing expenses (exclusive of stock compensation costs of $0 and $0.5 million) were $38.5 million and $68.4 million for the six months ended April 30, 2000 and 2001, respectively. During the first six months of 2000 and 2001, selling and marketing expenses were 11.4% and 8.8% of revenue, respectively. The approximate $30.0 million or 77.9% increase in selling and marketing expenses in the first six months of 2001 compared to the first six months of 2000 was primarily the result of increased staffing levels in the areas of sales, technical assistance and field support, utilization of outside consultants, trade show participation, promotional costs, and depreciation expense.
General and Administrative Expenses. General and administrative expenses (exclusive of stock compensation costs of $0 and $0.6 million) were $14.0 million and $27.9 million for the six months ended April 30, 2000 and 2001, respectively. During the first six months of 2000 and 2001, general and administrative expenses were 4.2% and 3.6% of revenue, respectively. The approximate $13.9 million or 98.8% increase in general and administrative expenses in the first six months of 2001 compared to the first six months of 2000 was primarily due to increases in staffing levels and outside consulting services.
Deferred Stock Compensation Costs. Deferred stock compensation costs were $2.7 million for the six months ended April 30, 2001. As part of our acquisition of Cyras we recorded $98.5 million of deferred stock compensation relating to the unvested stock options and restricted stock assumed in the acquisition. Deferred stock compensation is presented as a reduction of stockholder’s equity and is amortized over the remaining vesting period of the applicable options.
Amortization of Goodwill. Amortization of goodwill was $1.6 million and $26.3 million for the six months ended April 30, 2000 and 2001, respectively. On March 29, 2001, we acquired Cyras which was accounted for under the purchase method of accounting. Accordingly, we recorded goodwill of approximately $2.1 billion representing the excess of the purchase price paid over the fair value of the net tangible and other intangible assets acquired. The goodwill from the Cyras purchase will be amortized over a seven-year period.
Amortization of Intangible Assets. Amortization of intangible assets was $0.2 million and $1.1 million for the six months ended April 30, 2000 and 2001, respectively. As part of our acquisition of Cyras we recorded $59.3 million worth of other intangible assets. The other intangible assets from the Cyras purchase will be amortized over a three to seven year period.
14
In-Process Research and Development. In connection with the Cyras acquisition, the Company recorded a $45.9 million charge for the six months ended April 30, 2001 for in-process research and development. This generally represents the estimated value of purchased in-process technology related to Cyras’s K2 product development that had not yet reached technological feasibility and had no alternative future use at the time of the acquisition. 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 to the in-process K2 technology for a discrete projection period and discounting the net cash flows back to their present value.
Interest and Other Income, Net. Interest income and other income, net were $6.4 million and $25.0 million for the six months ended April 30, 2000 and 2001, respectively. The approximate $18.6 million increase in interest income and other income, net was attributable to higher cash and investment balances, resulting from our equity and debt offerings during February 2001. Other expense in the six months ended April 30, 2001 also includes amortization of debt issuance costs attributable to the convertible notes.
Interest Expense. Interest expense was $0.2 million and $7.2 million for the six months ended April 30, 2000 and 2001, respectively. Interest expense during the six months ended April 20, 2000 was primarily related to capital lease obligations. Interest expense during the six months ended April 30, 2001 consists of accrued interest attributable to the convertible notes, and the accretion of the redemption premium that is associated with the convertible subordinated notes assumed as part of the Cyras acquisition.
Provision for Income Taxes. CIENA’s provision for income taxes were $13.2 million and $100.0 million for the six months ended April 30, 2000 and 2001, respectively. During the first six months of 2000 and 2001, the
tax rate usedprovision for income taxes were 32.5% and33.5%97.5% of income before income taxes, respectively. The increase in the income tax rate in the firstquartersix months of 2001 compared tofirst quarter2000was due to a reduction in the marginal benefits derivedresulted from recording non-deductible goodwill, deferred stock compensation and in-process research and developmentcredits.connected with the Cyras acquisition. Under the tax code, expenses recorded for the amortization of certain intangible assets (such as goodwill, deferred stock compensation and in-process research and development) are not deductible for tax purposes. As a result ofJanuary 31,the Cyras acquisition, we have recorded a significant amount of intangible asset amortization. Since these expenses are not deductible for tax purposes, these expenses result in an increase in the CIENA’s effective tax rate. Exclusive of these charges, the Company’s effective income tax rate would have been 33.5% for the six months ended April 30, 2001.Liquidity and Capital Resources
At April 30, 2001,
CIENA's deferred tax asset was $166.3 million. The realization of this asset could be adversely affected if future earnings are lower than anticipated. LIQUIDITY AND CAPITAL RESOURCES At January 31, 2001, CIENA'sCIENA’s principal source of liquidity was its cash and cashequivalents. The Company had $176.7 million in cash and cashequivalentsand $83.0 million in corporate debt securities and U.S. Government obligations. The Company's corporate debt securities and U.S. Government obligations have contractual maturitiesofsix months or less. The Company's operating activities provided cash$1.1 billion, short-term investments of$54.4$357.2 million and$4.6 million for the three months ended January 31, 2001 and 2000, respectively.long-term investments of $336.0 million.Cash provided by operations was $3.2 million and $117.8 for the
threesix months endedJanuary 31,April 30, 2000 and 2001 respectively. The increase of cash generated from operations wasprimarilyapproximately $114.7 million from the first six months of 2000 compared to the first six months of 2001. The increases were principally attributable tonet income adjusted forthenon-cash charges of depreciation and amortization,tax benefit related to exercise of stock options, increases in accounts payable,accrued expenses, 1011non-cash charges of in-process research and development, decrease in deferredrevenue,tax asset, amortization, depreciation and provisions for inventory obsolescence andwarranty,warranty. This was offset by the increases in inventory,accounts receivable,prepaidassetsexpenses anddeferred income taxprepaid assets.Cash used in investing activities was $75.7 million and $687.0 million for
