1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 29, 2001
--------------
Date of Report (Date of earliest event reported)
CIENA Corporation
-----------------
(Exact name of registrant as specified in its charter)
Delaware 0-21969 23-2725311
(State or other jurisdiction of (Commission File No.) (IRS Employer Identification No.)
incorporation)
1201 Winterson Road, Linthicum, Maryland 21090
----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(410) 865-8500
--------------
Not applicable
--------------
(Former name or former address, if changed since last report)
Exhibit Index on Page 2
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 29, 2001, CIENA Corporation (the "Company" or "CIENA")
acquired Cyras Systems, Inc., a Delaware corporation ("Cyras"), by the statutory
merger (the "Merger") of a wholly-owned subsidiary of the Company, CO
Acquisition Corp., a Delaware corporation ("Sub"), with and into Cyras. The
Merger was accomplished pursuant to the Agreement and Plan of Merger dated as of
December 18, 2000, among the Company, Cyras and Sub (the "Merger Agreements").
The Merger occurred following the approval of the Merger Agreement by the
shareholders of Cyras and satisfaction of other closing conditions. As a result
of the Merger, the Company became the owner of 100% of the issued and
outstanding common stock of Cyras and each outstanding share of Cyras Common
stock (after conversion of Cyras's Preferred Stock, excluding Series E
Preferred, into Cyras Common Stock) was converted into 0.127673316 of a share of
the Company's Common Stock. Each outstanding share of Cyras Series E Preferred
Stock was converted into 0.394883567 of a share of the Company's Common Stock. A
total of approximately 27,882,000 shares of the Company's Common Stock will be
issued to former Cyras shareholders and option holders in exchange for the
acquisition by Sub of all outstanding Cyras capital stock. The offering of the
shares of the Company to Cyras shareholders was registered on Form S-4 on
Registration Statement No. 333-53146. Cyras stock options to purchase Cyras
Common Stock were assumed by the Company and remain outstanding as options to
purchase shares of the Company's Common Stock.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Audited Financial Statements
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 3
Balance Sheets.............................................. 4
Statements of Operations and Other Comprehensive Income..... 5
Statements of Stockholders' Deficit......................... 6
Statements of Cash Flows.................................... 7
Notes to Financial Statements............................... 8
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cyras Systems, Inc.:
We have audited the accompanying balance sheets of Cyras Systems, Inc. (the
Company), a development stage company, as of December 31, 1999 and 2000, and the
related statements of operations and other comprehensive income, stockholders'
deficit, and cash flows for the period from July 24, 1998 (inception) to
December 31, 1998, for the years ended December 31, 1999 and 2000 and for the
period from July 24, 1998 (inception) to December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1999 and 2000, and the results of its operations and its cash flows for the
period from July 24, 1998 (inception) to December 31, 1998, for the years ended
December 31, 1999 and 2000 and for the period from July 24, 1998 (inception) to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 12, 2001
(March 29, 2001 as to the second paragraph of Note 1)
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
------------------
1999 2000
------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $42,663 $ 42,672
Short-term investments.................................... 5,003 102,848
Inventories, net.......................................... -- 3,694
Prepaid expenses and other current assets................. 659 2,189
------- --------
Total current assets............................... 48,325 151,403
Property and equipment, net................................. 2,667 7,412
Deferred debt issuance costs................................ -- 7,750
Other assets................................................ 115 835
------- --------
Total assets....................................... $51,107 $167,400
======= ========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,410 $ 8,307
Accrued expenses.......................................... 443 13,819
Current portion of capital lease obligation............... 677 910
Current portion of term loan.............................. 810 952
------- --------
Total current liabilities.......................... 4,340 23,988
Convertible subordinated notes.............................. -- 156,393
Capital lease obligation, less current portion.............. 1,238 988
Term loan, less current portion............................. 1,596 644
------- --------
Total liabilities.................................. 7,174 182,013
------- --------
Commitments (Note 8)
Convertible preferred stock:
Series A, no par value; 7,200,000 shares authorized,
issued and outstanding as of December 31, 1999 and 2000;
aggregate liquidation preference of $300................ 300 300
Series B, no par value; 73,800,000 shares authorized;
70,143,996 shares issued and outstanding as of December
31, 1999 and 2000; aggregate liquidation preference of
$8,768.................................................. 9,011 9,011
Series C, no par value; 57,000,000 shares authorized;
52,646,118 shares issued and outstanding as of December
31, 1999 and 2000; aggregate liquidation preference of
$32,202................................................. 32,169 32,169
Series D, no par value; 13,200,000 shares authorized;
5,381,436 and 7,594,947 shares issued and outstanding as
of December 31, 1999 and 2000, respectively; aggregate
liquidation preference of $14,503 and $20,468 as of
December 31, 1999 and 2000, respectively................ 14,467 20,433
Series E, no par value; 1,500,000 shares authorized;
270,756 shares issued and outstanding as of December 31,
2000; aggregate liquidation preference of $5,000 as of
December 31, 2000....................................... -- 5,399
------- --------
Total convertible preferred stock.................. 55,947 67,312
------- --------
Stockholders' deficit:
Common stock, $0.0001 par value, 847,300,000 shares
authorized; 44,535,168 and 62,180,444 shares issued and
outstanding as of December 31, 1999 and 2000,
respectively............................................ 4 6
Additional paid-in capital................................ 1,483 134,989
Deferred stock compensation............................... (949) (86,809)
Notes receivable from stockholders........................ (99) (8,970)
Accumulated other comprehensive income.................... -- 230
Deficit accumulated during the development stage.......... (12,453) (121,371)
------- --------
Total stockholders' deficit........................ (12,014) (81,925)
------- --------
Total liabilities, convertible preferred stock and
stockholders' deficit............................. $51,107 $167,400
======= ========
See accompanying notes to financial statements.
