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Filed pursuant to Rule 424(b)(4)
Registration No. 333-53922
[CIENA LOGO]
$600,000,000
CIENA CORPORATION
3.75% Convertible Notes due February 1, 2008
You may convert the notes into shares of CIENA Corporation's common stock at
any time before their maturity or their prior redemption or repurchase by CIENA.
The notes will mature on February 1, 2008. The conversion rate is 9.5808 shares
per each $1,000 principal amount of notes, subject to adjustment in some
circumstances. This is equivalent to a conversion price of approximately $104.38
per share. On February 5, 2001, the last reported sale price for CIENA's common
stock on the Nasdaq National Market was $84.50 per share. The common stock is
quoted on the Nasdaq National Market under the symbol "CIEN".
CIENA will pay interest on the notes on February 1 and August 1 of each
year. The first interest payment will be made on August 1, 2001. The notes will
be issued only in denominations of $1,000 and integral multiples of $1,000.
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 redemption prices set forth in this prospectus. You have the
option, subject to certain conditions, to require CIENA to repurchase any notes
held by you in the event of a "change in control", as described in this
prospectus, at a price equal to 100% of the principal amount of the notes plus
accrued interest to the date of repurchase.
Concurrently with this offering, CIENA is also conducting a separate public
offering of 11,000,000 shares of its common stock by a separate prospectus.
Neither the completion of the common stock offering nor the completion of this
convertible debt offering is contingent upon the other.
See "Risk Factors" beginning on page 8 in this prospectus to read about
certain factors you should consider before buying the notes.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Per Note Total
-------- -----
Initial public offering price................... 100.0% $600,000,000
Underwriting discount........................... 3.0% $ 18,000,000
Proceeds, before expenses, to CIENA............. 97.0% $582,000,000
The offering prices set forth above do not include accrued interest, if any.
Interest on the notes will accrue from the date of original issuance of the
notes, expected to be February 9, 2001.
To the extent the underwriters sell more than $600,000,000 of notes at the
initial public offering price, the underwriters have the option to purchase up
to an additional $90,000,000 of notes from CIENA at the initial offering price
less the underwriting discount.
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The underwriters expect to deliver the notes in book-entry form only through
the facilities of the Depository Trust Company in New York, New York on February
9, 2001.
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
ROBERTSON STEPHENS
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Prospectus dated February 5, 2001.
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying notes
incorporated by reference in this prospectus.
CIENA CORPORATION
We are an established leader in the rapidly growing intelligent optical
networking equipment market. We offer a comprehensive portfolio of products for
communications service providers worldwide, including long-distance and
metropolitan optical transport, intelligent optical core switching and network
management solutions. Our customers include long-distance carriers, competitive
and incumbent local exchange carriers, Internet service providers and wholesale
carriers. We have pursued a strategy to develop and leverage the power of our
technologies to change the fundamental economics of building carrier-class tele-
and data-communications networks, thereby providing our customers with a
competitive advantage. Our intelligent optical networking products are designed
to enable carriers to deliver any time, any size, any priority bandwidth to
their customers. Our optical networking products add intelligence to the
network, enabling communications service providers to optimize network capacity
and to offer a new range of services on demand at a substantially lower cost
than traditional products. Furthermore, our products allow service providers to
optimize their investments in fiber-optic infrastructure while positioning them
to easily transition to next-generation optical network architectures.
Rapidly increasing use of the Internet and Internet-based applications and
services has fueled dramatic growth in the volume of data traffic in the public
communications network. In response, communications service providers are making
significant investments to upgrade their network infrastructure by laying
fiber-optic cable and installing transmission equipment based on optical
technology. While advances in optical technology have enabled carriers to expand
network capacity, they continue to face critical challenges including network
scalability, escalating capital and operational costs and network management
difficulties.
We provide a comprehensive portfolio of optical networking solutions that
address these challenges by optimizing bandwidth in critical areas of service
provider networks: long-distance and metropolitan optical transport, intelligent
optical core switching and network management. Our solutions provide our
customers with the following benefits:
- greater bandwidth capacity;
- simplified and more scalable networks;
- enhanced network manageability;
- lower capital and operational costs;
- ability to provision high-bandwidth services rapidly and flexibly; and
- ability to offer new revenue-generating services.
We have shipped products to over 35 customers, including 27 new customers
since the end of fiscal 1998. Our customers include:
- Bell South;
- Broadwing;
- Cable & Wireless (U.S. & U.K.);
- CrossWave Communications;
- Enron;
- GTS (now known as eBone);
- MobilCom AG;
- PSINet;
- Qwest;
- Sprint;
- Telecom Developpement;
- Telia AB;
- Verizon;
- WorldCom (U.S. & Europe); and
- XO Communications.
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Our strategy is to maintain and build upon our market leadership in the
development and deployment of intelligent optical networking systems and to
leverage our bandwidth-optimizing technologies to provide solutions for both
voice and data communications-based networks. Important elements of our strategy
are to:
- expand our base of customers using our intelligent optical networking
solutions;
- increase sales and marketing efforts;
- continue to emphasize technical support and customer service;
- maintain world class manufacturing capability; and
- leverage bandwidth-optimizing technology and know-how.
Our revenue and net income for the fiscal year ended October 31, 2000 were
$858.8 million and $81.4 million, respectively. Of our revenue for this period,
33.0% was derived from international sales. We recorded revenue for the fiscal
year ended October 31, 2000 from sales to 32 customers, including 12 new
customers.
We were incorporated in Delaware in 1992. Our principal executive offices
are located at 1201 Winterson Road, Linthicum, Maryland 21090. Our telephone
number is (410) 865-8500.
RATIO OF EARNINGS TO FIXED CHARGES
We present below the ratio of our earnings to our fixed charges for each of
the fiscal years ended October 31, 1996, 1997, 1998, 1999 and 2000:
YEARS ENDED OCTOBER 31,
-----------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ----- ------
Ratio of earnings to fixed charges..................... 33.8x 153.1x 36.2x -- 25.9x
====== ====== ====== ===== ======
These computations include CIENA and its consolidated subsidiaries. For
these ratios "earnings" represents income (loss) before taxes plus fixed
charges. "Fixed charges" consists of interest on all indebtedness and interest
expense under operating leases deemed by us to be representative of the interest
factor. Due to the loss before income taxes in the year ended October 31, 1999,
the ratio coverage was less than 1:1. CIENA must have generated additional
earnings of $5,991,000 to achieve a coverage ratio of 1:1 for the year ended
October 31, 1999.
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THE OFFERING
Securities offered......... $600.0 million aggregate principal amount of 3.75%
Convertible Notes due February 1, 2008 ($690.0
million if the underwriters exercise their
overallotment option).
Offering price............. 100% of the principal amount of the notes, plus
accrued interest, if any, from February 9, 2001.
Interest................... We will pay interest on the notes semi-annually on
February 1 and August 1 of each year, commencing
August 1, 2001.
Conversion................. You may convert your notes into shares of our
common stock at a conversion rate of 9.5808 shares
of common stock per $1,000 principal amount of
notes. This is equivalent to a conversion price of
approximately $104.38 per share. The conversion
rate is subject to adjustment in certain events.
The notes will be convertible at any time before
the close of business on the maturity date, unless
we have previously redeemed or repurchased the
notes. You may convert your notes called for
redemption or submitted for repurchase up to and
including the business day immediately preceding
the date fixed for redemption or repurchase, as the
case may be.
Global note; Book-entry
system................... We will issue the notes only in fully registered
form with interest coupons and in minimum
denominations of $1,000. The notes will be
evidenced by one or more global notes deposited
with the trustee for the notes, as custodian for
DTC. Beneficial interests in the global note will
be shown on, and transfers of those beneficial
interests can only be made through, records
maintained by DTC and its participants.
Optional redemption by
CIENA.................... On or after the third business day after February
1, 2004, we have the right, at any time, to redeem
some or all of your notes at the redemption prices
set forth in this prospectus plus accrued and
unpaid interest.
Repurchase at the option of
the holders upon a change
in control............... In the event of a change in control, as that term
is defined in "Description of the
Notes -- Repurchase at Option of Holders Upon a
Change in Control", you will have the right,
subject to conditions and restrictions, to require
us to repurchase some or all of your notes at a
price equal to 100% of the principal amount, plus
accrued and unpaid interest to the repurchase date.
The repurchase price is payable in cash or, at our
option and subject to certain conditions, in shares
of our common stock, valued at 95% of the average
closing sales prices of the common stock for the
five trading days preceding and including the third
trading day prior to the repurchase date.
Use of proceeds............ We will use the net proceeds from the offering for
general corporate purposes, which may include
working capital, capital expenditures and
acquisitions. We have not determined the amount we
plan to spend on any of the uses described above or
the timing of these expenditures. Pending our use
of the net
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proceeds, we intend to invest them in short-term
interest-bearing, investment grade securities.