threethe six months endedJanuary 31,April 30, 2000 and 2001and 2000, was $30.0respectively. Investment activities included the net purchase of $28.2 million and$8.2$598.1 million worth of short and long-term investments during the six months ended April 30, 2000 and 2001, respectively.IncludedInvestment activities also included $47.5 million and $135.0 million invested ininvestment activities werecapital expenditures during the six months ended April 30, 2000 and 2001, respectively. Of the amount invested in capital expenditures, $40.7 million and $130.5 million was used for additions to capital equipment and furniture and the remaining $6.8 million and $4.5 million was invested in leasehold improvementsforduring thethreesix months endedJanuary 31,April 30, 2000 and 2001,and 2000,respectively. CIENA expects to use an additional $170 million of$42.2 million and $17.0 million, respectively. Thecapitalequipment expenditures were primarily for test, manufacturing and computer equipment. The Company expects additional combined capital equipment and leasehold improvement expenditures of approximately $160 million to be madeduring theremaining nine monthsremainder of fiscal 2001 tosupport selling and marketing, manufacturing and product development activities andcomplete the construction of leasehold improvements for itsfacilities. Wefacilities and additional investments in capital equipment.Cash generated
$9.1 million and $8.5 million in cashfrom financing activities for the six months ended April 30, 2000 and 2001 was $19.1 million and $1.6 billion, respectively. Included in thethreefinancing activities for the six months endedJanuary 31, 2001 andApril 30, 2000respectively. During the three months ended January 31, 2001 and 2000,was cashfrom financing activities included receipts of $8.6 million and $8.4 milliongenerated from the exercise of employee stock optionsrespectively.and the issuance of common stock of $19.1 million. On February 9, 2001, we completed a public offering of 11,000,000 shares of common stock at a price of $83.50 per share lessunderwriters'underwriters’ discounts and commissions.For a period of thirty days from February 5, 2001, the underwriters have the option to purchase up to an additional 1,650,000 shares from CIENA at the initial price of $83.50 to the public, less the underwriting discount. As of February 15, 2001, the underwriters have not exercised this option.Concurrent with the offering of common stock, CIENA completed a public offering of 3.75% convertible notes with an aggregate principal amount of $690 million. Net proceeds from these public offerings were approximately$1.5$1.6 billion, after deducting underwriting discounts, commissions andoffering expenses.offering. Pending our use of the net proceeds, we have invested them in interest bearing, investment grade securities.15
We believe that our existing cash balances and investments, together with cash from our recently completed public offerings and cash flow from operations, will be sufficient to meet our liquidity and capital spending requirements for the next 18 to 24 months. However, possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing prior to such time. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.
RISK FACTORS OUR RESULTS CAN BE UNPREDICTABLERisk Factors
Our Results Can Be Unpredictable
Our ability to recognize revenue during a quarter from a customer depends upon our ability to ship product and satisfy other contractual obligations of a customer sale in that quarter. In general, revenue and operating results in any reporting period may fluctuate due to factors including:
- loss of a customer; - the timing and size of orders from customers; - changes in customers' requirements, including changes to orders from customers; - the introduction of new products by us or our competitors; - changes in the price or availability of components for our products; - readiness of customer sites for installation; - satisfaction of contractual customer acceptance criteria and related revenue recognition issues; - manufacturing and shipment delays and deferrals; - increased service, warranty or repair costs; 1112 - the timing and amount of employer payroll tax to be paid on employee gains on stock options exercised; and -
• loss of a customer; • a change in the pricing for our products; • the timing and size of orders from customers; • changes in customers’ requirements, including changes or cancellations to orders from customers; • the introduction of new products by us or our competitors; • changes in the price or availability of components for our products; • readiness of customer sites for installation; • satisfaction of contractual customer acceptance criteria and related revenue recognition issues; • manufacturing and shipment delays and deferrals; • increased service, installation, warranty or repair costs; • the timing and amount of employer payroll tax to be paid on employee gains on stock options exercised; and • changes in general economic conditions as well as those specific to the telecommunications and intelligent optical networking industries. Our intelligent optical networking products require a relatively large investment, and our
targetcurrent and potential customers are highly demanding and technically sophisticated. There are only a limited number of potential customers in each geographic market, and each customer has unique needs. As a result, the sales cycles for our products are long, often more than a year between our initial contact with the customer andits commitmentour ability topurchase.recognize revenue from sales of products to a customer.We budget expense levels on our expectations of long-term future revenue. These budgets reflect our substantial investment in the financial, engineering, manufacturing and logistics support resources we think we may need for large potential customers, even though we do not know the volume, duration or timing of any purchases from them. In addition, we make a substantial investment in financial, manufacturing and engineering resources for the development of new and enhanced products. As a result, we may continue to experience high inventory levels, operating expenses and general overhead.
We have experienced rapid expansion in all areas of our operations, particularly in the manufacturing of our products. Our future operating results will depend on our ability to continue to expand our manufacturing facilities in a timely manner so that we can satisfy our delivery commitments to our customers. Our failure to expand these facilities in a timely manner and meet our customer delivery commitments would harm our business, financial condition and results of operations.
Our product development efforts will require us to incur ongoing development and operating expenses, and any delay in the contributions from new products, such as the MultiWave CoreDirector product line and the MetroDirector K2 product line, and enhancements to our existing optical transport products could harm our business.