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
JULY 24, 1998 JULY 24, 1998
(INCEPTION) TO YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000 2000
-------------- ------------ ------------ --------------
Operating expenses:
Research and development (exclusive of
non-cash compensation expense)....... $526 $ 9,345 $ 50,989 $ 60,860
Sales and marketing (exclusive of
non-cash compensation expense)....... 78 493 8,515 9,086
General and administrative (exclusive
of non-cash compensation expense).... 190 2,265 9,420 11,875
Amortization of deferred stock
compensation*........................ -- 59 34,989 35,048
---- ------- -------- --------
Total operating expenses.......... 794 12,162 103,913 116,869
Interest income............................. (69) (899) (5,743) (6,711)
Interest expense............................ -- 463 4,354 4,817
Interest expense -- accretion of redemption
premium................................... -- -- 6,393 6,393
---- ------- -------- --------
Loss before income tax expense.............. 725 11,726 108,917 121,368
Income tax expense.......................... 1 1 1 3
---- ------- -------- --------
Net loss.......................... $726 $11,727 $108,918 $121,371
---- ------- -------- --------
Other comprehensive income:
Unrealized gain on short-term
investments.......................... -- -- (230) (230)
---- ------- -------- --------
Comprehensive loss................ $726 $11,727 $108,688 $121,141
==== ======= ======== ========
*Amortization of deferred stock
compensation:
Research and development............... $ -- $ 50 $ 17,212 $ 17,262
Sales and marketing.................... -- 2 9,798 9,800
General and administrative............. -- 7 7,979 7,986
---- ------- -------- --------
$ -- $ 59 $ 34,989 $ 35,048
==== ======= ======== ========
See accompanying notes to financial statements.
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM JULY 24, 1998 (INCEPTION) TO DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE OTHER
------------------- PAID-IN STOCK FROM COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS INCOME DEFICIT
---------- ------ ---------- ------------ ------------ ------------- -----------
Issuance of restricted common stock
to founders on inception of the
Company........................... 22,320,000 $2 $ 46 $ -- $ (19) $ -- $ --
Repurchase of common stock.......... (720,000) -- (1) -- -- -- --
Net loss............................ -- -- -- -- -- -- (726)
---------- -- -------- --------- ------- ---- ---------
Balances as of December 31, 1998.... 21,600,000 2 45 -- (19) -- (726)
Issuance of common stock pursuant to
exercise of stock options......... 24,717,048 2 454 -- (80) -- --
Repurchase of common stock.......... (1,781,880) -- (24) -- -- -- --
Deferred stock compensation......... -- -- 1,008 (1,008) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- 59 -- -- --
Net loss............................ -- -- -- -- -- -- (11,727)
---------- -- -------- --------- ------- ---- ---------
Balances as of December 31, 1999.... 44,535,168 4 1,483 (949) (99) -- (12,453)
Issuance of common stock pursuant to
exercise of stock options......... 24,811,428 3 13,411 -- (9,596) -- --
Repurchase of common stock.......... (7,166,152) (1) (899) -- 725 -- --
Deferred stock compensation......... -- -- 120,849 (120,849) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- 34,989 -- -- --
Issuance of warrants for common
stock............................. -- -- 145 -- -- -- --
Other comprehensive income.......... -- -- -- -- -- 230 --
Net loss............................ -- -- -- -- -- -- (108,918)
---------- -- -------- --------- ------- ---- ---------
Balances as of December 31, 2000.... 62,180,444 $6 $134,989 $ (86,809) $(8,970) $230 $(121,371)
========== == ======== ========= ======= ==== =========
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
Issuance of restricted common stock
to founders on inception of the
Company........................... $ 29
Repurchase of common stock.......... (1)
Net loss............................ (726)
---------
Balances as of December 31, 1998.... (698)
Issuance of common stock pursuant to
exercise of stock options......... 376
Repurchase of common stock.......... (24)
Deferred stock compensation......... --
Amortization of deferred stock
compensation...................... 59
Net loss............................ (11,727)
---------
Balances as of December 31, 1999.... (12,014)
Issuance of common stock pursuant to
exercise of stock options......... 3,818
Repurchase of common stock.......... (175)
Deferred stock compensation......... --
Amortization of deferred stock
compensation...................... 34,989
Issuance of warrants for common
stock............................. 145
Other comprehensive income.......... 230
Net loss............................ (108,918)
---------
Balances as of December 31, 2000.... $ (81,925)
=========
See accompanying notes to financial statements.
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
JULY 24, 1998 JULY 24, 1998
(INCEPTION) TO YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000 2000
-------------- ------------ ------------ --------------
Cash flows from operating activities:
Net loss.............................................. $ (726) $(11,727) $(108,918) $(121,371)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 23 683 2,137 2,843
Loss on disposal of property and equipment.......... -- 48 -- 48
Provision for inventory valuation adjustment........ -- -- 4,816 4,816
Accrued loss on purchase commitments................ -- -- 5,748 5,748
Amortization of deferred stock compensation......... -- 59 34,989 35,048
Non-cash warrant expense............................ -- -- 145 145
Amortization of deferred debt issuance costs........ -- -- 625 625
Accretion of redemption premium (Note 6)............ -- -- 6,393 6,393
Amortization of discounts on term loans............. -- 47 47 94
Amortization of discounts on capital leases......... -- 47 47 94
Changes in operating assets and liabilities:
Inventory......................................... -- -- (8,510) (8,510)
Prepaid expenses and other current assets......... (371) (288) (1,121) (1,780)
Other assets...................................... -- (115) (720) (835)
Accounts payable.................................. 411 1,999 5,897 8,307
Accrued expenses.................................. 83 360 7,628 8,071
------- -------- --------- ---------
Net cash used in operating activities........... (580) (8,887) (50,797) (60,264)
------- -------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.................... (626) (578) (6,155) (7,359)
Proceeds from disposal of property and equipment...... -- 56 -- 56
Purchase of short-term investments.................... (3,976) (1,027) (97,615) (102,618)
------- -------- --------- ---------
Net cash used in investing activities........... (4,602) (1,549) (103,770) (109,921)
------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock Series A.... 300 -- -- 300
Proceeds from issuance of preferred stock Series B.... 8,731 -- -- 8,731
Proceeds from issuance of preferred stock Series C.... -- 32,169 -- 32,169
Proceeds from issuance of preferred stock Series D.... -- 14,467 5,966 20,433
Proceeds from issuance of preferred stock Series E.... -- -- 4,990 4,990
Issuance of common stock.............................. 29 376 3,818 4,223
Repurchase of common stock............................ (1) (24) (175) (200)
Proceeds from convertible subordinated notes.......... -- -- 141,625 141,625
Proceeds from term loans.............................. -- 3,000 -- 3,000
Repayment of term loans............................... -- (501) (857) (1,358)
Principal payments of capital leases.................. -- (265) (791) (1,056)
------- -------- --------- ---------
Net cash provided by financing activities....... 9,059 49,222 154,576 212,857
------- -------- --------- ---------
Net increase in cash and cash equivalents............... 3,877 38,786 9 42,672
Cash and cash equivalents at beginning of year/period... -- 3,877 42,663 --
------- -------- --------- ---------
Cash and cash equivalents at end of year/period......... $ 3,877 $ 42,663 $ 42,672 $ 42,672
======= ======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year/period:
Interest............................................ $ -- $ 417 $ 579 $ 996
======= ======== ========= =========
Income taxes........................................ $ 1 $ 1 $ 1 $ 3
======= ======== ========= =========
Noncash investing and financing activities:
Equipment purchases under capital lease............. $ -- $ 2,273 $ 727 $ 3,000
======= ======== ========= =========
Deferred stock compensation......................... $ -- $ 1,008 $ 120,849 $ 121,857
======= ======== ========= =========
Convertible preferred stock warrant issuance........ $ -- $ 280 $ 409 $ 689
======= ======== ========= =========
Issuance of common stock for stockholder notes
receivable........................................ $ 19 $ 80 $ 9,596 $ 9,695
======= ======== ========= =========
See accompanying notes to financial statements.