Events of default.......... The following will be events of default under the
indenture for the notes:
- we fail to pay principal of, or any premium on,
any note when due, whether or not the payment is
prohibited by the subordination provisions of the
indenture;
- we fail to pay any interest on any note when due
and that default continues for 30 days;
- we fail to provide the notice that we are
required to give in the event of a change in
control;
- we fail to perform any other covenant in the
indenture and that failure continues for 60 days
after written notice to us by the trustee or the
holders of at least 25% in aggregate principal
amount of outstanding notes;
- we or any of our significant subsidiaries fail to
pay when due at final maturity thereof, either at
its maturity or upon acceleration, any
indebtedness under any bonds, debentures, notes
or other evidences of indebtedness for money
borrowed, or any guarantee thereof, in excess of
$25 million if the indebtedness is not
discharged, or the acceleration is not annulled,
within 30 days after written notice to us by the
trustee or the holders of at least 25% in
aggregate principal amount of the outstanding
notes; and
- events of bankruptcy, insolvency or
reorganization with respect to us or any of our
significant subsidiaries specified in the
indenture.
Listing of notes........... The notes will not be listed on any securities
exchange or quoted on the Nasdaq National Market.
Our common stock is quoted on the Nasdaq National
Market under the symbol "CIEN".
Governing law.............. The indenture and the notes will be governed by the
laws of the State of New York.
CONCURRENT COMMON STOCK OFFERING
Concurrent with this offering of convertible notes, CIENA is conducting a
separate public offering of 11,000,000 shares of its common stock by a separate
prospectus. Neither the completion of the common stock offering nor the
completion of this convertible debt offering is contingent upon the other.
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RECENT DEVELOPMENTS
PROPOSED ACQUISITION OF CYRAS SYSTEMS, INC.
On December 19, 2000, we announced an agreement to acquire all of the
outstanding capital stock, options and warrants of Cyras Systems, Inc., a
privately held provider of next-generation optical networking systems based in
Fremont, California. As consideration in the acquisition, we agreed to issue a
total of approximately 27 million shares of our 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 the
development phase and is not yet 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.
This consolidation results in the increased cost effectiveness, network
optimization and scalability that are demanded in today's increasingly
data-oriented carrier environment. We believe that the addition of the K2
product to our portfolio will increase our market opportunity by leveraging this
leading-edge product for the metropolitan network with our CoreDirector(TM) and
long-haul optical transport presence, extensive sales force and global services
and support infrastructure. These capabilities will enable us to offer carriers
seamless end-to-end service creation and management with unmatched scalability,
agility and efficiency using our LightWorks architecture for smart bandwidth
provisioning and network-wide service management.
We will account for the Cyras acquisition as a purchase. We expect to
complete the acquisition in the first calendar quarter of 2001. If and when we
complete the acquisition of Cyras, we will record a charge for acquired
in-process research and development, which we currently estimate will be
approximately $16.4 million, and will amortize goodwill and other intangibles of
approximately $1.6 billion over a three- to seven-year period and deferred stock
compensation of approximately $255 million over the relevant vesting periods. We
expect the Cyras acquisition to be dilutive to our fiscal 2001 earnings by $0.19
to $0.22 per share and, excluding one-time charges associated with the
acquisition and amortization of intangibles and deferred stock compensation,
accretive during the latter half of our fiscal 2002, assuming expected revenue
and cost synergies as well as anticipated product cost and pricing.
For the nine months ended September 30, 2000, Cyras recorded no revenues,
incurred operating expenses of $53.8 million and had a net loss of $54.4
million. Additional audited and unaudited financial information of Cyras, and
unaudited pro forma combined financial statements showing the pro forma effect
of the acquisition on our historical financial statements, are incorporated in
this prospectus by reference to our Form 8-K report filed on January 18, 2001.
The Cyras acquisition is subject to customary closing conditions, including
regulatory approvals. See "Risk Factors -- Risks Related to the Cyras
Acquisition".
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RISK FACTORS
Investing in our securities involves a high degree of risk. Before making
an investment decision, you should carefully consider the risk factors set forth
below as well as other information we include or incorporate by reference in
this prospectus and the additional information in the other reports we file with
the SEC. The risks and uncertainties we have described are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also affect us.
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;
- 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 target 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 and its commitment to purchase.
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
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CoreDirector 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 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 could harm our
competitive position and financial condition. Several of our new products,
including the MultiWave CoreDirector and the enhancements to the MultiWave
CoreStream products, are based on complex technology which could result in
unanticipated delays in the development, manufacture 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 competitive 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. 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
the deployment of our products for the RBOC market.
WE 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' 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 product line 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
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- 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 pricing for 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.
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, 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 more 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 CI product and some enhancements to the
MultiWave CoreDirector and MultiWave CoreStream product lines and LightWorks
Toolkit are in the development phase and are not yet ready for commercial
manufacturing or deployment. We expect to offer additional releases of the
MultiWave CoreDirector product over the life of the product and continue to
enhance features of our MultiWave CoreStream product, including the longer reach
and higher channel count functionality of our product line. The initial release
of MultiWave CoreDirector CI is expected in limited availability for customer
trials during the first calendar quarter of 2001. 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
- 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
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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 product line, 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 product line 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 SUPPLIER
We depend on a limited number of suppliers for components of our products,
as well as for equipment used to 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 sources, and in some cases, that sole source is also a 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 customer relationships.
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 pending purchases of E-TEK
and SDL, respectively, 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.
WE RELY ON CONTRACT MANUFACTURERS FOR OUR PRODUCTS
We rely on a small number of contract manufacturers to manufacture our
CoreDirector product line 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, including
for our 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. If we cannot effectively manage these
manufacturers or they fail to deliver components in a timely manner, it may have
an adverse effect on our business and results of operations.
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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:
- 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. 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 RESULTS
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. Our ability to recognize revenue from financed 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 their financial conditions
deteriorate in the future. Purchasing delays and changes in the financial
condition or the amount of purchases by any of these customers could have a
material adverse effect on us. In the past we have had to make provisions for
the accounts receivables from customers that experienced financial difficulty.
If additional customers face similar financial difficulties, our receivables
from these 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-offs would adversely affect our
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 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 agreements 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
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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 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
- declining interest from potential customers.
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'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 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
expectations. These changes could harm our business.
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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. 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. To date 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 PERSONNEL
Our 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' 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
SUCCESSFUL
As part of our strategy for growth, we will consider acquiring businesses
that are intended to accelerate our product and service development processes
and add complementary products and services. We may issue equity or incur debt
to finance these acquisitions and may incur significant amortization expenses
related to goodwill and other intangible assets. Acquisitions involve a number
of operational risks, including risks that the acquired business will not be
successfully integrated, may distract management attention and may involve
unforeseen costs and liabilities.
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,
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which 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.
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
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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 OF 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 February 1, 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.
RISKS RELATED TO THE NOTES
SIGNIFICANT LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW AND OUR ABILITY TO REPAY OR REPURCHASE THE NOTES
We will have significant amounts of outstanding indebtedness, primarily
related to the notes, upon the completion of this offering, and will assume
significant additional indebtedness if our acquisition of Cyras is consummated.
As a result of this indebtedness, our principal and interest payment obligations
will increase substantially. 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, or 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.
In addition, the notes will be our obligation exclusively. The indenture
for the notes does not limit our ability, or that of our subsidiaries, to incur
other indebtedness and liabilities. We may have difficulty paying what we owe
under the notes if we or our subsidiaries incur additional indebtedness or other
liabilities.
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THERE CURRENTLY IS NO PUBLIC MARKET FOR THE NOTES BEING OFFERED
Prior to the sale of the notes in this offering, there has been no public
market for any of the notes, and there can be no assurance as to:
- the liquidity of any such market that may develop;
- the ability of the holders to sell their notes; or
- the price at which the holders would be able to sell their notes.
If such a market were to exist, the notes could trade at prices that may be
higher or lower than the principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar notes, and
our financial performance. We do not presently intend to apply for the listing
of the notes on any securities exchange or for inclusion of the notes in the
automated quotation system of the National Association of Securities Dealers,
Inc.
The underwriters have advised us that they presently intend to make a
market in the notes. The underwriters are not obligated, however, to make a
market in the notes, and any such market-making may be discontinued at any time
at the sole discretion of the underwriters. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act. and the
Exchange Act. Accordingly, no assurance can be given as to the development or
liquidity of any market for the notes.
FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS THE PRICE OF OUR NOTES
Sales of substantial amounts of common stock by our officers, directors and
other stockholders in the public market after this offering, or the awareness
that a large number of shares is available for sale, could adversely affect the
market price of our notes and common stock. In addition to the adverse effect a
price decline would have on holders of our notes and 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 that for 90 days
after the date of this prospectus 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.
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. The value of the notes will
depend, in part, on the market price of our common stock. 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 as 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.
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FORWARD LOOKING STATEMENTS
Some of the statements contained, or incorporated by reference, in this
prospectus discuss future expectations, contain projections of results of
operations or financial condition or state other "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" information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these so-called "forward-looking statements" by words like "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "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 prospectus.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our convertible notes
will be approximately $581.7 million, after deducting the underwriting discount
and estimated offering expenses. If the underwriters' option to purchase
additional convertible notes in this offering is exercised in full, we estimate
that our net proceeds will be approximately $669.0 million.
Concurrent with the offering of convertible notes, CIENA is conducting a
separate offering of 11,000,000 shares of common stock. This offering of
convertible notes is not conditioned on the completion of the offering of our
common stock.
We may use the net proceeds for working capital, capital expenditures,
acquisitions and other general corporate purposes.
We have not determined the amounts we plan to spend on any of the uses
described above or the timing of these expenditures. Pending our use of the net
proceeds, we intend to invest them in short-term, interest-bearing, investment
grade securities.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." CIENA has a 52- or 53-week fiscal year which ends on
the Saturday nearest to the last day of October in each year. For purposes of
financial statement presentation, each fiscal year is described as having ended
on October 31. Fiscal 1997, 1998, 1999 and 2000 comprised 52 weeks and fiscal
1996 comprised 53 weeks.