CHANGES IN TECHNOLOGY OR THE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT OUR NEAR-TERM PROSPECTS16
Changes In Technology Or The Delays In The Deployment Of New Products Could Hurt Our Near-Term Prospects
The market for optical networking equipment is changing at a rapid pace. The accelerated pace of deregulation and the adoption of new technology in the telecommunications industry likely will intensify the competition for improved optical networking products. Our ability to develop, introduce and manufacture new and enhanced products will depend upon our ability to anticipate changes in technology, industry standards and customer requirements. Our failure to introduce new and enhanced products in a timely manner and to integrate these products with our existing product line in a timely manner could harm our competitive position and financial condition. Several of our new products, including the MultiWave CoreDirector, the MetroDirector K2 product and
theenhancements to the MultiWave CoreStream,products,are based on complex technology which could result in unanticipated delays in the development,manufacturemanufacturing or deployment of these products. In addition, our ability to recognize revenue from these products could be adversely affected by the extensive testing required for these products by our customers. The complexity of technology associated with support equipment for these products could also result in unanticipated delays in their deployment. These delays could harm our competitive and financial condition.Competition from competitiveCompetitive products, the introduction of new products embodying new technologies, a change in the requirements of our customers, or the emergence of new industry standards could delay or hinder the purchase and deployment of our products and could render our existing products obsolete, unmarketable or uncompetitive from a pricing
standpoint.standpoint and would harm our business, financial condition and results of operations. The long certification process for new telecommunications equipment used in the networks of the regional Bell operating companies, referred to as RBOCs, has in the past resulted in and may continue to result in unanticipated delays which may affect thedeployment oftiming and ability for us to deploy our products for the RBOC market.WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITYWe Face Intense Competition Which Could Hurt Our Sales And Profitability
The market for optical networking equipment is extremely competitive. Competition in the optical networking installation and test services market is based on varying combinations of price, functionality, software functionality, manufacturing capability, installation, services, scalability and the ability of the system solution to meet
customers' 1213customers’ immediate and future network requirements. A small number of very large companies, including Alcatel, Cisco Systems, Fujitsu Group, Hitachi, Lucent Technologies, NEC Corporation, Nortel Networks, Siemens AG and Telefon AB LM Ericsson, have historically dominated the telecommunications equipment industry. These companies have substantial financial, marketing, manufacturing and intellectual property resources. In addition, these companies have substantially greater resources to develop or acquire new technologies than we do and often have existing relationships with our potential customers. We sell systems that compete directly with product offerings of these companies and in some cases displace or replace equipment they have traditionally supplied for telecommunications networks. As such, we represent a specific threat to these companies. The continued expansion of our product offerings with the MultiWave CoreDirector and MetroDirector K2 productlinelines and enhancements to our MultiWave CoreStream product line likely will increase this perceived threat. We expect continued aggressive tactics from many of these competitors, including:- price discounting; - early announcements of competing products and other marketing efforts; - "one-stop shopping" options; - customer financing assistance; - marketing and advertising assistance; and -
• price discounting; • early announcements of competing products and other marketing efforts; • “one-stop shopping” options; • customer financing assistance; • marketing and advertising assistance; and • intellectual property disputes. These tactics can be particularly effective in a highly concentrated customer base such as ours. Our customers are under increasing competitive pressure to deliver their services at the lowest possible cost. This pressure may result in the pricing
forof optical networking systems becoming a more important factor in customer decisions, which may favor larger competitors that can spread the effect of price discounts in their optical networking products across a larger array of products and services and across a larger customer base than ours. If we are unable to offset any reductions in the average sales price for our products by a reduction in the cost of our products, our gross profit margins will be adversely affected. Our inability to compete successfully against our competitors and maintain our gross profit margins would harm our business, financial condition and results of operations.17
Many of our customers have indicated that they intend to establish a relationship with at least two vendors for optical networking products. With respect to customers for whom we are the only supplier of intelligent optical products, we do not know when or if these customers will select a second vendor or what impact the selection might have on purchases from us. If a second optical networking supplier is chosen, these customers could reduce their purchases from us, which could in turn have a material adverse effect on us.
New competitors are emerging to compete with our existing products as well as our future products. We expect new competitors to continue to emerge as the optical networking market continues to expand. These companies may achieve commercial availability of their products more quickly due to the narrow and exclusive focus of their efforts. Several of these competitors have raised
significantly moresignificant cash and they have in some cases offered stock in their companies, positions on technical advisory boards, or have provided significant vendor financing to attract new customers. In particular, a number of companies, including several start-up companies and recently public companies that have raised substantial equity capital, have announced products that compete with our products. Our inability to compete successfully against these companies would harm our business, financial condition and results of operations.WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL ACCEPTANCE OF NEW PRODUCTS Our MultiWave CoreDirector CIWe May Not Be Able To Successfully Complete Development And Achieve Commercial Acceptance of New Products
It is necessary for us to continually enhance each of our product
and somelines to satisfy our customer’s requirements. Certain enhancements tothe MultiWave CoreDirector and MultiWave CoreStream product lines and LightWorks Toolkitour products are in the development phase and are not yet ready for commercial manufacturing or deployment.WeFor example, we expect to offer additional feature enhancement releases of the MultiWave CoreDirector product line over the life of the product and continue to enhance features of our MultiWave CoreStream,product, includingMultiWave Metro and MetroDirector K2 products over thelonger reach and higher channel count functionalitylife ofour product line. The initial release of 1314 MultiWave CoreDirector CI is expected in limited availability for customer trials during the first calendar quarter of 2001.these products. The maturing process from laboratory prototype to customer trials, and subsequently to general availability, involves a number of steps, including:- completion of product development; - the qualification and multiple sourcing of critical components, including application-specific integrated circuits, referred to as ASICs; - validation of manufacturing methods and processes; - extensive quality assurance and reliability testing, and staffing of testing infrastructure; - validation of embedded software; - establishment of systems integration and systems test validation requirements; and -
• completion of product development; • the qualification and multiple sourcing of critical components, including application-specific integrated circuits, referred to as ASICs; • validation of manufacturing methods and processes; • extensive quality assurance and reliability testing, and staffing of testing infrastructure; • validation of embedded software; • establishment of systems integration and systems test validation requirements; and • identification and qualification of component suppliers. Each of these steps in turn presents serious risks of failure, rework or delay, any one of which could decrease the speed and scope of product introduction and marketplace acceptance of the product. Specialized ASICs and intensive software testing and validation, in particular, are key to the timely introduction of enhancements to the MultiWave CoreDirector and MetroDirector K2 product
line,lines, and schedule delays are common in the final validation phase, as well as in the manufacture of specialized ASICs. In addition, unexpected intellectual property disputes, failure of critical design elements, and a host of other execution risks may delay or even prevent the introduction of these products. If we do not develop and successfully introduce these products in a timely manner, our business, financial condition and results of operations would be harmed.The markets for our MultiWave CoreDirector and MetroDirector K2 product
linelines are relatively new. We have not established commercial acceptance of these products, and we cannot assure you that the substantial sales and marketing efforts necessary to achieve commercial acceptance in traditionally long sales cycles will be successful. If the markets for these products do not develop or the products are not accepted by the market, our business, financial condition and results of operations would suffer.WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE A SUBSTITUTE SUPPLIERWe Depend On a Limited Number of Suppliers and for Some Items We Do Not Have a Substitute Supplier
We depend on a limited number of suppliers for components of our products, as well as for equipment used to
18
manufacture and test our products. Our products include several high-performance components for which reliable, high-volume suppliers are particularly limited. Furthermore, some key optical and electronic components we use in our optical transport systems are currently available only from sole or limited sources, and in some cases, that
solesource also isalsoa competitor.A worldwide shortage of some electrical components has caused an increase in the price of components.Any delay in component availability for any of our products could result in delays in deployment of these products and in our ability to recognize revenues. These delays could also harm our customerrelationships.relationships and our results of operations.Failures of components can affect customer confidence in our products and could adversely affect our financial performance and the reliability and performance of our products. On occasion, we have experienced delays in receipt of components and have received components that do not perform according to their specifications. Any future difficulty in obtaining sufficient and timely delivery of components could result in delays or reductions in product shipments which, in turn, could harm our business. A recent wave of consolidation among suppliers of these components, such as the recent
and pendingpurchases of E-TEK and SDLrespectively,by JDS Uniphase, could adversely impact the availability of components on which we depend. Delayed deliveries of key components from these sources could adversely affect our business.Any delays in component availability for any of our products or test equipment could result in delays in deployment of these products and in our ability to recognize revenue from them. These delays could also harm our customer relationships and our results of operations.