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) THE COMPANY
The Company designs, develops and markets next generation optical
networking solutions for telecommunications carriers. The Company was
incorporated on July 24, 1998, under the laws of the State of California and
commenced operations on that date. In November 2000, the Company reincorporated
in the State of Delaware. From July 24, 1998 through December 31, 2000, the
Company was considered to be in the development stage, principally engaged in
research and development, raising capital and building its management team.
On March 29, 2001, the Company merged with CIENA Corporation (CIENA) in a
transaction to be accounted for as a purchase by CIENA, as the acquiror. The
Company's stockholders, option holders and warrant holders received an aggregate
total of approximately 27,882,000 shares of CIENA common stock and shares
subject to options or warrants, as applicable, in the merger.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a purchased
maturity of 90 days or less to be cash equivalents.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale,"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company has classified its investment securities as
available-for-sale. Available-for-sale securities are carried at fair value,
which approximates amortized cost for debt securities. Gains and losses on the
sale of short-term investments are determined using the specific identification
method.
(b) INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. The Company records a provision for excess and
obsolete inventory whenever such an impairment has been identified. Inventories
as of December 31, 2000 consisted of raw materials.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment, generally three years. Equipment
recorded under capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the respective lease term or the
estimated useful life of the asset, generally one and a half years to three
years.
(d) LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the
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CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(e) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
(f) STOCK-BASED COMPENSATION
The Company uses the intrinsic value-based method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, to account for employee stock-based compensation. Accordingly,
compensation cost is recorded on the date of grant to the extent the fair value
of the underlying share of common stock exceeds the exercise price for a stock
option or the purchase price for a share of common stock. The compensation cost
is being amortized on an accelerated basis over the vesting period of the
individual award consistent with the method described in Financial Accounting
Standards Board (FASB) Interpretation No. 28. Pursuant to SFAS No. 123
Accounting for Stock-Based Compensation, the Company discloses the pro forma
effect of using the fair value method of accounting for employee stock-based
compensation arrangements.
Stock based awards granted to nonemployees are accounted for pursuant to
the fair value method in SFAS No. 123 and Issue No. 96-18 of the Emerging Issues
Task Force. The associated expense is recognized by the Company over the period
the services are performed by the nonemployee.
(g) STOCK SPLIT
In February 2000, the Company's stockholders approved a two-for-one common
and convertible preferred stock split effective March 16, 2000. In November
2000, the Company reincorporated in the State of Delaware. In connection with
the reincorporation, the Company split its common and convertible preferred
stock three-for-one. Accordingly, the accompanying financial statements have
been adjusted to give effect to the reincorporation and the February 2000 and
November 2000 stock splits.
(h) RESEARCH AND DEVELOPMENT COSTS
Development costs incurred in the research and development of new products
and enhancements to existing products are expensed as incurred until the product
has been completed, tested, and is ready for commercial manufacturing. Hardware
development projects are generally completed concurrent with the establishment
of commercial manufacturing and, accordingly, to date no costs have been
capitalized. Software development projects are generally completed concurrent
with the establishment of technological feasibility in the form of a working
model and, accordingly, to date no costs have been capitalized.
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10
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying value of the Company's financial instruments, consisting of
cash and cash equivalents, short-term investments and long-term debt
approximates fair market value. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents and short-term investments. The Company maintains the management of
the majority of its cash and cash equivalents and short-term investments with
three financial institutions. Investment of the funds by these institutions is
governed by the Company's corporate investment policy, which aims to reduce
credit risk by restricting investment to readily convertible high-grade U.S.
dollar denominated investments and spreading it amongst a number of
institutions.
(j) CONCENTRATION OF COMPONENTS
Certain key components used in the Company's products, including
transponders and application specific integrated circuits, are purchased from
single or limited sources. This concentration exposes the Company to risk of
manufacturing delays and the possibility of lost sales.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported results of
operations during the reporting period. Actual results could differ from those
estimates.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, Deferral of the Effective
Date of FASB Statement No. 133, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption of this statement has not had
a material effect on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The adoption of SAB No. 101
did not have a material impact on the Company's financial position and results
of operations as the Company has not had any revenue to date.
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. FIN No. 44 clarifies (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occur
after either December 15,
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11
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
1998, or January 12, 2000. The adoption of certain of the conclusions of FIN No.
44 covering events occurring during the period after December 15, 1998 or
January 12, 2000 did not have a material effect on the Company's financial
position and results of operations. The adoption of this statement did not have
a material effect on the Company's financial position or results of operations.