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue............................... $ 88,463 $413,215 $508,087 $482,085 $858,750
Cost of goods sold.................... 47,315 166,472 256,014 299,769 477,393
-------- -------- -------- -------- --------
Gross profit........................ 41,148 246,743 252,073 182,316 381,357
-------- -------- -------- -------- --------
Operating expenses:
Research and development............ 8,922 23,773 73,756 104,641 129,069
Selling and marketing............... 5,641 22,627 47,343 61,603 90,922
General and administrative.......... 6,346 11,476 18,468 22,736 34,000
Settlement of accrued contract
obligation....................... -- -- -- -- (8,538)
Purchased research and
development...................... -- -- 9,503 -- --
Pirelli litigation.................. -- 7,500 30,579 -- --
Merger related costs................ -- -- 2,548 13,021 --
Provision for doubtful accounts..... 76 489 806 250 28,010
-------- -------- -------- -------- --------
Total operating expenses.... 20,985 65,865 183,003 202,251 273,463
-------- -------- -------- -------- --------
Income (loss) from operations......... 20,163 180,878 69,070 (19,935) 107,894
Other income (expense), net........... 653 7,178 12,830 13,944 12,680
-------- -------- -------- -------- --------
Income (loss) before income taxes..... 20,816 188,056 81,900 (5,991) 120,574
Provision (benefit) for income
taxes............................... 3,553 72,488 36,200 (2,067) 39,187
-------- -------- -------- -------- --------
Net income (loss)..................... $ 17,263 $115,568 $ 45,700 $ (3,924) $ 81,387
======== ======== ======== ======== ========
Basic net income (loss) per common
share............................... $ 0.62 $ 0.76 $ 0.19 $ (0.01) $ 0.29
======== ======== ======== ======== ========
Diluted net income (loss) per common
and dilutive potential common
share............................... $ 0.09 $ 0.55 $ 0.18 $ (0.01) $ 0.27
======== ======== ======== ======== ========
Weighted average basic common shares
outstanding......................... 27,634 151,928 235,980 267,042 281,621
======== ======== ======== ======== ========
Weighted average basic common and
dilutive potential common shares
outstanding......................... 184,814 209,686 255,788 267,042 299,662
======== ======== ======== ======== ========
OCTOBER 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............ $24,040 $273,286 $250,714 $143,440 $ 143,187
Working capital...................... 42,240 338,078 391,305 427,471 639,675
Total assets......................... 79,676 468,247 602,809 677,835 1,027,201
Long-term obligations, excluding
current portion.................... 3,465 1,900 3,029 4,881 4,882
Mandatorily redeemable preferred
stock.............................. 40,404 -- -- -- --
Stockholders' equity................. 10,783 377,278 501,036 530,473 809,835
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data."
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, Internet service
providers, 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's intelligent optical networking products are designed to enable carriers
to deliver any time, any size, any priority bandwidth to their customers.
CIENA has increased the number of revenue-generating optical networking
equipment customers from a total of 27 customers during fiscal 1999 to 32
customers for fiscal 2000. During fiscal 2000, three customers each represented
more than 10% of CIENA's total revenues. We intend to preserve and enhance our
market leadership and eventually build on our 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" in the
prospectus.
As of October 31, 2000, CIENA and its subsidiaries employed approximately
2,775 persons, which was an increase of 847 persons over the approximate 1,928
employed on October 31, 1999.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 2000, 1999 AND 1998
REVENUE. CIENA recognized $858.8 million, $482.1 million and $508.1
million in revenue for the fiscal years ended October 31, 2000, 1999 and 1998,
respectively. The approximate $376.7 million or 78.1% increase in revenue from
fiscal 1999 to fiscal 2000 was due primarily to an increase in product shipments
across all product lines. The approximate $26.0 million or 5.1% decrease in
revenue from fiscal 1998 to fiscal 1999 was largely the result of reduced
selling prices.
CIENA recognized revenues from a total of 32, 27, and 14 optical equipment
customers during fiscal 2000, 1999, and 1998, respectively. During fiscal year
2000, Sprint, Qwest Communications and GTS Network Ltd. each accounted for at
least 10% or more of CIENA's revenue and all three combined accounted for 60.9%
of CIENA's fiscal 2000 revenue. During fiscal year 1999 Sprint, WorldCom and GTS
Network Ltd. each accounted for at least 10% or more of CIENA's revenue and all
three combined accounted for 46.2% of CIENA's fiscal 1999 revenue. This compares
to fiscal 1998 in which Sprint was the only 10% customer and in total accounted
for 52.5% of CIENA's fiscal 1998 revenue. Revenue derived from foreign sales
accounted for approximately 33.0%, 44.3%, and 23.0% of CIENA's total revenues
during fiscal 2000, 1999, and 1998, respectively.
For fiscal 2000, CIENA's optical network equipment revenues were derived
from sales of the MultiWave Sentry 4000, MultiWave CoreStream configured for
both 2.5 gigabits per second ("Gbps") and 10.0 Gbps transmission rates,
MultiWave Sentry 1600, MultiWave Metro, MultiWave 1600, MultiWave CoreDirector,
MultiWave Firefly systems and MultiWave MetroOne. During fiscal 1999, CIENA
recognized revenues from sales of MultiWave Sentry 4000, MultiWave Sentry 1600,
MultiWave 1600, MultiWave Metro, MultiWave Firefly, and MultiWave CoreStream
systems. During fiscal 1998, CIENA recognized revenues from sales of MultiWave
Sentry 1600,
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MultiWave 1600, MultiWave Firefly and MultiWave Sentry 4000 systems. The
revenues for fiscal 2000 improved as compared to fiscal 1999 due to increased
sales of MultiWave Sentry 4000, MultiWave CoreStream, MultiWave Sentry 1600,
MultiWave Metro, and MultiWave Firefly systems, and also from the introduction
of revenues from MultiWave CoreDirector and MultiWave MetroOne systems. The
amount of revenue recognized from MultiWave Sentry 1600 and MultiWave 1600
declined in fiscal 1999 as compared to fiscal 1998. This decline in MultiWave
Sentry 1600 sales in fiscal 1999 was offset by the introduction of new revenues
from the MultiWave CoreStream and MultiWave Metro products in fiscal 1999.
Fiscal 1999 revenues from MultiWave Sentry 4000 and MultiWave Firefly were
comparable to the revenues recognized for these products in fiscal 1998.
Revenues derived from engineering, furnishing and installation services as a
percentage of total revenue were 8.4%, 12.1%, and 9.2% for the fiscal years
2000, 1999, and 1998, respectively.
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 CIENA's
manufacturing and engineering, furnishing and installation operations. Gross
profit was $381.4 million, $182.3 million, and $252.1 million for fiscal years
2000, 1999, and 1998, respectively. Gross margin was 44.4%, 37.8%, and 49.6% for
fiscal 2000, 1999, and 1998, respectively. The increase in gross profit from
fiscal 1999 to fiscal 2000 was due primarily to lower component costs and
improved production efficiencies. The decrease in gross profit from fiscal 1998
to fiscal 1999 was largely attributable to lower selling prices.
CIENA's gross margins may be affected by a number of factors, including
product mix, continued competitive market pricing, outsourcing of manufacturing,
manufacturing volumes and efficiencies, competition for skilled labor, and
fluctuations in component costs. Downward pressures on our gross margins may be
further impacted by an increased percentage of engineering, furnishing and
installation revenues from services or additional service requirements. CIENA
will continue to concentrate on efforts to reduce product costs 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. Research and development expenses were
$129.1 million, $104.6 million, and $73.8 million for fiscal 2000, 1999, and
1998, respectively. The approximate $24.4 million or 23.3% increase from fiscal
1999 to 2000 and the approximate $30.9 million or 41.9% increase from fiscal
1998 to 1999 in research and development expenses related to increased staffing
levels, purchases of materials used in development of new or enhanced product
prototypes, and outside consulting services in support of certain developments
and design efforts. During fiscal 2000, 1999, and 1998 research and development
expenses were 15.0%, 21.7%, and 14.5% of revenue, respectively. CIENA expects
that its research and development expenditures will continue to increase in
absolute dollars and perhaps as a percentage of revenue during fiscal 2001 to
support the continued development of CIENA's intelligent optical networking
products, the exploration of new or complementary technologies, and the pursuit
of various cost reduction strategies. CIENA has expensed research and
development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $90.9
million, $61.6 million, and $47.3 million for fiscal 2000, 1999, and 1998,
respectively. The approximate $29.3 million or 47.6% increase from fiscal 1999
to 2000 and the approximate $14.3 million or 30.1% increase from fiscal 1998 to
1999 in selling and marketing expenses was primarily the result of increased
staffing levels in the areas of sales, technical assistance and field support,
and increases in commissions earned, trade show participation and promotional
costs. During fiscal 2000, 1999, and 1998 selling and marketing expenses were
10.6%, 12.8%, and 9.3% of revenue, respectively. CIENA anticipates that its
selling and marketing expenses may increase in absolute dollars and perhaps as a
percentage of revenue during fiscal 2001 as additional personnel are hired and
additional offices are opened to allow CIENA to pursue new customers
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and market opportunities. CIENA also expects the portion of selling and
marketing expenses attributable to technical assistance and field support,
specifically in Europe, Latin America, and Asia, will increase as CIENA's
installed base of operational MultiWave systems increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $34.0 million, $22.7 million and $18.5 million for fiscal 2000, 1999, and
1998, respectively. The approximate $11.2 million or 49.5% increase from fiscal
year 1999 to 2000 and the approximate $4.3 million or 23.1% increase from fiscal
year 1998 to 1999 in general and administrative expenses was primarily the
result of increased staffing levels and outside consulting services. During
fiscal 2000, 1999, and 1998 general and administrative expenses were 4.0%, 4.7%,
and 3.6% of revenue, respectively. CIENA believes that its general and
administrative expenses will increase in absolute dollars and perhaps as a
percentage of revenue during fiscal 2001 as a result of the expansion of CIENA's
administrative staff required to support its expanding operations.
