10Q pages 18-end:
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have a material adverse effect on the Company's business, financial condition
and results of operations. Further, as is the case with most manufacturing
companies, the Company has manufactured, and from time to time in the future
likely will manufacture finished products on the basis of non-binding customer
forecasts rather than actual purchase orders. However, in contrast to most
manufacturing companies, given the Company's dependence on very few customers,
and the relatively high cost of the Company's DWDM systems, the potentially
adverse financial consequences of mismatches between what is built and what is
actually ordered can be magnified. Long distance carriers may also encounter
delays in their build out of new routes or in their installation of new
equipment in existing routes, with the result that orders for the MultiWave
systems may be delayed or deferred. Any such delay with any major customer, as
well as any other delay or deferral of orders for MultiWave systems, and any
material mismatch between what is built and what is later ordered could result
in material fluctuations in the timing of orders and revenue, and could have
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success will also depend
in large part upon its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel, particularly those skilled and
experienced with optical communications equipment. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in retaining its existing key personnel and in attracting and
retaining the personnel it requires. There are also some indications that the
Company is beginning to exhaust the local market for skilled engineers, and will
have to expand this portion of its workforce through the establishment of
regional facilities, such as the research and development support center in
Atlanta, Georgia. This geographical broadening of the Company's product
development efforts will place strains on the management, coordination and
control of such efforts. Failure to attract and retain key personnel, and the
failure to coordinate their activities efficiently despite large geographic
distances between facilities, will have a material adverse effect on the
Company's business, financial condition and results of operations.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PIRELLI LITIGATION - CHRONOLOGICAL SEQUENCE OF LITIGATION. On
December 20, 1996, a U.S. affiliate of Pirelli SpA ("Pirelli") filed suit in
U.S. District Court in Delaware, alleging willful infringement by the Company of
five U.S. patents held by Pirelli. The lawsuit (the "First Pirelli Lawsuit")
seeks treble damages, attorneys' fees and costs, as well as preliminary and
permanent injunctive relief against the alleged infringement. On February 10,
1997, the Company filed its answer denying infringement, alleging inequitable
conduct on the part of Pirelli in the prosecution of certain of its patents, and
stating a counterclaim against the relevant Pirelli parties for a declaratory
judgment finding the Pirelli patents invalid and/or not infringed. Following the
filing of the Company's answer, Pirelli dedicated to the public and withdrew
from the lawsuit all infringement claims relating to one of the five patents. In
September 1997, Pirelli withdrew another patent from the suit, leaving three
patents at issue in the First Pirelli Lawsuit.
In February 1997, the Company filed a complaint against Pirelli with
the International Trade Commission ("ITC"), based on the Company's belief that a
32 channel DWDM system announced by Pirelli infringed at least two of the
Company's patents. The Company's complaint sought a ban on the importation by
Pirelli into the U.S. of any infringing 32 channel system. A formal
investigative proceeding was instituted by the ITC on April 3, 1997. On November
24, 1997, the parties settled the matter by entry of a Consent Order. Under the
Consent Order, Pirelli has agreed not to import into the United States WDM
components and or systems which infringe the Company's patented in fiber Bragg
gratings-based WDM systems.
On March 14, 1997, the Company filed suit against Pirelli in U.S.
District Court in the Eastern District of Virginia, alleging willful
infringement by Pirelli of three U.S. patents held or co-owned by the Company.
In September 1997, the Company withdrew one of the three patents from the suit.
The two patents which remained at issue related to certain of Pirelli's cable
television equipment, and to certain Pirelli fiberoptic communications equipment
announced by Pirelli in January 1997 as being deployed in a field trial in the
MCI network. As to the second of the two patents, on December 5, 1997, the court
issued an order granting partial summary judgment for Pirelli on the issue of
non-infringement, and denying Pirelli's motion for summary judgment of
invalidity of this patent. The court later amended its ruling to specifically
affirm the validity of this patent. The Company has elected to appeal the
partial summary judgment of non-infringement, and has agreed to dismiss its
other claims,
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with the right to reassert certain of them, pending the outcome of the appeal.