(n) RECLASSIFICATIONS
Pursuant to recent guidance from the staff of the Securities and Exchange
Commission, the Company has reclassified its convertible preferred stock to a
separate classification outside of stockholders' deficit.
(3) SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities:
DECEMBER 31,
------------------
1999 2000
------- --------
Money market funds....................................... $37,586 $ 42,614
Commercial paper......................................... 4,985 63,465
Municipal obligations.................................... 3,000 23,687
Corporate bonds.......................................... 2,003 10,552
Government agency bonds.................................. -- 5,080
------- --------
47,574 145,398
Less amounts classified as cash equivalents............ 42,571 42,550
------- --------
Securities available-for-sale....................... $ 5,003 $102,848
======= ========
As of December 31, 1999, the aggregate amortized cost of all
available-for-sale debt securities approximates the estimated fair value. As of
December 31, 2000, the Company recognized an unrealized gain of $230 which is
included in the comprehensive loss for the year ended December 31, 2000.
The contractual maturities of available-for-sale debt securities included
in short-term investments is as follows:
DECEMBER 31,
-----------------
1999 2000
------ --------
Due within one year....................................... $3,003 $100,248
Due in 2020 through 2035.................................. 2,000 2,600
------ --------
$5,003 $102,848
====== ========
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12
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
---------------
1999 2000
------ ------
Computer equipment.......................................... $1,523 $5,609
Software.................................................... 1,413 3,623
Furniture and fixtures...................................... 298 648
Leasehold improvements...................................... 22 258
------ ------
3,256 10,138
Less accumulated depreciation and amortization.............. 589 2,726
------ ------
$2,667 $7,412
====== ======
Certain property and equipment are recorded under capital leases that
aggregated $1,745, net of accumulated amortization of $528 as of December 31,
1999, and $1,410, net of accumulated amortization of $1,515 as of December 31,
2000.
(5) INCOME TAXES
The differences between the income tax expense computed at the federal
statutory rate and the Company's tax provision for all periods presented
primarily related to net operating losses for which no benefit has been taken.
Income tax expense for the years ended December 31, 1999 and 2000, relates to
state taxes. The types of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
------------------
1999 2000
------- --------
Deferred tax assets:
Accruals and reserves not deductible for tax........... $ 143 $ 6,004
Property and equipment................................. 14 --
Capitalized startup expenditures....................... 1,234 753
Net operating loss carryforward........................ 3,936 26,317
Stock compensation..................................... -- 15,014
Research and development credit carryforward........... 535 6,155
Other.................................................. -- 3,177
------- --------
5,862 57,420
Valuation allowance.................................... (5,862) (57,386)
------- --------
-- 34
Deferred tax liabilities -- property and equipment....... -- (34)
------- --------
$ -- $ --
======= ========
In light of the Company's history of operating losses, the Company has
provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized.
12
13
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) INCOME TAXES -- CONTINUED
The Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $9,200 and $61,200 as of December 31, 1999
and 2000, respectively. In addition, the Company had federal and state research
and development credit carryforwards as of December 31, 2000 of approximately
$3,779 and $2,376, respectively. The Company's federal net operating loss and
research and development credit carryforwards will expire in the years 2019 and
2020, respectively, if not utilized. The Company's state net operating loss
carryforwards will expire in the year 2006. The state research and development
credit can be carried forward indefinitely.
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Internal Revenue Code Section 382. If the
Company has an ownership change, the Company's ability to utilize the above
mentioned carryforwards could be significantly reduced. The Company has not yet
determined whether an ownership change has occurred.
(6) SUBORDINATED CONVERTIBLE NOTES
In August 2000, the Company 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. The notes will be
convertible to common stock upon certain qualifying events, including the
initial public offering (IPO) of our common stock. In the event of an IPO, the
notes are convertible to common stock at a premium to the IPO price. If an IPO
has not occurred on or before March 31, 2002, the Company will be obligated to
make an offer to repurchase the notes at 118.9% of the principal balance thereof
on April 30, 2002. The Company is accreting the redemption premium over the
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 $6,393 during the year ended December 31, 2000.
(7) LONG-TERM DEBT
On January 11, 1999, the Company entered into a loan facility agreement
with a financial institution. The agreement allows for term loans in the
aggregate principal amount of $3,000 and equipment loans in the aggregate
principal amount of $3,000. Borrowings under the agreement are repayable in 36
equal installments of principal plus interest commencing on the individual loan
inception dates, and each month thereafter, with a final balloon payment. The
loan facilities bear interest at an effective rate of approximately 14% per
annum, with the term loans secured by the assets of the Company and the
equipment loans secured by the equipment leased. As of December 31, 1999 and
2000, the balances of the term loans are $2,499 and $1,643, respectively. As of
December 31, 2000, principal payments due under the term loans in 2001 and 2002
are $976 and $667, respectively.
In conjunction with the loan facility agreement, the Company issued
warrants to purchase 3,600,000 shares of Series B convertible preferred stock at
a price of $0.13 per share. As of December 31, 2000, the lender had not
exercised the warrants. The fair value of the warrants was estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: no dividends; risk-free rate of 4.65%; volatility of 65% and
contractual life of seven years. The fair value of the warrants at the date of
grant was $280 and has been recorded as a discount on the term loans and capital
leases. The discount is being amortized as interest expense over the life of the
loans and capital leases. As of December 31, 2000, the current and long-term
portion of the unamortized discount on term loans was $23 and $23, respectively.
13
14
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) COMMITMENTS
The Company leases certain equipment and its facilities under various
noncancelable operating leases. In addition, the Company has certain capital
leases for computers and equipment per the loan facility agreement referred to
in Note 7. The leases expire between 2001 and 2013. As of December 31, 2000,
future minimum lease payments required under capital and operating leases are as
follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
2001....................................................... $1,134 $ 2,705
2002....................................................... 968 3,130
2003....................................................... 118 3,251
2004....................................................... -- 3,393
2005....................................................... -- 3,543
Thereafter................................................. -- 20,142
------ -------
Total future minimum lease payments.............. 2,220 $36,164
=======
Less amounts representing interest......................... 275
Less discount on capital leases due to warrants............ 47
------
1,898
Less current portion of capital lease obligations.......... 910
------
Capital lease obligation, less current portion............. $ 988
======
Rent expense was $12, $307 and $1,489 for the period from July 24, 1998
(inception) to December 31, 1998, and the years ended December 31, 1999 and
2000, respectively.