SETTLEMENT OF ACCRUED CONTRACT OBLIGATION. The $8.5 million gain from
settlement of accrued contract obligation relates to the July 2000 termination
of certain accrued contract obligations that CIENA received from iaxis Limited,
one of CIENA's European customers. In September 2000, CIENA was informed that an
administrative order had been issued by a London court against iaxis Limited. As
a result of this order, joint administrators were appointed to manage the
business of iaxis Limited while they marketed the business for sale and
formulated a reorganization. See "Provision for Doubtful Accounts" below.
PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development
costs were $9.5 million for the fiscal year 1998. These costs were for the
purchase of technology and related assets associated with the acquisition of
Terabit during the second quarter of fiscal 1998.
PIRELLI LITIGATION. The Pirelli litigation costs of $30.6 million in
fiscal 1998 were attributable to a $30.0 million payment made to Pirelli during
the third quarter of 1998 and to additional other legal and related costs
incurred in connection with the settlement of this litigation.
MERGER-RELATED COSTS. The merger costs for fiscal 1999 of approximately
$13.0 million were costs related to CIENA's acquisition of Omnia and Lightera.
These costs include an $8.1 million non-cash charge for the acceleration of
warrants based upon CIENA's common stock price on June 30, 1999 and $4.9 million
for fees, legal and accounting services and other costs. The warrants were
issued to one of Omnia's potential customers and became exercisable upon the
consummation of the merger between CIENA and Omnia. The merger-related costs for
fiscal 1998 were costs related to the contemplated merger between CIENA and
Tellabs. These costs include approximately $1.2 million in Securities and
Exchange Commission filing fees and approximately $1.3 million in legal,
accounting, and other related expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. CIENA performs ongoing credit evaluations
of its customers and generally does not require collateral from its customers.
CIENA maintains an allowance for potential losses when identified. CIENA's
allowance for doubtful accounts as of October 31, 2000 was $29.6 million.
Approximately $27.8 million relates to provisions made for doubtful accounts
associated with iaxis Limited, one of CIENA's European customers. In September
2000, CIENA was informed that an administrative order had been issued by a
London court against iaxis Limited. As a result of this order, joint
administrators were appointed to manage the business of iaxis Limited while they
marketed the business for sale and formulated a reorganization. In November
2000, CIENA was notified that Dynegy Inc. and its subsidiaries had entered into
a proposed agreement to acquire the assets and stock of iaxis Limited from the
administrators. As a consequence of the terms of (a) the proposed agreement
between the administrators of iaxis Limited, Dynegy and its subsidiaries, and of
(b) a related sales agreement between CIENA and Dynegy, CIENA expects to realize
approximately $8.9 million of the gross outstanding accounts receivable balance
due from iaxis Limited as of October 31, 2000. While the proposed purchase
agreement between the administrators of iaxis Limited and Dynegy is subject to
certain administrative and judicial approvals, CIENA believes that such
approvals will be
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22
ultimately obtained and that CIENA will be successful in collecting the net $8.9
million outstanding accounts receivable balance from the customer. However,
should such approvals not occur, additional write-offs might be required.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on CIENA's cash, cash equivalents and marketable debt
securities, net of interest expense associated with CIENA's debt obligations.
Other income (expense), net, was $12.7 million, $13.9 million, and $12.8 million
for fiscal 2000, 1999, and 1998, respectively. The decrease in other income
(expense) from fiscal 1999 to fiscal 2000 was due to lower balances of cash,
cash equivalents and marketable debt securities in fiscal 2000 as compared to
fiscal 1999. The increase in companies other income (expense) from fiscal 1998
to fiscal 1999 was primarily the result of the investment of the net proceeds of
CIENA's stock offerings and net earnings.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's provision (benefit) for
income taxes was 32.5%, (34.5%), and 44.2% of pre-tax earnings (loss) for fiscal
2000, 1999 and 1998, respectively. The income tax provision for 2000 was lower
than the expected 35% primarily due to benefits from research and development
tax credits. The benefit for fiscal 1999 was less than the expected statutory
benefit of 35% due to non-deductible merger costs. The income tax provision for
1998 was higher than the expected statutory rate of 35%, due primarily to
charges for purchased research and development and state tax charges related to
the Alta acquisition. Purchased research and development charges are not
deductible for tax purposes. Exclusive of the effect of these charges, CIENA's
provision for income taxes was 38.6% of income before income taxes in fiscal
1998. As of October 31, 2000, CIENA's deferred tax asset was $143.0 million. The
realization of this asset could be adversely affected if future earnings are
lower than anticipated.
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth the operating results and percentage of revenue
represented by certain items in CIENA's statements of operations for each of the
eight quarters in the period ended October 31, 2000. This information is
unaudited, but in the opinion of CIENA reflects all adjustments (consisting only
of normal recurring adjustments) that CIENA considers necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The results for any quarter are not necessarily
indicative of results for any future period.
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23
QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................ $100,417 $111,490 $128,826 $141,352 $152,213 $185,679 $233,268 $287,590
Cost of goods sold..... 65,778 71,238 79,361 83,392 87,003 104,205 128,172 158,013
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit......... 34,639 40,252 49,465 57,960 65,210 81,474 105,096 129,577
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and
development........ 22,218 24,094 28,402 29,927 29,742 29,965 32,697 36,665
Selling and
marketing.......... 13,608 13,092 16,839 18,064 18,122 20,331 24,375 28,094
General and
administrative..... 5,036 5,849 5,433 6,418 6,621 7,176 9,339 10,864
Settlement of accrued
contract
obligation......... -- -- -- -- -- -- (8,538) --
Merger-related
costs.............. -- 2,253 10,768 -- -- -- -- --
Provision for
doubtful
accounts........... -- -- -- 250 250 -- 8,538 19,222
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses..... 40,862 45,288 61,442 54,659 54,735 57,472 66,411 94,845
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations........... (6,223) (5,036) (11,977) 3,301 10,475 24,002 38,685 34,732
Other income (expense),
net.................. 3,301 3,583 3,492 3,568 2,950 3,268 3,026 3,436
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes......... (2,922) (1,453) (8,485) 6,869 13,425 27,270 41,711 38,168
Provision (benefit) for
income taxes......... (1,041) (468) (2,928) 2,370 4,363 8,863 13,556 12,405
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (1,881) $ (985) $ (5,557) $ 4,499 $ 9,062 $ 18,407 $ 28,155 $ 25,763
======== ======== ======== ======== ======== ======== ======== ========
Basic net income (loss)
per common share
(1).................. $ (0.01) $ 0.00 $ (0.02) $ 0.02 $ 0.03 $ 0.07 $ 0.10 $ 0.09
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income
(loss) per common
share and dilutive
potential common
share (1)............ $ (0.01) $ 0.00 $ (0.02) $ 0.02 $ 0.03 $ 0.06 $ 0.09 $ 0.09
======== ======== ======== ======== ======== ======== ======== ========
Weighted average basic
common share (1)..... 262,404 265,060 266,032 267,616 276,182 280,162 282,258 285,177
======== ======== ======== ======== ======== ======== ======== ========
Weighted average basic
common and dilutive
potential common
share (1)............ 262,404 265,060 266,032 290,604 295,806 299,126 299,790 301,582
======== ======== ======== ======== ======== ======== ======== ========
---------------
(1) All share and per share information has been retroactively restated to
reflect the two-for-one stock split effective September 18, 2000.