The appellate decision is not expected until late 1998 at the earliest.
RECENT DEVELOPMENTS IN LITIGATION. In the First Pirelli Lawsuit,
the so-called "Markman" hearing was conducted in September 1997. Markman
hearings are pre-trial proceedings typically required in patent infringement
litigation, and result in rulings by the trial judge on certain issues of
patent claim construction. These rulings then become the basis for later jury
determination of the infringement claims, and can be very influential in
determining the outcome of the litigation. The Delaware court's Markman ruling
in the First Pirelli Lawsuit was issued in November. The Company believes the
Markman ruling is generally favorable to the Company's position, and nothing in
the ruling, including the ruling as recently amended in response to Pirelli's
motion for reargument, has changed the Company's view that its MultiWave
systems do not infringe any valid claim of the three remaining Pirelli patents
and that certain of the Pirelli patents and/or claims are invalid.
The Company anticipated, and continues to anticipate, that as the
First Pirelli Lawsuit approaches trial, either or both parties might take
actions to amend or add to the patent infringement claims already pending.
On December 26, 1997, the Company received word that Pirelli filed
on December 23, 1997, a new complaint in U.S. District Court in Delaware,
alleging willful infringement by the Company of two additional U.S. patents held
by Pirelli (the "Second Pirelli Lawsuit"). Further, after the Court ruled in
early January 1998, that Pirelli's attempts to allege infringement against
products other than the MultiWave 1600 were not timely in the First Pirelli
Lawsuit, on January 14, 1998, Pirelli filed a third complaint in Delaware (the
"Third Pirelli Lawsuit"), alleging willful infringement of the same three
patents still at issue in the First Pirelli Lawsuit, but alleging the
infringement against unspecified other products of the Company. The Second
Pirelli Lawsuit and the Third Pirelli Lawsuit seek treble damages, attorneys'
fees and costs, as well as preliminary and permanent injunctive relief against
the alleged infringement.
On February 4, 1998, the Company filed its answer to the Third
Pirelli Lawsuit, denying infringement, and stating a counterclaim against the
relevant Pirelli parties for a declaratory judgment finding the Pirelli patents
invalid and/or not infringed.
On February 13, 1998, and based upon the Court's Markman ruling in
the First Pirelli Lawsuit, the Company filed a motion for summary judgment of
non-infringement on two of the three remaining patents in the First Pirelli
Lawsuit, and of invalidity on portions of the third. Pirelli filed a motion for
summary judgment of literal infringement of a single claim of the patent as to
which the Company has filed for summary judgment of invalidity. There is no
assurance that Pirelli's motion will not be granted, or that the Company's
motions will result in complete disposition of the First Pirelli Lawsuit. The
Company continues to plan on going to trial in all litigation.
On February 17, 1998, the Company filed its answer to the Second
Pirelli Lawsuit, denying infringement, alleging inequitable conduct on the part
of Pirelli in the prosecution of the two patents, and stating a counterclaim
against the relevant Pirelli parties for a declaratory judgment finding the
Pirelli patents invalid and/or not infringed.
Concurrent with the filing of its answer to the Second Pirelli
Lawsuit, the Company filed a motion to consolidate the First, Second and Third
Lawsuits for purposes of trial. If the motion is not granted, trial in First
Lawsuit, or perhaps a consolidation of the First and Third Lawsuits, will likely
commence in or around fall of 1998. If the motion to consolidate all three
lawsuits is granted, the start of trial may be delayed, although it is not
presently clear as to how long the delay might be.