In October 2000, the Company entered into a 12-year lease for a new
commercial building, commencing on March 1, 2001. The base rent is $159 per
month and will be increased by 4% each year over the 12-year term. In connection
with the lease agreement, the Company issued warrants to purchase 25,000 shares
of Series E convertible preferred stock at an exercise price of $18.47 per
share. The fair value of the warrants at the date of grant was $151 and has been
recorded as prepaid rent and will be expensed over the term of the lease.
Additionally, the Company issued warrants to purchase 25,896 shares of Series E
convertible preferred stock at an exercise price of $0.01 per share. The fair
value of the warrants at the date of grant was $259 and has been recorded as
prepaid rent which will be expensed over the term of the lease. The fair value
of the warrants are estimated using the Black-Scholes option pricing model with
the following weighted-average assumptions: no dividend yield; volatility of
85%; risk-free interest rate of 6.31% and a contractual life of five years.
(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(a) COMMON STOCK
In connection with the formation of the Company in July 1998, the Company
issued 18,000,000 shares of restricted common stock to the four founders of the
Company at $0.002 per share. In August 1998, the Company repurchased 720,000
shares of common stock at the original purchase price. The founders purchased
the shares in part by issuing 10-year promissory notes to the Company amounting
to $19 which bear interest at 7% per annum. The notes are due and payable at the
earlier of August 2009 or upon leaving the Company, and are secured by the
common stock. In August 1998, the Company issued an additional 4,320,000 shares
of common stock to a director at $0.004 per share. The shares vest in
14
15
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
48 equal monthly installments commencing on April 15, 1998 (predated prior to
inception), or on the occurrence of a change of control event. Upon termination
of employment, the Company may repurchase all unvested shares at $0.002 and
$0.004 per share, respectively. As of December 31, 1999 and 2000, 12,600,000 and
7,200,000 shares were subject to repurchase, respectively.
The Company maintains a right of first refusal with respect to restricted
common stock. A restricted common stockholder must notify the Company prior to
selling these restricted shares to a third party. Upon notification, the Company
may purchase the restricted shares from the restricted common stockholder at the
price offered by the third party.
During the years ended December 31, 1999 and 2000, the Company received $80
and $9,596, respectively, in promissory notes from certain officers and
employees in exchange for common stock. The notes are repayable over a period of
five years and bear interest at 7% per annum. The notes are full recourse and
are secured by the underlying common stock.
(b) CONVERTIBLE PREFERRED STOCK
In September 1998, the Company issued 7,200,000 shares of Series A
convertible preferred stock at a price of $0.04 per share for cash proceeds of
$300.
In October 1998, the Company issued 70,143,996 shares of Series B
convertible preferred stock at a price of $0.13 per share for cash proceeds of
$8,731, net of issuance costs of $37.
In August and October 1999, the Company issued 52,646,118 shares of Series
C convertible preferred stock at a price of $0.61 per share for cash proceeds of
$32,169, net of issuance costs of $33.
In December 1999, the Company issued 5,381,436 shares of Series D
convertible preferred stock at a price of $2.70 for cash proceeds of $14,467,
net of issuance costs of $35.
In January, March and April 2000, the Company issued 2,213,511 shares of
Series D Convertible Preferred Stock at a price of $2.70 for cash proceeds of
$5,966.
In September 2000, the Company issued 270,756 shares of Series E
convertible preferred stock at a price of $18.47 for cash proceeds of $4,990,
net of issuance costs of $10.
The rights, preferences, and privileges of the holders of Series A, B, C, D
and E convertible preferred stock are as follows:
- Each share of preferred stock is convertible into one share of common
stock, subject to certain antidilutive adjustments, except that Series E
convertible preferred stock is convertible at the lower of the issue
price or 90% of a qualifying future initial public offering. Accordingly,
if such a qualifying initial public offering occurs, the Company will
recognize the beneficial conversion amount of approximately $556 as a
deemed dividend to the Series E stockholders.
- Shares of preferred stock automatically convert to common stock on the
earlier of consummation of an underwritten initial public offering in
which the aggregate proceeds are at least $20,000, or the date specified
by written consent or agreement of at least two-thirds of the respective
series shareholders.
- Holders of preferred stock are entitled to dividends in preference to
common shareholders at a rate of 8% of the original issue price per share
per annum, if and when declared by the Company's Board of Directors.
15
16
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
- Preferred stock votes equally with the shares of common stock on an
"as-if-converted" basis, but also has class voting rights as provided by
law and in the Articles of Incorporation.
- Holders of preferred stock have a liquidation preference of the original
purchase price per share, plus all declared but unpaid dividends.
(c) STOCK OPTION PLAN
The 1998 Stock Plan permits the Company to grant employees, outside
directors, and consultants qualified stock options, nonstatutory stock options
or stock purchase rights to purchase shares of the Company's common stock.
Options generally vest 25% with respect to the number granted upon the first
anniversary date of the option grant and the remainder vest in equal monthly
installments over the 36 months thereafter. Options are exercisable immediately.
Shares issued upon exercise of non-vested stock options are subject to the
Company's right to repurchase at the original exercise price. The Company's
repurchase right lapses in accordance with the vesting schedule for the stock
options. As of December 31, 1999 and 2000, 19,969,005 and 26,875,651 shares were
subject to repurchase at a weighted-average exercise price of $0.02 and $0.44,
respectively. As of December 31, 1999 and 2000, 20,407,578 and 9,940,614 shares
were available for future option grants.