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QUARTER ENDED
-------------------------------------------------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF REVENUE)
Revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 65.5 63.9 61.6 59.0 57.2 56.1 54.9 54.9
----- ----- ----- ----- ----- ----- ----- -----
Gross profit.......................... 34.5 36.1 38.4 41.0 42.8 43.9 45.1 45.1
Operating expenses:
Research and development.............. 22.1 21.6 22.0 21.2 19.5 16.1 14.0 12.7
Selling and marketing................. 13.6 11.7 13.1 12.8 11.9 10.9 10.4 9.8
General and administrative............ 5.0 5.2 4.2 4.5 4.3 3.9 4.0 3.8
Settlement of accrued contract
obligation.......................... -- -- -- -- -- -- (3.7) --
Merger-related costs.................. -- 2.0 8.4 -- -- -- -- --
Provision for doubtful accounts....... -- -- -- 0.2 0.2 -- 3.7 6.7
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses........ 40.7 40.5 47.7 38.7 35.9 30.9 28.4 33.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........... (6.2) (4.4) (9.3) 2.3 6.9 13.0 16.7 12.1
Other income (expense), net............. 3.3 3.2 2.7 2.5 1.9 1.8 1.3 1.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes....... (2.9) (1.2) (6.6) 4.8 8.8 14.8 18.0 13.3
Provision (benefit) for income taxes.... (1.0) (0.4) (2.3) 1.7 2.9 4.8 5.8 4.3
----- ----- ----- ----- ----- ----- ----- -----
Net income(loss)........................ (1.9)% (0.8)% (4.3)% 3.1% 5.9% 10.0% 12.2% 9.0%
===== ===== ===== ===== ===== ===== ===== =====
CIENA's quarterly operating results have varied and are expected to vary in
the future. CIENA's detailed discussion of risk factors addresses the many
factors that have caused such variation in the past, and may cause similar
variations in the future. See "Risk Factors". CIENA's revenues have increased in
each of the last eight quarters due to strong demand across existing products
and introduction of new products such as MultiWave CoreStream configured for
both 2.5 Gbps and 10.0 Gbps transmission rates. CIENA's gross margin percentage
has improved from the first quarter fiscal 1999 to the fourth quarter fiscal
2000 as a result of component cost reductions, production efficiencies, and
relative stable sales pricing. CIENA's operating expenses have increased in each
of the last eight quarters due to continued investments in research and
development, selling and marketing, and infrastructure activities. Exclusive of
provisions for doubtful accounts and merger-related costs, the Company's
operating expenses as a percentage of revenue have generally decreased each of
the last eight quarters. During fiscal 2001, CIENA's operating expenses will
continue to increase in absolute dollars and may increase as percentage of
revenue. We expect to preserve and enhance our market leadership and build on
our installed base with new and additional products in conjunction with
increased investments in selling, marketing, and customer service activities.
See "Risk Factors".
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, CIENA's principal source of liquidity was its cash and
cash equivalents. CIENA had $143.2 million in cash and cash equivalents, and
$95.1 million in corporate debt securities and U.S. Government obligations.
CIENA's corporate debt securities and U.S. Government obligations have
contractual maturities of six months or less.
CIENA's operating activities provided cash of $59.0 million, $28.7 million,
and $48.8 million for fiscal 2000, 1999, and 1998, respectively. Cash provided
by operations in fiscal 2000 was primarily attributable to a net gain adjusted
for the non-cash charges of depreciation, amortization, tax benefit related to
exercise of stock options, provisions for doubtful accounts, inventory
obsolescence, and warranty, increases in accounts payable, and accrued expenses,
offset by increases in accounts receivable and inventories.
Cash used in investing activities in fiscal 2000, 1999, and 1998 was $103.2
million, $149.7 million, and $107.0 million, respectively. Included in
investment activities were additions to capital equipment and leasehold
improvements in fiscal 2000, 1999, and 1998 of $123.9 million, $46.8 million,
and $88.9 million, respectively. The capital equipment expenditures were
primarily for test, manufacturing and computer equipment. CIENA expects
additional combined capital
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25
equipment and leasehold improvement expenditures of approximately $208 million
to be made during fiscal 2001 to support selling and marketing, manufacturing
and product development activities and the construction of leasehold
improvements for its facilities.
We generated $43.9 million, $13.8 million, and $35.6 million in cash from
financing activities in fiscal 2000, 1999, and 1998, respectively. During fiscal
2000, CIENA received $44.0 million from the exercise of stock options and the
sale of stock through our employee stock purchase plan. During fiscal 1999 CIENA
received $11.3 million from the exercise of stock options, the sale of stock
through our employee stock purchase plan, and from the additional capitalization
of Omnia and Lightera. During fiscal 1998, CIENA received approximately $34.3
million from the issuance of stock associated with the capitalization of Omnia
and Lightera, and from the exercise of stock options.
We believe that our existing cash balances and investments, together with
cash flow from operations, will be sufficient to meet our liquidity and capital
spending requirements at least through the end of fiscal 2001. 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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date for SFAS No. 133", will be
effective for the Company's fiscal year ending October 31, 2000. The Company
believes the adoption of SFAS No. 133 and SFAS No. 137 will not have a material
effect on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the Securities and Exchange Commission's view on revenue
recognition. Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. CIENA is required to be in
conformity with the provisions of SAB 101, as amended, no later than January 31,
2001, with the impact of such adoption being treated on a cumulative basis as of
November 1, 2000. While management will continue to assess SAB 101, CIENA
presently believes its existing revenue recognition policies and procedures are
generally in compliance with SAB 101 and, therefore, SAB 101's adoption will
have no material impact on CIENA's financial condition, results of operations or
cash flows.
In July 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
final consensus that the income tax benefit realized by a company upon the
exercise of a nonqualified stock option or the disqualifying disposition of an
incentive stock option should be classified in the operating section of the
statement of cash flows. The consensus is effective for the Company's quarters
ending after July 20, 2000. All comparative cash flow statements as presented
have been restated to comply with this consensus.
In September 2000, the FASB issued SFAS No. 140, "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 Company believes the adoption
of SFAS No. 140 will not have a material effect on the consolidated financial
statements.
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26
BUSINESS
OVERVIEW
CIENA is an established 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, Internet service
providers, wireless and wholesale carriers. CIENA offers intelligent optical
transport and optical switching systems that enable service providers to
provision, manage and deliver high-bandwidth services to their customers. We
have pursued a strategy to develop and leverage the power of our technologies to
change the fundamental economics of building carrier-class tele- and
data-communications networks, thereby providing our customers with a competitive
advantage. CIENA's intelligent optical networking products are designed to
enable carriers to deliver any time, any size, any priority bandwidth to their
customers.
Historically, the significant majority of CIENA's revenue has come from the
sale of long-distance optical transport equipment. CIENA believes it is one of
the worldwide market leaders in field deployment of open-architecture
long-distance optical transport equipment utilizing dense wavelength division
multiplexing, or DWDM, technology. The majority of CIENA's fiscal 2000 revenue
was derived from sales of its long-distance optical transport products,
including MultiWave CoreStream(TM) and MultiWave Sentry 4000(TM). During the
fiscal year 2000, CIENA also recognized revenue from the sale of seven optical
networking products including sales of its metropolitan optical transport
product, MultiWave(R) Metro and its intelligent optical core switch, MultiWave
CoreDirector(TM).
For the fiscal year ended October 31, 2000, CIENA recorded revenue from
sales of intelligent optical networking equipment to a total of 32 customers.
Our research and development efforts as well as potential future acquisition and
partnership activities are targeted at capitalizing on our installed base of
carrier customers and leveraging our position as a leader in the rapidly growing
optical networking market.
INDUSTRY BACKGROUND
The world's tele- and data-communications infrastructure is formed by
fiber-optic networks owned and operated by service providers. In recent years,
the combination of several factors, including global deregulation which fueled
competition among service providers and increased bandwidth demand resulting
from the proliferation of the Internet and the emergence of electronic commerce,
gave rise to the increased deployment of communications equipment utilizing
dense wavelength division multiplexing technology.
DWDM replaces the single beam of light that traverses fiber-optic cable in
legacy networks with multiple colors of light, each of which is capable of
carrying tens of thousands of voice conversations or data transmissions. Prior
to the emergence of DWDM, service providers could increase network capacity
either by adding new physical fibers to their network or by increasing the rate
of transmission through the fiber. In many cases DWDM has proven to be more cost
efficient than physically deploying new fibers, and it has enabled the delivery
of significantly more traffic by service providers.
The widespread adoption of DWDM enabled carriers to efficiently and
economically expand network capacity, or bandwidth, while reducing bandwidth
costs. CIENA believes that the application of products using DWDM has led to a
dramatic decline in service providers' capital cost per bit from 1995 to
present, thereby enabling pricing competition between carriers and significant
bandwidth price declines of up to 80% in some U.S. regions.
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27
NETWORK SCALABILITY CHALLENGES
For the past several years DWDM has been implemented by carriers to
increase capacity between discrete points in their long-distance networks. To
construct a network using DWDM equipment as its backbone, a carrier must
interconnect the point-to-point high-capacity links and manage all traffic
flowing through them. For example, an important element enabling this
interconnection in traditional architectures has been the SONET/SDH add/drop
multiplexer, or ADM. In most network architectures, a SONET ADM is used to
transmit the information-carrying signal for each DWDM optical channel. A second
ADM then is used to receive the information-carrying signal from each DWDM
optical channel. As a result, every time an additional optical channel is
deployed, two additional SONET ADMs must be purchased, installed and
maintained -- one for each end of the traffic-carrying route. For example, in
order to transmit/receive the traffic from a DWDM optical transport system with
96 channels of DWDM, a service provider would require a total of 192 SONET ADMs.
Though DWDM gave carriers the ability to solve the bandwidth problem in the
core of their networks, the technology created operational and scalability
challenges for carriers. Historically this method has been the only way
available to service providers to scale their networks. Unfortunately, this
approach creates upwardly spiraling costs. In addition to the capital equipment
costs associated with the equipment, each SONET ADM uses valuable central office
space and power. Furthermore, as the number of DWDM channels and links
increases, the carrier's management of the network grows more complex, making
manual service provisioning and network operation more difficult and costly.
ESCALATING OPERATIONAL COSTS
In addition to the problems inherent in scaling traditional network
architectures, carriers are challenged to scale their operating staff as quickly
as they can grow their networks. According to information filed by carriers with
the United States Securities and Exchange Commission, many service providers are
spending more on operating, growing, and managing their networks than they are
on capital expenditures relating to their networks. In some cases, service
providers are spending two to four dollars on network operations and support
expenses for every dollar spent on network capital equipment. In addition, in
many cases, network operations and support expenses are increasing at a
significantly faster rate than revenues.