The patent claims cited in the Second Pirelli Lawsuit had been
evaluated by the Company prior to the lawsuit, as had the patent claims cited in
the Third Pirelli Lawsuit. The Company continues to believe that its MultiWave
systems do not infringe any valid claims of any patents held by Pirelli. The
Company further believes certain of the Pirelli patents and/or claims are
invalid, and that certain of the patents were obtained through inequitable
conduct. The Company is defending itself vigorously, and is planning on the
litigation proceeding through trial. In light of the complexity and likely
time-consuming nature of the litigation, including the ITC proceeding, and the
Company's patent infringement lawsuit against Pirelli in the Eastern District of
Virginia, the Company recorded a charge of approximately $7.5 million in
estimated legal and related costs associated with these proceedings during
fiscal 1997. While the Company believes its estimate of legal and related costs
is
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adequate based on its current understanding of the overall facts and
circumstances, the estimate may be increased in future periods depending on the
course of the legal proceedings.
The Pirelli proceedings have been and will continue to be costly and
involve a substantial diversion of the time and attention of some members of
management. Further, the Company believes Pirelli and other competitors have
used the existence of the Delaware litigation to raise questions in customers'
and potential customers' minds as to the Company's ability to manufacture and
deliver MultiWave systems. There can be no assurance that such efforts by
Pirelli and others will not disrupt the Company's existing and prospective
customer relationships.
There can be no assurance that the Company will be successful in the
Pirelli litigation, and an adverse determination in the Delaware court, either
on a motion for summary judgment or in trial, could result from a finding of
infringement of only one claim of a single patent. The Company may settle the
litigation due to the costs and uncertainties associated with litigation in
general and patent infringement litigation in particular and due to the fact
that an adverse determination in the litigation could preclude the Company from
producing MultiWave systems until it were able to implement a non-infringing
alternative design to any portion of any system to which such a determination
applied. However, there can be no assurance that any settlement will be reached
by the parties. The Company is planning on all litigation proceeding through
trial. An adverse determination in, or settlement of, the Pirelli litigation
could involve the payment of significant amounts, or could include terms in
addition to such payments, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 2. CHANGE IN SECURITIES
On December 23, 1997 the Board of Directors of the Company adopted a
Stockholder Rights Plan. The Stockholders Rights Plan is designed to protect all
stockholders of the Company against hostile acquirers who may seek to take
advantage of the Company and its stockholders through coercive or unfair tactics
aimed at gaining control of the Company without paying all stockholders of the
Company a full and fair price. As part of this Plan, a special type of dividend
was declared on the Common Stock of the Company in the form of a distribution
rights to all stockholders of record on January 8, 1998.
The rights are not intended to prevent a fair and equitable takeover
of the Company and will not do so. However, the rights should discourage any
effort to acquire the Company in a manner or on terms not approved by the Board
of Directors. The distribution of the rights will not alter the financial
strength of the Company or interfere with its business plans. The distribution
will not change the way in which stockholders can currently trade the Company's
shares and will not be dilutive of affect reported per share results. While the
distribution of the rights was not taxable either to stockholders or to the
Company, stockholders may, depending on their individual circumstances,
recognize taxable income should the rights become exercisable. See Form 8-K
filed with the Securities and Exchange Commission on December 29, 1997 for
further information.
Also during the quarter ended January 31, 1998, the Company issued
an aggregate of 169,754 shares of Common Stock to the shareholders of Astracom
for the purchase of the Astracom business. These shares were not registered in
reliance on the exemption provided under Section 4(2) of the Securities Act of
1933, as amended, and Registration D promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description
11.0 Statement of Computation of Per Share Earnings - see Note 1
of Notes to Consolidated Financial Statements
27.0 Financial Data Schedule (filed only electronically with
the SEC)
(b) Reports on Form 8-K:
Form 8-K filed December 29, 1997, reporting on the adoption of a
Shareholders Rights Plan under Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
Date: February 19, 1998 By: /s/ Patrick H. Nettles
----------------- -----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: February 19, 1998 By: /s/ Joseph R. Chinnici
----------------- -----------------------
Joseph R. Chinnici
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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This schedule contains Summary Financial Information extracted from The Balance
Sheet, Statement of Operation and Statement of Cash Flows included in the
Company's Form 10-Q for the period ending January 31, 1998, and is qualified in
its entirety by reference to such financial statements.
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