A summary of the activity under the Company's option plan is as follows:
JULY 24, 1998
(INCEPTION) THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
---------------------------- ------------------------------ ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- ----------- ---------------- ----------- ----------------
Outstanding at beginning
of period............. -- $ -- 5,845,002 $0.01 7,057,254 $0.05
Granted................. 5,845,002 0.01 26,955,300 0.03 37,351,700 1.55
Exercised............... -- -- (24,717,048) 0.02 (24,811,428) 0.54
Forfeited............... -- -- (1,026,000) 0.02 (4,718,584) 0.59
--------- ----------- -----------
Outstanding at end of
period................ 5,845,002 $0.01 7,057,254 $0.05 14,878,942 $2.82
========= =========== ===========
Weighted-average fair
value of options
granted during the
period with exercise
prices equal to fair
value at date of
grant................. 5,845,002 0.01 22,455,300 0.01 -- --
Weighted-average fair
value of options
granted during the
period with exercise
prices less than fair
value at date of
grant................. -- -- 4,500,000 0.17 37,351,700 1.55
16
17
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
The following table summarizes information about such stock options
outstanding as of December 31, 2000:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PER SHARE
------------------------ ----------- ---------------- ----------------
$0.01 to $0.50 7,225,926 8.75 $0.28
$0.67 to $1.17 1,196,766 9.52 1.06
$6.00 6,456,250 9.76 6.00
---------- ---- -----
14,878,942 9.25 $2.82
========== ==== =====
The Company uses the intrinsic-value method in accounting for its
stock-based compensation arrangements for employees, whereby compensation cost
is recognized to the extent the fair value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. Deferred
stock compensation of $515 and $110,867 has been recorded during the years ended
December 31, 1999 and 2000, respectively, for the excess of the fair value of
the common stock underlying the options at the grant date over the exercise
price of the options. These amounts are being amortized on an accelerated basis
over the vesting period, generally four years, consistent with the method
described in FASB Interpretation No. 28. Amortization of deferred compensation
related to employee grants was $20 and $28,241 during the years ended December
31, 1999 and 2000, respectively.
Had compensation cost been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss would have been
changed to the amounts indicated below for the period from July 24, 1998
(inception) to December 31, 1998, and for the years ended December 31, 1999 and
2000:
1998 1999 2000
----- -------- ---------
Net loss:
As reported.................................. $(726) $(11,727) $(108,918)
Pro forma.................................... $(728) $(11,785) $(110,588)
The fair value of options granted to employees are estimated on the date of
grant using the minimum value method with the following weighted-average
assumptions: no dividend yield; risk-free interest rate of 4.82%, 5.69% and
6.31% in 1998, 1999 and 2000, respectively; and an expected life of three years.
Under the 1998 Stock Plan, the Company issued 445,002, 136,800 and 265,200
stock options to nonemployees in 1998, 1999 and 2000, respectively, in exchange
for consulting services rendered. These stock options were fully vested at the
date of grant. The aggregate estimated fair value of these shares and the
resulting expense based on the Black-Scholes option pricing model was not
material in 1998 and 1999, and $2,081 in 2000. In addition, the Company granted
960,000 and 645,000 options in 1999 and 2000, respectively, to nonemployees,
which vest ratably over 24 months as services are performed. Deferred stock
compensation of $493 and $7,901 has been recorded in 1999 and 2000,
respectively, for the fair value of these options. Amortization of deferred
stock compensation related to these nonemployee grants was $39 in 1999 and
$4,666 in 2000. The fair value of the options granted to nonemployees are
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions: no dividend yield; volatility of 65% in 1999 and
65% to 85% in 2000; risk-free interest rate of 5.69% and 6.31% in 1999 and
17
18
CYRAS SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT -- CONTINUED
2000, respectively; and a contractual life of 10 years. The fair value of the
unvested portion of these options is subject to adjustment based upon the future
value of the Company's common stock.
(d) WARRANTS
In addition to the warrants issued in connection with a borrowing
arrangement discussed in Note 7 and the facility lease discussed in Note 8, the
Company issued to a third party, in consideration for product promotion,
evaluation and feedback services to be performed, warrants to purchase 20,000
shares of common stock at an exercise price equal to the fair market value on
the effective date. The warrants became vested on December 31, 2000 and the fair
value of the warrants of $145 has been charged to sales and marketing expense.
The fair value of the warrants are estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions: no dividend
yield; volatility of 85%; risk-free interest rate of 6.31% and a contractual
life of five years.
(10) EMPLOYEE BENEFIT PLAN
During the year ended December 31, 1999, the Company adopted a 401(k) Plan.
The 401(k) Plan allows eligible employees to contribute up to 15% of their
compensation, subject to a statutory prescribed annual limit. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) Plan, none have been made as of
December 31, 2000.
(11) SEGMENT INFORMATION
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments, products and services, geographic
areas and major customers in annual and interim financial statements. The method
of determining what information to report is based on the way that management
organizes the operating segments within the enterprise for making operating
decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). From inception of the Company through
December 31, 2000, the Company has had one product line. The CEO reviews
financial information on an entity level basis for purposes of making operating
decisions and assessing financial performance. The entity level financial
information is the same as the information presented in the accompanying
statements of operations. Accordingly, the Company has determined that it is
engaged in a single operating segment.
(12) SUBSEQUENT EVENTS
On January 30, 2001, commercial paper with a face value of $5,300 which was
purchased by the Company as a short-term investment, matured and the issuer
defaulted on the obligation. The Company also owns additional commercial paper
from a subsidiary of the same issuer with a face value of $4,200 due February
20, 2001. The default represents an other than temporary decline in the fair
value of the investment, however, the issuer has publicly announced that it
intends to make their investors whole with respect to the obligations on which
they have defaulted. At this time, it is not clear whether the issuer has the
financial resources to make restitution on their defaulted obligations or meet
the payment obligations of future maturities of their commercial paper. The
Company will be required to adjust the carrying value to the fair value in the
first quarter 2001 and recognize an impairment loss estimated between $1,425 and
$1,900.
18
19
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data present the
effect of the merger between CIENA and Cyras to be accounted for as a purchase.
The unaudited pro forma combined balance sheet presents the combined financial
position of CIENA and Cyras as of January 31, 2001 assuming that the merger had
occurred as of that date. Such pro forma information is based upon the
historical consolidated balance sheet data of CIENA as of January 31, 2001, and
the historical balance sheet data of Cyras as of December 31, 2000. The
unaudited pro forma combined statement of operations for the year ended October
31, 2000 gives effect to the pending merger of CIENA and Cyras for the year
ended October 31, 2000, as if such acquisition had occurred on November 1, 1999.