1415 WE RELY ON CONTRACT MANUFACTURERS FOR OUR PRODUCTSWe Rely On Contract Manufacturers For Our Products
We rely on a small number of contract manufacturers to manufacture our MultiWave CoreDirector and MetroDirector K2 product
linelines and some of the components for our other products. The qualification of these manufacturers is an expensive and time-consuming process, and these contract manufacturers build modules for other companies, includingforour competitors. In addition, we do not have contracts in place with many of these manufacturers. We may not be able to effectively manage our relationships with our manufacturers and we cannot be certain that they will be able to fill our orders in a timely manner. We provide forecasts of our demand to our contract manufacturers several months prior to scheduled delivery of products. If we overestimate our future product requirements, the contract manufacturers may have excess inventory, which would increase our costs. Conversely, if we underestimate our future product requirements the contract manufacturer may not have enough product to meet our customer requirements and it could result in delays in the shipment of our products and our ability to take revenue. If we cannot effectively manage these manufacturers and forecast future demand or if they fail to deliver components in a timely manner, it may have an adverse effect on our business and results ofoperations. SOME OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS Someoperations and financial results.Changes in our Customers’ Purchasing Plans May Increase The Unpredictability Of Our Results
Unanticipated changes in customer purchasing plans create unpredictability in our results. Although sales to the emerging carriers and to the larger service provider market have grown historically, this market is characterized by large and often sporadic purchases. Sales activity to emerging carriers, and to service providers generally, depend upon the stage of
our component supplierscompletion of expanding network infrastructures, the availability of funding, and the extent that service providers areboth primary sources for componentsaffected by regulatory andmajor competitorsbusiness conditions in themarket for system equipment. For example, we buy components from: - Alcatel; - Lucent Technologies; - NEC Corporation; - Nortel Networks; and - Siemens AG. Eachcountry ofthese companies offers optical communications systems and equipment that are competitive with our products. Also, Lucent is the sole source of two components and is one of two suppliers of two others. Recently, Lucent has announced that it intends to spin off a portion of its components business. Our supply of components from Lucent may be adversely affected by this restructuring. Alcatel and Nortel are suppliers of lasers used in our products, and NEC is a supplier of an important piece of testing equipment. A decline in reliability or other adverse change in these supply relationships could harm our business. SALES TO EMERGING CARRIERS MAY INCREASE THE UNPREDICTABILITY OF OUR RESULTSoperations. As we continue to address emerging carriers, timing and volume of purchasing from these carriers can also be more unpredictable due to factors such as their need to build a customer base, acquire rights of way and interconnections necessary to sell network service, and build out new capacity, all while working within their capital budget constraints. Sales to these carriers may increase the unpredictability of our financial results because even these emerging carriers purchase our products in multi-million dollar increments.Unanticipated changes in customer purchasing plans also create unpredictability in our results.A portion of our anticipated revenue over the next several quarters is comprised of orders of less than $25 million each from several customers, some of which may involve extended payment terms or other financing assistance. A decline or delay in sales orders could have a material adverse effect on our business, operating results, and financial condition.We are Exposed to the Credit Risk of Our
abilityCustomersWe continue to
recognize revenuemonitor increased credit exposures fromfinanced sales to emerging carriers will depend on the relative financial condition of the specific customer, among other factors. Further, we will need to evaluate the collectibility of receivables from these customers if theirweakened financial conditionsdeteriorate inand thefuture. Purchasing delaysimpact that these conditions may have on our current andchangespotential customers. Changes in the financial conditionor the amountofpurchases by any of theseour customers could have a material adverse effect on us. In the past we have had to make provisions for the accounts receivable from customers that experienced financial difficulty. If additional customers face similar financial difficulties, our receivables fromthesethose customers may become uncollectible, and we would have to write off the asset or decrease the value of the asset to the extent the receivable could not be collected. These write-downs or write-offswouldcould harm our business and have a material adverse effect on our operating results and financial condition.19
We continue to experience demand for customer financing. A portion of our future revenue may include loan financing, and leasing solutions. Our ability to recognize revenue from financed sales will depend on the relative financial condition of the specific customer, among other factors. Further, we will need to evaluate the collectibility of receivables from these customers if their financial conditions deteriorate in the future. Any change in the financial condition of customers that we provide financing to could harm our business and have a material adverse effect on our operating results and financial condition.