CIENA'S SOLUTIONS
CIENA's intelligent optical networking equipment was designed to enable
service providers to transition from inefficient, legacy, voice-centric networks
to more efficient data-optimized, intelligent optical networks. CIENA's systems
address both the network scalability challenges and the escalating operational
costs faced by service providers by:
- leveraging expertise in optics, software, systems and Application
Specific Integrated Circuits, or ASICs, to develop innovative products
designed to dramatically lower the cost of constructing service provider
networks;
- replacing multiple traditional network elements such as ADMs and digital
cross-connects with fewer, more intelligent network elements, thereby
simplifying the network and lowering carriers' capital and operational
costs;
- enhancing bandwidth availability to service providers, thereby allowing
them to increase network bandwidth with growing Internet demand;
- lowering ongoing network operating costs by enabling carriers to more
efficiently manage network traffic;
- enabling carriers to shorten the time it takes to provision services, in
some cases from months to minutes, thereby accelerating the generation of
revenue; and
- enabling new, revenue-generating and differentiated optical services.
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Our optical networking product portfolio is targeted at the critical areas
of service provider networks: long-distance and metropolitan optical transport,
intelligent optical core switching and network management.
- OPTICAL TRANSPORT. CIENA's long-distance optical transport products,
MultiWave CoreStream(TM), MultiWave Sentry(TM) and MultiWave 1600, and
our short-distance products, MultiWave Metro(TM), Metro One(TM) and
MultiWave Firefly(TM), utilize DWDM technology and should enable carriers
to cost effectively add critical network bandwidth when and where they
need it. As a result, service providers should be better able to scale
their networks to meet demand.
- INTELLIGENT OPTICAL CORE SWITCHING. Our intelligent optical core
switches, MultiWave CoreDirector(TM) and MultiWave CoreDirector CI(TM),
which is currently under development, allow carriers to manage the
bandwidth created with optical transport products. CoreDirector and
CoreDirector CI help carriers solve both the issues of network
scalability and escalating operating costs by incorporating the
functionality of multiple network elements into single elements with
previously unavailable switching capabilities and management.
- NETWORK MANAGEMENT. ON-Center, CIENA's recently introduced fully
integrated family of software-based tools for comprehensive element,
network and service layer management, is designed to enable accelerated
deployment of new, differentiating optical services. ON-Center should
also reduce network operating and management costs.
CIENA calls the network architecture created by these products "CIENA
LightWorks." The components of CIENA's LightWorks can be sold together as a
complete network solution or separately as best-of-breed solutions. CIENA's
LightWorks architecture is designed to dramatically simplify a carrier's network
by reducing the number of network elements. We believe this network
simplification will enable service providers to lower capital equipment and
operating costs.
STRATEGY
CIENA's strategy is to maintain and build upon its market leadership in the
deployment of intelligent optical networking systems and to leverage its
technologies in order to provide solutions for both voice and data
communications-based network architectures. CIENA believes that the
technological, operational and cost benefits of its optical networking solutions
create competitive advantages for service providers worldwide. We believe our
solutions will become increasingly important as these service providers are
being pressed by their customers to deliver services to address the dramatic
growth in Internet and other data communications traffic. CIENA's strategy
includes the following initiatives:
- EXPAND OUR BASE OF CUSTOMERS USING OUR INTELLIGENT OPTICAL NETWORKING
SOLUTIONS. We believe that achieving early widespread operational
deployment of our systems in a particular carrier's network will provide
CIENA significant competitive advantages with respect to additional
optical networking deployments and will enhance our marketing to other
carriers as a field-proven supplier. While continuing to aggressively
serve our existing customers, we intend to actively pursue additional
optical networking deployment opportunities among fiber-optic carriers in
domestic and foreign long distance, interoffice and local exchange
markets.
- INCREASE SALES AND MARKETING EFFORTS. The nature of the target customer
base for all our product lines requires a focused sales effort on a
customer-by-customer basis. We will continue to increase our sales and
marketing efforts aimed at the worldwide market of service providers.
CIENA increased the number of revenue-generating optical networking
customers from 27 during 1999 to 32 in 2000. In addition, CIENA has a
significant international presence, particularly in Europe. Revenues from
international customers represented 33.0% of CIENA's total revenues in
fiscal 2000. CIENA plans to continue to
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29
strengthen its marketing programs and to increase its domestic and
international presence through both direct sales and distributor
relationships.
- CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. CIENA
markets technically advanced systems to sophisticated customers. The
nature of CIENA's systems and market require a high level of technical
support and customer service. We believe we have a good reputation for
our technical support and customer service, and we intend to emphasize
our global service and support excellence and capabilities as
differentiating factors in our efforts to maintain and enhance our market
position. CIENA offers complete engineering, furnishing and installation
services in addition to full-time customer support from strategic
locations worldwide.
- MAINTAIN WORLD CLASS MANUFACTURING CAPABILITY. CIENA's optical
networking systems play a critical role in our customers' networks.
Quality assurance and manufacturing excellence are necessary for CIENA to
achieve success. CIENA believes it has developed a world class optical
manufacturing capability, and this capability provides CIENA with a
significant competitive advantage. CIENA achieved ISO 9001 certification
in July 1997 in further support of this element of its strategy. CIENA
expects to continue to invest in both the capital and the human resources
necessary to maintain and leverage this advantage. In addition, CIENA
expects to utilize this expertise to leverage our manufacturing
capability with contract manufacturers.
- LEVERAGE CIENA'S BANDWIDTH-OPTIMIZING TECHNOLOGY AND KNOW-HOW. We
believe the overall growth in demand for bandwidth and the need for
intelligent bandwidth-optimizing services in telecommunications networks
will lead to transmission bottlenecks in other segments of the networks
where the application of optical technologies and other high bandwidth
enabling technologies may provide solutions, either within existing
network architectures, or as part of the design and development of
alternative data communications-based network architectures. CIENA
expects to leverage the core competencies it has developed in the design,
development and manufacturing of its optical transport and intelligent
optical switching product lines and key enabling components by pursuing
new product development efforts, and strategic alliances or acquisitions,
to address these expected opportunities. CIENA intends to move
aggressively to maintain leadership in the design and development of
intelligent optical networking equipment, components and software which
will both respond to customer needs and help customers move toward newer,
higher capacity, more cost-efficient network designs for the future.
PRODUCTS
Our optical networking product portfolio is targeted at the critical areas
of service provider networks: long-distance and metropolitan optical transport,
intelligent optical core switching and network management. CIENA's open
architecture design allows its products to operate with most carriers' existing
fiber-optic transmission systems and network elements, including connecting
directly to either traditional SONET equipment, ATM switches or IP routers.
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30
LONG-DISTANCE OPTICAL TRANSPORT
PRODUCT FEATURES
------- --------
MULTIWAVE CORESTREAM - CIENA's fourth generation carrier-class
intelligent optical transport product.
- First commercially deployed 96-channel DWDM
system with commercial shipments beginning in
the third fiscal quarter of 1999.
- Utilizes DWDM technology to deliver up to 96
optical channels at 2.5Gbps (240 gigabits) or
up to 48 channels at 10Gbps (480 gigabits).
- Designed for in-service growth; scalable to
handle 2 terabits of traffic in the future.
- With its longer reach feature set, will
ultimately be capable of transporting signals
up to 5,000 kilometers without electrical
regeneration.
MULTIWAVE SENTRY 4000 - CIENA's third generation carrier-class
intelligent optical transport product.
- First commercially deployed 40-channel system
with commercial shipments beginning in the
second fiscal quarter of 1998.
- Utilizes DWDM technology to deliver up to 40
channels at 2.5Gbps (100 gigabits).
MULTIWAVE SENTRY 1600 - CIENA's second generation carrier-class
intelligent optical transport product.
- Utilizes DWDM technology to deliver up to 16
channels at 2.5Gbps (40 gigabits).
- Incorporated performance monitoring
capabilities, not previously available in
DWDM equipment beginning in the second half
of fiscal 1996.
MULTIWAVE 1600 - CIENA's first generation carrier-class
intelligent optical transport product.
- First commercially deployed 16-channel system
with commercial shipments beginning in the
first half of fiscal 1996.
- Utilizes DWDM technology to deliver 16
channels at 2.5Gbps (40 gigabits).
METROPOLITAN OPTICAL TRANSPORT
PRODUCT FEATURES
------- --------
MULTIWAVE METRO - A carrier-class optical transport product
designed specifically to address the
performance and economic requirements of
metropolitan markets.
- Provides up to 24 duplex channels over a
single fiber pair, enabling a service
provider to transport up to 60Gbps.
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- Supports multiple network topologies, such as
rings, hubs, and stars.
- Offers a wide range of interfaces from 100
megabits per second up to 10Gbps.
MULTIWAVE METRO ONE - Offers the same carrier-class reliability and
functionality as MultiWave Metro, but for a
single channel in a reduced size and reduced
power consumption package.
MULTIWAVE FIREFLY - MultiWave Firefly was developed specifically
for use by carriers in short-distance,
point-to-point applications.
- Multiplexes up to 24 channels at 2.5Gbps,
over a single fiber pair, allowing a carrier
to transport up to 60Gbps.