This includes Cyras's combined historical results for the three months ended
December 31, 1999 and the nine months ended September 30, 2000 with CIENA's
historical consolidated results for the year ended October 31, 2000. The pro
forma quarter ended January 31, 2001 combined statement of operations includes
the consolidated statement of operations data from CIENA for the quarter ended
January 31, 2001 and the statement of operations data from Cyras for the three
months ended December 31, 2000.
The unaudited pro forma combined financial data are based on the estimates
and assumptions set forth in the notes to such statements, which are preliminary
and have been made solely for purposes of developing such pro forma information.
The unaudited pro forma combined financial data are not necessarily an
indication of the results that would have been achieved had the transaction been
consummated as of the dates indicated or that may be achieved in the future.
19
20
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JANUARY 31, 2001
(IN THOUSANDS)
HISTORICAL PRO FORMA
------------------------- ----------
CIENA CYRAS ADJUSTMENTS COMBINED
---------- --------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 176,725 $ 42,672 $ -- $ 219,397
Marketable debt securities............. 82,958 102,848 -- 185,806
Accounts receivable, net............... 250,996 -- -- 250,996
Inventories, net....................... 207,221 3,694 -- 210,915
Deferred income taxes.................. 166,273 -- 44,906A 211,179
Prepaid expenses and other............. 41,012 2,189 -- 43,201
---------- --------- ---------- ----------
Total current assets................ 925,185 151,403 44,906 1,121,494
Equipment, furniture and fixtures, net... 212,376 7,412 -- 219,788
Goodwill and other intangible assets,
net.................................... 8,851 -- 1,658,114A 1,666,965
Deferred debt issuance costs............. -- 7,750 (7,750) --
Other assets............................. 20,740 835 -- 21,575
---------- --------- ---------- ----------
Total assets........................... $1,167,152 $ 167,400 $1,695,270 $3,029,822
========== ========= ========== ==========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable....................... $ 82,477 $ 8,307 $ -- $ 90,784
Accrued liabilities.................... 90,412 13,819 46,500A 150,731
Income taxes payable................... 7,266 -- -- 7,266
Deferred revenue....................... 19,923 -- -- 19,923
Other current obligations.............. 1,082 1,862 -- 2,944
---------- --------- ---------- ----------
Total current liabilities........... 201,160 23,988 46,500 271,648
Convertible subordinated notes......... -- 156,393 -- 156,393
Deferred income taxes.................. 39,145 -- -- 39,145
Other long-term obligations............ 4,986 1,632 -- 6,618
---------- --------- ---------- ----------
Total liabilities................... 245,291 182,013 46,500 473,804
---------- --------- ---------- ----------
Commitments and contingencies............
Convertible Preferred stock.............. -- 67,312 (67,312)A --
Stockholders' equity:
Common stock........................... 2,881 6 246A 3,133
Additional paid-in capital............. 615,898 134,989 1,779,104A 2,529,991
Deferred stock compensation............ -- (86,809) (168,239)A,C (255,048)
Notes receivable from stockholders..... -- (8,970) -- (8,970)
Accumulated other comprehensive
income.............................. (810) 230 -- (580)
Retained earnings...................... 303,892 (121,371) 121,371A 303,892
(16,400)A,B (16,400)
---------- --------- ---------- ----------
Total stockholders' equity
(deficit)......................... 921,861 (81,925) 1,716,082 2,556,018
---------- --------- ---------- ----------
Total liabilities, convertible
preferred stock and stockholders'
equity (deficit).................. $1,167,152 $ 167,400 $1,695,270 $3,029,822
========== ========= ========== ==========
20
21
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
----------------------
CIENA CYRAS ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
Revenue...................................... $858,750 $ -- $ -- $ 858,750
Cost of goods sold........................... 477,393 -- -- 477,393
-------- -------- --------- ---------
Gross profit............................... 381,357 -- -- 381,357
-------- -------- --------- ---------
Operating expenses
Research and development................... 129,069 31,662 41,913C 202,644
Selling and marketing...................... 90,922 4,599 25,286C 120,807
General and administrative................. 34,000 5,122 17,817C 56,939
Settlement of accrued contact obligation... (8,538) -- -- (8,538)
Amortization of intangibles................ -- -- 238,854B 238,854
Amortization of deferred stock
compensation............................ -- 17,360 (17,360)C --
Provision for doubtful accounts............ 28,010 -- -- 28,010
-------- -------- --------- ---------
Total operating expenses..................... 273,463 58,743 306,510 638,716
-------- -------- --------- ---------
Income (loss) from operations................ 107,894 (58,743) (306,510) (257,359)
Interest and other income (expense), net..... 13,020 3,542 -- 16,562
Interest expense............................. (340) (1,738) -- (2,078)
Interest expense -- accretion of
redemption................................. -- (2,131) -- (2,131)
-------- -------- --------- ---------
Income (loss) before income taxes............ 120,574 (59,070) (306,510) (245,006)
Provision (benefit) for income taxes......... 39,187 1 (39,188)D --
-------- -------- --------- ---------
Net income (loss)............................ $ 81,387 $(59,071) $(267,322) $(245,006)
======== ======== ========= =========
Basic net income (loss) per common share..... $ 0.29 $ (2.85) $ (0.81)
======== ======== =========
Diluted net income (loss) per common and
dilutive potential common share............ $ 0.27 $ (2.85) $ (0.81)
======== ======== =========
Weighted average basic common shares
outstanding................................ 281,621 20,719 1,067A 303,407
======== ======== ========= =========
Weighted average basic common and dilutive
potential common shares outstanding........ 299,662 20,719 (16,974)A 303,407
======== ======== ========= =========
21
22
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
QUARTER ENDED JANUARY 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
---------------------
CIENA CYRAS ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
Revenue..................................... $351,989 $ -- $ -- $ 351,989
Cost of goods sold.......................... 191,837 -- -- 191,837
-------- ------- -------- ---------
Gross profit.............................. 160,152 -- -- 160,152
-------- ------- -------- ---------
Operating expenses
Research and development.................. 43,511 23,070 10,478C 77,059
Selling and marketing..................... 29,636 4,094 6,322C 40,052
General and administrative................ 11,145 5,296 4,454C 20,895
Settlement of accrued contact
obligation............................. -- -- -- --
Purchased research and development........ -- -- -- --
Amortization of intangibles............... -- -- 59,714B 59,714
Amortization of deferred stock