We May Not Be Able To Achieve The Benefits We Sought From The Acquisition with Cyras
We have limited experience with acquisitions and cannot be certain that we will achieve the benefits we envision from the recently completed acquisition with Cyras. The expected benefits of the Cyras acquisition depend on our ability to successfully complete the development of future releases of the MetroDirector K2 product and integrate it into our product portfolio, achieve market acceptance and revenue expectations for the MetroDirector K2 product, and achieve the expected synergies of the merger, including the successful integration and retention of personnel. Also, in the future we will incur non-cash charges in connection with the merger related to goodwill and other intangible amortization and amortization of deferred stock compensation.
The integration of Cyras involves a number of risks, including:
• difficulty assimilating Cyras’s operations and personnel; • diversion of management attention; • potential disruption of ongoing business; • inability to retain key personnel; • inability to maintain uniform standards, controls, procedures and policies; and • impairment of relationships with employees, customers or vendors. Failure to overcome these risks or any other problems encountered in connection with the integration of the Cyras personnel could have a material adverse effect on our business, results of operations and financial condition.
Our Prospects Depend On Demand Which We Cannot Reliably Predict Or Control
We may not anticipate changes in direction or magnitude of demand for our products. The product offerings of our competitors could adversely affect the demand for our products. In addition, unanticipated reductions in demand for our products could adversely affect us.
Demand for our products depends on our customers’ requirements. These requirements may vary significantly from quarter to quarter due to factors such as:
• the type and quantity of optical equipment needed by our customers; • the timing of the deployment of optical equipment by our customers; • the rate at which our current customers fund their network build-outs; and • the equipment configurations and network architectures our customers want. Customer determinations are subject to abrupt changes in response to their own competitive pressures, capital requirements and financial
performance. OUR ABILITY TO COMPETE COULD BE HARMED IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERSperformance expectations. These changes could harm our business.Some Of Our Suppliers Are Also Our Competitors
Some of our component suppliers are both primary sources for components and major competitors in the market for system equipment. For example, we buy components from:
20
• Alcatel; • Lucent Technologies; • NEC Corporation; • Nortel Networks; and • Siemens AG. Each of these companies offers optical communications systems and equipment that are competitive with our products. Alcatel and Nortel are suppliers of lasers used in our products, and NEC is a supplier of an important piece of testing equipment. A decline in reliability or other adverse change in these supply relationships could harm our business.
Our Ability To Compete Could Be Harmed If We Are Unable To Protect And Enforce Our Intellectual Property Rights Or If We Infringe On Intellectual Property Rights Of Others
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into non-disclosure and proprietary rights
1516agreements with our employees and consultants, and license agreements with our corporate partners, and control access to and distribution of our products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. We are involved in an intellectual property dispute regarding the use of our technology and may become involved with additional disputes in the future. Such lawsuits can be costly and may significantly divert time and attention from some members of our personnel.We have received, and may receive in the future, notices from holders of patents in the optical technology field that raise issues of possible infringement by our products. Questions of infringement in the optical networking equipment market often involve highly technical and subjective analysis. We cannot assure you that any of these patent holders or others will not in the future initiate legal proceedings against us, or that we will be successful in defending against these actions. We are involved in an intellectual property dispute regarding the possible infringement of our products. In the past, we have been forced to take a license from the owner of the infringed intellectual property, or to redesign or stop selling the product that includes the challenged intellectual property. If we are sued for infringement and are unsuccessful in defending the suit, we could be subject to significant damages, and our business and customer relationships could be adversely affected.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTSProduct Performance Problems Could Limit Our Sales Prospects
The production of new optical networking products and systems with high technology content involves occasional problems as the technology and manufacturing methods mature. If significant reliability, quality or network monitoring problems develop, including those due to faulty components, a number of negative effects on our business could result, including:
- costs associated with reworking our manufacturing processes; - high service and warranty expenses; - high inventory obsolescence expense: - high levels of product returns; - delays in collecting accounts receivable; - reduced orders from existing customers; and -
• costs associated with reworking our manufacturing processes; • high service and warranty expenses; • high inventory obsolescence expense: • high levels of product returns; • delays in collecting accounts receivable; • reduced orders from existing customers; and • declining interest from potential customers. 21
Although we maintain accruals for product warranties, actual costs could exceed these amounts. From time to time, there will be interruptions or delays in the activation of our products at a
customer'scustomer’s site. These interruptions or delays may result from product performance problems or from aspects of the installation and activation activities, some of which are outside our control. If we experience significant interruptions or delays that we can not promptly resolve, confidence in our products could be undermined, which could harm our business.OUR PROSPECTS DEPEND ON DEMAND WHICH WE CANNOT RELIABLY PREDICT OR CONTROLWe Face Risks Associated with our International Operations
We market, sell and service our products in the United States and internationally. We have established offices around the world, including in North America, Europe, Latin America and in the Asia Pacific region. We will continue to expand our international operations and enter new international markets. This expansion will require significant management attention and financial resources to develop successfully direct and indirect international sales and support channels. We may not
anticipate changes in directionbe able to maintain ormagnitude ofincrease international market demand for our products.The product offerings of our competitors could adversely affect the demand for our products. In addition, unanticipated reductions in demand for our products could adversely affect us. Demand for our products depends on our customers' requirements. These requirements may vary significantly from quarter to quarter due to factors such as: - the type and quantity of optical equipment needed by our customers; 1617 - the timing of the deployment of optical equipment by our customers; - the rate at which our current customers fund their network build-outs; and - the equipment configurations and network architectures our customers want. Customer determinationsInternational operations are subject to
abruptinherent risks and our future results could be materially adversely affected by a variety of uncontrollable and changing factors, including greater difficulty in accounts receivable collection and longer collection periods, difficulties and costs of staffing and managing foreign operations, the impact of recessions in economies outside the United States, unexpected changes inresponse to their own competitive pressures, capitalregulatory requirements, certification requirements, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences, political and economic instability, trade protection measures and other regulatory requirements; service provider and government spending patterns; and natural disasters. Such factors could have a material adverse impact on our operating results and financialperformance expectations. These changes could harm our business. Recently we have experienced an increased level of sales activity that could lead to an upsurge in demand that is reflected in the overall increase in demand for optical networking and similar products in the telecommunications industry.condition.Our
results may suffer if we are unable to address this demand adequately by successfully scaling up our manufacturing capacity and hiring additional qualified personnel.Success Largely Depends On Our Ability Todate we have largely depended on our own manufacturing and assembly facilities to meet customer expectations, but we cannot be sure that we can satisfy our customers' expectations in all cases by internal capabilities. In that case, we face the challenge of adequately managing customer expectations and finding alternative means of meeting them. If we fail to manage these expectations we could lose customers or receive smaller orders from customers. OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNELRetain Key PersonnelOur success has always depended in large part on our ability to attract and retain highly-skilled technical, managerial, sales and marketing personnel, particularly those skilled and experienced with optical communications equipment. Our key founders and employees, together with the key founders and employees of our acquired companies, have received a substantial number of our shares and vested options that can be sold at substantial gains. In many cases, these individuals could become financially independent through these sales before our future products have matured into commercially deliverable products. These circumstances may make it difficult to retain and motivate these key personnel.