INTELLIGENT OPTICAL CORE SWITCHING
PRODUCT FEATURES
------- --------
MULTIWAVE COREDIRECTOR - Provides traffic management and switching
capability beyond current network solutions
of up to 256 ports of OC-48 or up to 640Gbps
in a single 7 foot bay.
- Designed to reduce capital equipment costs by
displacing multiple traditional devices.
- CoreDirector's intelligence is designed to
simplify service provisioning, in some cases
reducing provisioning times from months to
seconds.
- CoreDirector offers the ability to switch at
the wavelength level or at levels of
granularity down to an STS-1.
- CoreDirector should enable new revenue
opportunities for service providers through
new optical layer capabilities and services.
COREDIRECTOR CI - When available, CoreDirector CI will provide
up to 64 ports of OC-48 or up to 160Gbps in a
half bay.
- CoreDirector CI will deliver CoreDirector
functionality in a smaller package and at a
lower entry cost that is ideal for lower
capacity networks or smaller switching sites.
NETWORK MANAGEMENT
PRODUCT FEATURES
------- --------
LIGHTWORKS ON-CENTER - A fully integrated family of software-based
tools for comprehensive element, network and
service layer management across service
provider networks.
- ON-Center is designed to enable accelerated
deployment of new, differentiating optical
services, reduced network operating and
management costs, and innovative customer
service solutions.
- Designed so that service providers can select
any or all components necessary to meet their
particular network's management needs,
LightWorks ON-Center is comprised of:
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- an Optical Service Layer Management
System for cross-vendor end-to-end
service management;
- an Optical Network Management System for
integrated management across all of
CIENA's intelligent optical transport,
switching and access systems; and
- a Modeling and Planning System for
network design.
NEW OPTICAL SERVICES
In addition to allowing significant capital equipment and operational cost
savings, CIENA's intelligent optical networking equipment is designed to enable
its customers to offer new, revenue-generating optical layer services. CIENA's
LightWorks Toolkit(TM) is designed to allow carriers to offer dynamic
high-bandwidth services and handle real-time service provisioning and
prioritization. By mixing and matching CIENA's ToolKit options, carriers will be
able to offer customized services and further differentiate themselves from
their competition.
When development is completed, the breadth of options in the LightWorks
ToolKit will ultimately include:
SERVICE DESCRIPTION
------- -----------
OPTICAL PRIORITY PROVISIONING - Optical Priority Provisioning is designed to
allow carriers to turn-up optical services in
seconds, and to specify priority levels for
further differentiation of optical services.
For instance, a carrier may elect to offer
multiple levels of optical bandwidth, ranging
from "premium" to "best-effort" service, with
each level of service being priced and
delivered differently. Optical Priority
Provisioning is designed to help carriers
more easily meet service level agreements by
assigning and adjusting traffic priorities in
seconds, potentially allowing carriers to
unlock more revenue from data services.
- Optical Priority Provisioning should simplify
the delivery of differentiated optical
services by providing access to service
templates of predefined restoration
priorities, preemptability, and linear, ring
and mesh protection options. Using these
simplified templates, service provisioners
should be able to deliver optical services,
at any service level, in just a few clicks of
a mouse.
FLEXIBLE CONCATENATION - In legacy networks, bandwidth demand is
arbitrarily shoehorned into SONET/SDH-sized
transport containers where the size of the
container is fixed. For example, if a
customer requires OC-15 service, the customer
must purchase OC-48 service, even though only
a fraction of the 48 time slots in the
transport container will be filled with bits.
In this scenario, the customer is paying for
bandwidth it is not using and the carrier is
losing valuable network bandwidth. CIENA is
using a combination of silicon and software
to redefine how carriers access and deliver
bandwidth.
- When available, Flexible Concatenation will
allow carriers to access all time slots
within the SONET/SDH frame --
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even when those frames are fractionally
filled. That means carriers will be able to
create true OC-"N" services in which "N" can
be any number between 1 and 48 and in the
future will be 192 and eventually 768 instead
of the current restrictions of SONET, which
sets fixed sizes on transport containers.
Flexible concatentation is designed to enable
carriers to maximize their network bandwidth
and deliver customer-specific service.
RATE ADAPTIVE GIGABIT ETHERNET - CIENA's Rate-Adaptive Gigabit Ethernet
technology uses software and ASICs to enable
service providers to sell Gigabit Ethernet
services in customizable increments of 50Mbps
(STS-1) up to 1.25Gbps.
- When available, service providers will be
able to use Rate Adaptive Gigabit Ethernet to
create a wide range of customized optical
service options for end-users and deliver
those services over more efficient access and
core networks that leverage the economies of
Gigabit Ethernet transmission.
VSR OPTICS - For increased profitability, carriers must
continually drop their cost per bit. However,
to stay competitive, carriers must continue
to increase the value of their services. VSR
(Very Short Reach) Optics are designed to
provide lower-cost, high-capacity connections
between Internet and optical networking
systems within a service provider's central
office. VSR Optics leverage Vertical Cavity
Surface Emitting Laser (VCSEL) technology and
Gigabit Ethernet standards to make
variable-rate optical services possible and
economical -- a valuable service for
unpredictable bandwidth demands. When
available, CIENA will apply this data
rate-scalable technology to 10Gbps network
connections.
TRANSPARENT SERVICE
MULTIPLEXING - As opposed to traditional SONET/SDH
multiplexing, CIENA's "transparent"
multiplexing is designed to enable optical
services to be delivered without compromising
the SONET/SDH overheads of individual
tributaries that make up the aggregate
signal. Enabling multiple signals to be
transparently multiplexed, transported and
demultiplexed means signals are delivered as
if they were connected directly to the
destination equipment by their own unique
wavelength, maintaining the customers' signal
security and integrity. When available,
Transparent Service Multiplexing (TSM) should
be ideal for delivering IP traffic,
wavelength services and other new optical
services that CIENA's Toolkit enables. With
TSM, each end device appears to communicate
over its own unique wavelength while actually
being economically consolidated with other
signals.
WAVELENGTH BINDING - With unprecedented traffic growth and
changing traffic demands, Internet-centric
carriers are looking for ways
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to better match the changes in IP router
traffic demands with the provisioned
bandwidth capacities available within their
networks. To meet this need, CIENA is
developing Wavelength Binding.
- Wavelength Binding will leverage intellectual
property to enable a device of any speed to
be connected to a network operating at a
lower speed by building "virtual channels" of
multiple wavelengths bound together in a
single, very high-capacity bitstream. As a
result, when Wavelength Binding is available,
CIENA's customers will be able to deliver
40Gbps without changing their transport
infrastructure. Wavelength Binding will also
give carriers previously unavailable network
flexibility by enabling them to bundle and
unbundle wavelengths as network capacity
demands change.
PRODUCT DEVELOPMENT
We believe the overall growth in utilization of fiber-optic
telecommunications networks will lead to transmission bottlenecks in other
segments of the networks where the application of optical networking
technologies may provide solutions. We also believe there may be opportunities
for us to develop products and technologies complementary to existing optical
networking technologies which may broaden our ability to provide, facilitate
and/or interconnect with high-bandwidth solutions offered throughout fiber-optic
networks. CIENA intends to focus its product development efforts and possibly
pursue strategic alliances or acquisitions to address expected opportunities in
these areas, including our recently announced acquisition of Cyras Systems, Inc.
CUSTOMERS
CIENA has announced publicly relationships with the following customers:
DOMESTIC INTERNATIONAL
-------- -------------
Alltel Cable & Wireless, UK
Bell South CompleTel, France
Broadwing Crosswave Communications, Japan
Cable & Wireless Daini Deuden, Japan
Digital Teleport Dynegy, Austria
Enron ESAT Telecom, Ireland
Genuity Solutions Fibernet
Intermedia Communications Global Crossing, UK
PSINet GTS (now known as eBone), Belgium
Qwest HanseNet Telekommunikation, Germany
RCN of Pennsylvania Interoute, UK
Sprint Japan Telecom, Japan
Verizon KDD/Teleway Japan, Japan
Williams Communications Korea Telecom, Korea
WorldCom MobilCom AG, Germany
XO Communications Operadora Protel, Mexico
Telecom Developpement, France
Telia AB, Sweden
WorldCom, Europe
In addition, CIENA has a number of unannounced customer relationships.
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CUSTOMERS BY CATEGORY
INTEREXCHANGE CARRIERS (IXCS)
The initial deployments of CIENA's bandwidth enhancing optical transport
equipment occurred in the core of the U.S. long-distance network with the
interexchange carriers, or IXCs. IXCs provide connections between local
exchanges in different geographic areas. In recent years, incumbent IXCs such as
Sprint, WorldCom and AT&T have seen increased competition from emerging
long-distance carriers such as Qwest Communications, Global Crossing, Broadwing
Communications Services, Inc., and Level 3 Communications. We expect that
continued competition in long-distance call rates, as well as the carriers'
desire for market and service differentiation, will continue to drive demand for
the increased capacity and features offered by CIENA's optical networking
equipment.