compensation........................... -- 17,688 (17,688)C --
Provision for doubtful accounts........... -- -- -- --
-------- ------- -------- ---------
Total operating expenses.................... 84,292 50,148 63,280 197,720
-------- ------- -------- ---------
Income (loss) from operations............... 75,860 (50,148) (63,280) (37,568)
Interest and other income (expense), net.... 4,296 2,682 -- 6,978
Interest expense............................ (87) (2,783) -- (2,870)
Interest expense -- accretion of
redemption................................ -- (4,262) -- (4,262)
-------- ------- -------- ---------
Income (loss) before income taxes........... 80,069 (54,511) (63,280) (37,722)
Provision (benefit) for income taxes........ 26,823 1 (19,457)D 7,367
-------- ------- -------- ---------
Net income (loss)........................... $ 53,246 $(54,512) $(43,823) $ (45,089)
======== ======= ======== =========
Basic net income (loss) per common share.... $ 0.19 $ (1.77) $ (0.15)
======== ======= =========
Diluted net income (loss) per common and
dilutive potential common share........... $ 0.18 $ (1.77) $ (0.15)
======== ======= =========
Weighted average basic common shares
outstanding............................... 287,001 30,856 (9,070)A 308,787
======== ======= ======== =========
Weighted average basic common and dilutive
potential common shares outstanding....... 300,956 30,856 (23,025)A 308,787
======== ======= ======== =========
22
23
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
NOTE 1 -- BASIS OF PRESENTATION
On December 18, 2000, CIENA Corporation ("CIENA") entered into an agreement
to merge with Cyras Systems, Inc. ("Cyras") in a transaction to be accounted for
as a purchase. Cyras's stockholders, option holders and warrant holders will
receive an aggregate total of 27,564,527 shares of CIENA common stock and shares
subject to options or warrants, as applicable, in the merger. Assuming the
acquisition was consummated on December 27, 2000, the stockholders of Cyras
would have received approximately 25,167,016 shares of CIENA common stock of
which an estimated 3,380,534 are restricted and subject to repurchase.
Additionally, CIENA would have converted approximately 19,047,138 Cyras options
and warrants into approximately 2,397,511 options and warrants to purchase CIENA
common stock. Assuming the acquisition was consummated on December 27, 2000, the
purchase price of the Cyras acquisition would have been approximately $1.9
billion including the estimated value of the CIENA shares and the estimated
value of restricted common stock, vested and unvested options and warrants
issuable upon consummation of the acquisition and estimated transaction costs of
$46.5 million. These estimates are preliminary and the actual number of shares,
stock options and warrants to purchase shares will depend on the actual number
outstanding as of the date of consummation of the merger.
The estimated value of the CIENA common stock is approximately $78.80 per
share based on the average closing price of CIENA's common stock for the
five-day period including the date of the announcement of the signing of the
merger agreement and the two days preceding and succeeding such date.
The purchase consideration is estimated as follows (in millions):
Common stock................................................ $1,717.0
Assumption of Cyras options less intrinsic value of unvested
options and restricted common stock....................... 151.0
Estimated transaction expenses.............................. 46.5
--------
$1,914.5
========
The preliminary allocation of the purchase price using balances as of
January 31, 2001 is summarized below (in thousands):
Tangible assets............................................. $ 168,620
Deferred tax asset.......................................... 44,906
Developed technology........................................ 168,600
In-process research and development......................... 16,400
Workforce................................................... 10,400
Goodwill.................................................... 1,479,114
Deferred stock compensation................................. 255,048
Acquisition costs........................................... (46,500)
Other assumed liabilities................................... (25,620)
Convertible subordinated notes.............................. (156,393)
----------
Total purchase price.............................. $1,914,575
==========
The actual purchase price allocation is also dependent upon the fair values
of the acquired assets and assumed liabilities as of the acquisition date and
the finalization of the preliminary valuation report. For pro forma purposes the
convertible subordinated notes have been reflected at Cyras's December 31, 2000
carrying value, pending a determination of their estimated fair value. The $16.4
million amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future
23
24
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA -- (CONTINUED)
use. Based on preliminary assessments, the value of these projects was
determined by estimating the resulting net cash flows from the sale of the
products resulting from the completion of the projects, reduced by the portion
of the revenue attributable to developed technology and the percentage of
completion of the project. The resulting cash flows were then discounted back to
their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.
The amounts allocated to in-process research and development will be
charged to the statements of operations in the period the acquisition is
consummated.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
A To reflect acquisition of Cyras based on the preliminary purchase
price allocation described in Note 1.
B To reflect amortization of developed technology, goodwill and
workforce over their estimated useful lives of seven, seven and three
years respectively, as if the acquisition occurred on November 1,
1999. The $16.4 million amount allocated to in-process research and
development has not been included in the unaudited pro forma combined
statement of operations as it is nonrecurring, but is included in the
unaudited pro forma combined balance sheet. This amount will be
expensed in the period the acquisition is consummated.
C To eliminate historical deferred stock compensation and related
amortization charges for Cyras stock option grants and record
deferred stock compensation in accordance with FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation -- an
interpretation of APB 25," related to Cyras unvested stock options
and restricted common stock assuming a consummation date of December
27, 2000.
D To record pro forma combined provision for income taxes at a rate of
33.5% of income before taxes adjusted for permanent differences
including amortization of intangible assets.
24
25
(c) Exhibits
23.1 Consent of Deloitte & Touche LLP
99.1 Press Release, issued March 29, 2001
(announcing completion of the merger)
25
26
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: March 29, 2001 By: /s/ MICHAEL O. MCCARTHY
-------------------------------
Michael O. McCarthy, III
Senior Vice President, General Counsel
and Secretary
26