As we have grown and matured,
competitors'competitors’ efforts to hire our employees have intensified, particularly among competitive start-up companies and other early stage companies. We have agreements in place with most of our employees that limit their ability to work for a competitor and prohibit them from soliciting our other employees and our customers following termination of their employment. Our employees and our competitors may not respect these agreements. We have in the past been required to enforce, and are currently in the process of enforcing, some of these agreements. We expect in the future to continue to be required to resort to legal actions to enforce these agreements and could incur substantial costs in doing so. We may not be successful in these legal actions, and we may not be able to retain all of our key employees or attract new personnel to add to or replace them. The loss of key personnel would likely harm our business.PART OF OUR STRATEGY INVOLVES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE SUCCESSFULPart Of Our Strategy Involves Pursuing Strategic Acquisitions and Investments That May Not Be Successful
As part of our strategy for growth, we will consider acquiring or making strategic investments in businesses that are intended to accelerate our product and service development processes and add complementary products and services. We may issue equity that would dilute our current shareholder’s percentage ownership or incur debt
to financeor assume indebtedness in connection with theseacquisitions andacquisitions. In addition, we may incur significant amortization expenses related to goodwill and other intangibleassets.assets or incur large and immediate write-offs. Acquisitions and strategic investments involve numerous risks, including difficulties in integrating the operations, technologies, and products of the acquired companies; diversion of management’s attention from our core business; potential difficulties in completing projects of the acquired company; the potential loss of key employees of the acquired company; and dependence on unfamiliar or relatively small supply partners. In addition acquisitions and strategic investments involve significant risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions and of obtaining insufficient revenues to offset increased expenses associated with acquisitions. Mergers and acquisitions of optical networking companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition.We must also manage any growth effectively. Failure to manage growth effectively and successfully integrate acquisitions we made could harm our business and operating results in a material way.
22
Significant Leverage and Debt Service Obligations May Adversely Affect Our Cash Flow and Our Ability to Repay or Repurchase the Notes
We have approximately $840 million of outstanding principal indebtedness, primarily related to notes offered by us and the assumption of notes from our Cyras acquisition. As a result of this indebtedness, we have significant principal and interest payment obligations. There is the possibility that we may be unable to generate sufficient cash to pay the principal of, interest on and other amounts due in respect of our indebtedness, including the notes, when due. We may also add equipment loans and lease lines to finance capital expenditures and may obtain additional long-term debt, working capital lines of credit and lease lines.
Our significant leverage could have important negative consequences, including:
• increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a substantial portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; • limiting our flexibility in planning for, our reacting to, changes in our business and the industry in which we compete; • placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources; and • making it difficult or impossible for us to pay the principal amount of the notes at maturity or the repurchase price of the notes upon a change of control, thereby causing an event of default under the indenture. Cyras Systems LLC, our wholly owned subsidiary, has $150 million of 4 1/2% convertible subordinated notes outstanding. In the event that the holders of the Cyras notes convert their notes into our common stock, we would have to issue a significant number of
operational risks, including risksshares of additional common stock. Based on the exchange ratio for the Cyras acquisition of approximately 0.13, we will have to issue approximately 1,037,055 shares of our common stock if holders of the entire $150 million of convertible notes decided to convert their notes. In the event that theacquired businessholders of the Cyras notes do not elect to convert them into our common stock before March 31, 2002, and if a “complying public equity offering” has not occurred on or before that date, we will have to make an offer to repurchase the notes at 118.942% of the principal balance of the notes on April 30, 2002. A “complying public equity offering” is a firm commitment underwritten public offering of the common stock of Cyras, in which Cyras raises at least $50 million in gross proceeds.The notes offered by us and the Cyras notes are not
be successfully integrated, may distract management attention and may involve unforeseen costsour only obligations. The indentures for our notes does not limit our ability, or that of our subsidiaries, to incur other indebtedness and liabilities.OUR STOCK PRICE MAY EXHIBIT VOLATILITYWe may have difficulty paying what we owe under the notes if we or our subsidiaries incur additional indebtedness or other liabilities.Our Stock Price May Exhibit Volatility
Our common stock price has experienced substantial volatility in the past, and is likely to remain volatile in the future. Volatility can arise as a result of the activities of short sellers and risk arbitrageurs, and may have little relationship to our financial results or prospects. Volatility can also result from any divergence between our actual or anticipated financial results and published expectations of analysts, and announcements that we, our competitors, or our customers may make.
Divergence between our actual results and our anticipated results, analyst estimates and public announcements by us, our competitors, or by customers will likely occur from time to time in the future, with resulting stock price volatility, irrespective of our overall year-to-year performance or long-term prospects. As long
1718as we continue to depend on a limited customer base, and particularly when a substantial majority of their purchases consist of newly-introduced products,like the MultiWave CoreStream, MultiWave CoreDirector and MultiWave Metro,there is substantial risk that our quarterly results will vary widely.FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS ITS MARKET PRICE Sales of substantial amounts of common stock by our officers, directors and other stockholders in the public, or the awareness that a large number of shares is available for sale, could adversely affect the market price of our common stock. In addition to the adverse effect a price decline would have on holders of our common stock, that decline would impede our ability to raise capital through the issuance of additional shares of common stock or other equity or convertible debt securities. Substantially all of the shares of our common stock currently outstanding are eligible for resale in the public market. Furthermore, we will issue approximately 27 million additional shares of common stock if our acquisition of Cyras is consummated, almost all of which will be freely tradeable. Although some of our officers and directors have agreed until May 7, 2001 they will not offer, sell, contract to sell or otherwise dispose of any shares of our common stock, Goldman, Sachs & Co. may, in its discretion, waive this lock-up at any time for any holder. RISKS RELATED TO THE CYRAS ACQUISITION THE ACQUISITION MAY NOT BE COMPLETED We currently expect to complete the acquisition of Cyras Systems, Inc. in the first calendar quarter of 2001, but because completion is subject to regulatory approvals and a shareholder vote of Cyras, the acquisition may be delayed or not completed at all. WE MAY NOT BE ABLE TO ACHIEVE THE BENEFITS WE SEEK FROM THE ACQUISITION OR TO INTEGRATE CYRAS SUCCESSFULLY INTO OUR OPERATIONS Even if the acquisition of Cyras is completed, we cannot be certain that we will achieve the benefits we envision from the acquisition. These benefits, including the accretion to our earnings we expect to achieve in the second half of fiscal 2002, depend on our ability to successfully complete the development of the Cyras K2 product and integrate it into our product portfolio, achieve market acceptance for the Cyras product, achieve our revenue expectations for the Cyras product and the expected synergies, and successfully integrate and retain Cyras personnel. Cyras's product is in the development phase and is not yet ready for commercial manufacturing or deployment, and we cannot assure you that the substantial efforts necessary to complete development of the product and achieve commercial acceptance will be successful. We have only limited experience in significant acquisitions and cannot assure you that this acquisition will be successful. The integration of Cyras into our operations following our merger with Cyras involves a number of risks, including: - difficulty assimilating Cyras's operations and personnel; - diversion of management attention; - potential disruption of ongoing business; - inability to retain key personnel; - inability to maintain uniform standards, controls, procedures and policies; and - impairment of relationships with employees, customers or vendors. Failure to overcome these risks or any other problems encountered in connection with the merger could have a material adverse effect on our business, results of operations and financial condition. 1819 SIGNIFICANT MERGER-RELATED CHARGES AGAINST EARNINGS WILL REDUCE OUR EARNINGS IN THE QUARTER IN WHICH WE CONSUMMATE THE MERGER AND DURING THE POST-MERGER INTEGRATION PERIOD If and when we complete the acquisition of Cyras, we will incur a charge for in-process research and development, which we currently estimate will be approximately $16.4 million. The actual charge we incur could be greater than this estimate, which could have a material adverse effect on our results of operations and financial condition. Also, in the future we will incur non-cash charges in connection with the merger related to goodwill and other intangible amortization and amortization of deferred stock compensation. Other merger-related costs will be capitalized as part of the acquisition's purchase price and amortized in future periods. We could also incur other additional unanticipated merger costs relating to our acquisition of Cyras. WE WILL INCUR SIGNIFICANT ADDITIONAL DEBT IN CONNECTION WITH THE MERGER Cyras has $150 million of 4 1/2% convertible subordinated notes outstanding. We will indirectly assume these notes at the effective date of the merger. This additional indebtedness could adversely affect CIENA in a number of ways, including: - limiting our ability to obtain necessary financing in the future; - limiting our flexibility to plan for, or react to, changes in our business; - requiring us to use a substantial portion of our cash flow from operations or utilize a significant portion of cash on hand to repay the debt when due in August 2005, or earlier if we are required to offer to repurchase the notes, as described below, rather than for other purposes, such as working capital or capital expenditures; - making us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and - making us more vulnerable to a downturn in our business. Additionally, in the event that the holders of the notes convert their notes into our common stock, we would have to issue a significant number of shares of additional common stock. For example, if our merger with Cyras had closed on December 28, 2000, when the estimated exchange ratio would have been approximately 0.13, we would have had to issue approximately 1,000,000 shares of our common stock if holders of the entire $150 million of convertible notes decided to convert their notes. In the event that the holders of the notes do not elect to convert them into our common stock before March 31, 2002, and if a "complying public equity offering" has not occurred on or before that date, we will have to make an offer to repurchase the notes at 118.942% of the principal balance of the notes on April 30, 2002. A "complying public equity offering" is defined as a firm commitment underwritten public offering of the common stock of Cyras, in which Cyras raises at least $50 million in gross proceeds. FOLLOWING THE COMPLETION OF OUR ACQUISITION OR CYRAS, A SIGNIFICANT NUMBER OF ADDITIONAL SHARES WILL BE ADDED TO OUR PUBLIC FLOAT We will issue approximately 27 million shares of our common stock as consideration in the Cyras acquisition. These shares represent 9.4% of our outstanding common stock as of January 31, 2001. Almost all of these shares will be freely tradable immediately following the closing of the acquisition which is currently expected to be in the first calendar quarter of 2001. Any sales of substantial numbers of shares of our common stock in the public market following the completion of the Cyras acquisition could adversely affect the market price of our common stock. 1920 FORWARD LOOKING STATEMENTS23
Forward Looking Statements
Some of the statements contained, or incorporated by reference, in this quarterly report discuss future expectations, contain projections of results of operations or financial condition or state other
"forward-looking"“forward-looking” information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The"forward-looking"“forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these so-called"forward-looking statements"“forward-looking statements” by words like"may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential"“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or"continue"“continue” or the negative of those words and other comparable words. You should be aware that those statements only reflect our predictions. Actual events or results may differ substantially. Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report.ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskThe following discussion about the
Company'sCompany’s market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes.INTEREST RATE SENSITIVITY.Interest Rate Sensitivity. The Company maintains a short-term and long-term investment
portfolio consisting mainly of corporate debt securities and U.S. government agency discount notes with an average maturity of less than six months.portfolio. Theseheld-to-maturityavailable-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels atJanuary 31,April 30, 2001, the fair value of the portfolio would decline by approximately$1.3$74.8 million.The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio. FOREIGN CURRENCY EXCHANGE RISK.Foreign Currency Exchange Risk. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the
Company'sCompany’s financial results. Historically theCompany'sCompany’s primary exposures have been related to non-dollar denominated operating expenses in Europe and Asia where the Company sells primarily in U.S. dollars. Theintroduction of the Euro as a common currency for members of the European Monetary Union began during the Company's fiscal year 1999. The foreign currency exposure resulting from the introduction of the Euro has been immaterial to the operating results of the Company. TheCompany is prepared to hedge against fluctuations inthe Euroforeign currency if this exposure becomes material. As ofJanuary 31,April 30, 2001, the assets and liabilities of the Company related to non-dollar denominated currencies was not material. Therefore we do not expect an increase or decrease of 10 percent in the foreign exchange rate would have a material impact on theCompany'sCompany’s financial position.PART II.
-– OTHER INFORMATIONITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsOn October 3, 2000, Stanford University and Litton Systems filed a complaint in U.S. District Court for the Central District of California alleging that optical fiber amplifiers incorporated into
CIENA'sCIENA’s products infringe U.S. Patent No. 4,859,016. Due to the early stage of this litigation, CIENA is unable to determine whether the litigation will have an adverse effect on the Company. The Company intends to defend this suit vigorously.On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned subsidiary of CIENA, filed a complaint in the United States District Court for the District of Delaware requesting damages and injunctive relief against Corvis Corporation. The complaint charges Corvis Corporation with infringing three patents relating to
CIENA'sCIENA’s optical networking communication systems and technology. On September 8, 2000, Corvis filed an Answer and Counterclaim alleging invalidity, non-infringement and unenforceability of the asserted patents, and tortious interference with prospective economic advantage. On February 7, 2001, CIENA and CIENA Properties, Inc. filed an amendment to the complaint to add two additional patents relating toCIENA'sCIENA’s optical networking communications systems and technology. On March 19, 2001, Corvis filed an Answer and Counter claim to the amended complaint alleging invalidity non-infringement and unenforceability of the newly asserted patents. The Company is in the discovery phase of the litigation and a trial date has been set for April 1, 2002. CIENA believes thatCorvisCorvis’ counterclaims are without merit, and intends to defend itself vigorously.2021 ITEMItem 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Registrant was held on March 12, 2001. At the annual meeting, the stockholders voted on the following matters:
24
Votes Votes Votes For Against Abstained Non-Votes Election of three Class 1 Directors Lawton W. Fitt 244,149,387 - - 621,400 Patrick H. Nettles, PH.D 244,191,803 - - 578,984 John R. Dillon 244,175,997 - - 594,790 The following directors continue to hold office after that meeting:
Stephen P. Bradley, Judith M. O’Brien, Gary B. Smith and
Gerald H.TaylorTo approve the CIENA Corporation Third Amended and Restated
1994 Stock Option Plan to increase the number of shares of
Common Stock authorized for issuance thereunder from 40.1
million shares to 46.1 million shares and to make certain other
changes, including eliminating the ability of the Board of
Directors to reprice options granted after January 17, 2001.148,433,106 46,062,012 371,818 49,903,851 To amend the Ciena Corporation Third Amended and Restated
1994 Stock Option Plan to add a provision that will increase the
number of shares reserved under the Plan by .75% of the issued
and outstanding Common Stock of the Corporation on the last
day of each fiscal year beginning with 2001 ending with 2004.151,929,262 42,518,216 419,458 49,903,851 To amend the Corporation’s Third Restated Certificate of
Incorporation to increase the number of shares of Common
Stock authorized for issuance thereunder from 460 million shares
to 980 million shares.211,111,604 33,394,640 264,543 - 25
Item 6.
EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K
(a) Exhibit Description ------- -----------4.63.7 Certificate of Amendment to Third Restated Certificate of Incorporation dated March 13, 2001 4.7 Indenture dated February 9,August 18, 2000 between Cyras Systems, Inc. and State Street Bank and Trust Company for 4.50% convertible subordinated notes due August 15, 20054.8 First Supplemental Indenture dated November 27, 2000 to the Indenture dated August 18, 2000 between Cyras Systems, Inc. and State Street Bank and Trust Company for 4.50% convertible subordinated notes due August 15, 2005 4.9 Second Supplemental Indenture dated November 28, 2000 to the Indenture dated August 18, 2000 between Cyras Systems, Inc. and State Street Bank and Trust Company for 4.50% convertible subordinated notes due August 15, 2005 4.10 Third Supplemental Indenture dated March 29, 2001 between Cyras Systems, Inc., CIENA Corporation and First Union NationalState Street Bank and Trust Company to the Indenture dated August 18, 2000 between Cyras Systems, Inc. and State Street Bank and Trust Company for3.75%4.50% convertible subordinated notes dueFebruary 1, 2008.August 15, 200510.24 Cyras Systems, Inc. 1998 Stock Plan as amended and form of Stock Option Agreement (b) ReportReports on Form 8-K: Form 8-K filed January 18, 2001April 2, 2001.212226
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: February 15, 2001 By: /s/ Patrick H. Nettles ----------------- ---------------------- Patrick H. Nettles, Ph.D. Chief Executive Officer, Chairman of the Board of Directors (Duly Authorized Officer) Date: February 15, 2001 By: /s/ Joseph R. Chinnici ----------------- ---------------------- Joseph R. Chinnici Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) 22
CIENA CORPORATION Date: May 17, 2001 By: /s/ Gary B. Smith
Gary B. Smith
President, Chief Executive Officer
and Director
(Duly Authorized Officer)Date: May 17, 2001 By: /s/ Joseph R. Chinnici
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)27