INCUMBENT LOCAL EXCHANGE CARRIERS
Incumbent local exchange carriers, such as the RBOCs, are very active in
interoffice and local exchange markets and, under the Telecommunications Act of
1996, RBOCs are eligible to enter the long-distance market once they have met
certain requirements for opening their local markets to competition. CIENA
believes that over time the RBOCs will continue to gain approval to offer
long-distance services, although when and how they will offer these services is
unclear. For instance, the RBOCs' move to offering long-distance services could
occur through the establishment of owned network facilities, through the
purchase of long-distance capacity from other long-distance carriers, or through
some combination of the two. Regardless of the timing of any such move, CIENA
believes there are opportunities for in-region deployment of CIENA's
long-distance and metropolitan optical transport products at certain RBOCs.
INTERNATIONAL COMPETITIVE CARRIERS
New competitive carriers are emerging as a result of deregulation in the
international telecommunications markets. CIENA has concentrated its sales
efforts on these emerging carriers as opposed to the traditional carriers or
PTTs. During fiscal 2000, CIENA increased its announced international customer
base from fourteen to eighteen customers. In many cases, these new competitive
carriers do not have the installed fiber base of the larger carriers and
therefore are in need of the scalable bandwidth CIENA's optical transport
systems offer. In addition, because of the economies and flexibility afforded by
the application of DWDM technology, CIENA's equipment is being used on several
new projects where the service provider is physically constructing the network.
CIENA expects that in the near term, the majority of its international revenue
will come from these smaller, more aggressive competitive carriers, and CIENA
will continue to concentrate its sales efforts accordingly.
COMPETITIVE LOCAL EXCHANGE CARRIERS (CLECS)
Deregulation has fueled the growth of U.S. competitive local exchange
carriers, or CLECs. CIENA believes that in the short term, CLECs could benefit
from the hesitancy of incumbent local exchange carriers, such as the Regional
Bell Operation Companies, or RBOCs, to open their local markets to competitors,
and that these CLECs are likely to move aggressively to capitalize on
opportunities in the local area. CIENA recognized revenues from CLEC customers
in fiscal 2000 and expects that tactical CLEC applications for its long-haul
products, as well as the short-distance products, will be well suited to CLEC
network applications.
NON-TRADITIONAL TELECOMMUNICATION SERVICE PROVIDERS
The growth of the Internet has produced traffic growth substantial enough
to attract new, non-traditional telecommunication service providers to compete
in this market as well. Both domestically and internationally, companies with
rights-of-way, such as utility companies, cable TV providers, and railroads are
capitalizing on their "network", whether a pipeline, a railroad, or a highway,
and in some cases, are laying optical fiber and constructing telecommunications
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networks along those rights-of-way. The transmission capabilities of CIENA's
optical networking equipment enable these new carriers to provide competitive
services while purchasing and laying a minimal amount of fiber-optic cable.
MARKETING AND DISTRIBUTION
CIENA's intelligent optical networking systems require substantial
investment, and our target customers in the fiber-optic telecommunications
market -- where network capacity and reliability are critical -- are highly
demanding and technically sophisticated. There are only a small number of such
customers in any country or geographic market. Also, every network operator has
unique configuration requirements, which impact the integration of optical
networking systems with existing transmission equipment. The convergence of
these factors leads to a very long sales cycle for optical networking equipment,
often more than a year between initial introduction to CIENA and the customer's
commitment to purchase, and has further led CIENA to pursue sales efforts on a
focused, customer-by-customer basis. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and "Risk Factors".
CIENA has organized its resources for the separate but coordinated approach
to United States and international customers. In the United States market, a
sales team, comprised of an account manager, systems engineers and technical
support and training personnel, is assigned responsibility for each customer
account, and for the coordination and pursuit of sales contacts. In the
international market, CIENA pursues prospective customers through direct sales
efforts, as well as through distributors, independent marketing representatives
and independent sales consultants. Through its subsidiaries, CIENA has
established offices in the U.S., Europe and Latin America, including offices in
the U.K., Germany, France, Spain, Mexico and Brazil. CIENA has distributor or
marketing representative arrangements, including agreements with agents in
Italy, the Republic of Korea, Japan, Venezuela, Columbia and Chile.
In support of its worldwide selling efforts, CIENA conducts marketing
communications programs intended to position and promote its products within the
telecommunications industry. Marketing personnel also coordinate our
participation in trade shows and conduct media relations activities with trade
and general business publications.
MANUFACTURING
CIENA conducts most of the optical assembly, final assembly and final
component, module and system test functions for its optical transport products
at its manufacturing facilities in Maryland. We also manufacture the in-fiber
Bragg gratings used in our optical transport product lines. We expect the
majority of the manufacturing associated with our MultiWave CoreDirector and
CoreDirector CI products will be performed by third-party manufacturers, with
only final system test and assembly performed by CIENA. We also rely on
third-party manufacturers to manufacture some of our components for our products
and continue to evaluate whether additional portions of our manufacturing can be
done on a reliable and cost-effective basis by third-party manufacturers.
CIENA believes that portions of its manufacturing technologies and
processes represent a key competitive advantage. Accordingly, we have invested
significantly in automated production capabilities and manufacturing process
improvements and expect to further enhance our manufacturing process with
additional production process control systems. Some critical manufacturing
functions require a highly skilled work force, and CIENA puts significant
efforts into training and maintaining the quality of its manufacturing personnel
and in maintaining its proprietary information in this area.
CIENA's optical transport product lines utilize hundreds of individual
parts, many of which are customized for CIENA. Component suppliers in the
specialized, high technology end of the optical communications industry are
generally not as plentiful or, in some cases, as reliable, as component
suppliers in more mature industries. CIENA works closely with its strategic
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component suppliers to pursue new component technologies that could either
reduce cost or enhance the performance of our products.
COMPETITION
Competition in the telecommunications equipment industry is intense,
particularly in that portion of the industry focused on delivering higher
bandwidth and more cost effective services throughout the telecommunications
network. CIENA believes that its position as a leading supplier of open
architecture optical networking equipment and the field-tested design and
performance of its optical transport products give it a competitive advantage,
and CIENA expects to leverage that advantage in bringing its core switching
products to market. However, competition has been and will continue to be very
intense. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and "Risk Factors".
CIENA's competition is dominated by a small number of very large, usually
multinational, vertically integrated companies, each of which has substantially
greater financial, technical and marketing resources, and greater manufacturing
capacity as well as more established customer relationships with long distance
carriers than CIENA. Included among CIENA's competitors are Alcatel Alsthom
Group, Cisco, Fujitsu Group, Hitachi Ltd., Lucent Technologies Inc., NEC
Corporation, Nortel Networks Corporation, Siemens AG, Telefon AB LM Ericsson and
several new companies, such as ONI Systems, Sycamore Networks, Corvis Systems,
and Tellium, Inc. CIENA believes each of its major competitors is in various
stages of development, introduction or deployment of products directly
competitive with CIENA's optical transport, core switching and service delivery
systems.
In addition to optical networking equipment suppliers, traditional
TDM-based transmission equipment suppliers compete with CIENA in the market for
transmission capacity. Alcatel, Fujitsu, Hitachi, Lucent, NEC and Nortel are
already providers of a full complement of such transmission equipment. These and
other competitors have introduced or are expected to introduce equipment that
will offer 10 Gbps transmission capability.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
CIENA has licensed intellectual property from third parties, including key
enabling technologies with respect to the production of in-fiber Bragg gratings,
utilized publicly available technology associated with Erbium-doped fiber
amplifiers, and applied its design, engineering and manufacturing skills to
develop its optical transport systems. These licenses expire when the last of
the licensed patents expires or is abandoned. CIENA also licenses from third
parties some software components for its network management products. These
licenses are perpetual but will generally terminate after an uncured breach of
the agreement by CIENA. We have registered trademarks for CIENA, WaveWatcher,
MODULE SCOPE, CIENA Optical Communications, Multiwave and Multiwave Sentry.
CIENA also relies on contractual rights, trade secrets and copyrights to
establish and protect its proprietary rights in its products.
CIENA intends to enforce vigorously its intellectual property rights if
infringement or misappropriation occurs.
CIENA's practice is to require its employees and consultants to execute
non-disclosure and proprietary rights agreements upon commencement of employment
or consulting arrangements with CIENA. These agreements acknowledge CIENA's
exclusive ownership of all intellectual property developed by the individual
during the course of his or her work with CIENA, and require that all
proprietary information disclosed to the individual will remain confidential.
CIENA's employees generally also sign agreements not to compete with CIENA for a
period of twelve months following any termination of employment.
As of November 2000, CIENA had received fifty-eight United States patents,
and had one hundred sixteen pending U.S. patent applications. We also have a
number of foreign patents and patent applications. Of the United States patents
that have been issued to CIENA, the earliest
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any will expire is 2012. Pursuant to an agreement between CIENA and General
Instrument Corporation dated March 10, 1997, CIENA is a co-owner with General
Instrument Corporation of a portfolio of 27 United States and foreign patents
relating to optical communications, primarily for video-on-demand applications.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors".
EMPLOYEES
As of October 31, 2000, CIENA and its subsidiaries employed 2,775 persons,
of whom 527 were primarily engaged in research and development activities, 1,233
in manufacturing, 412 in installation services, 372 in sales, marketing,
customer support and related activities and 231 in administration. None of
CIENA's employees are currently represented by a labor union. CIENA considers
its relations with its employees to be good.
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DESCRIPTION OF NOTES
The notes will be issued under an indenture between us and First Union
National Bank, as trustee, substantially in the form filed as an exhibit to the
registration statement of which this prospectus forms a part. The indenture and
the notes are governed by New York law. Because this section is a summary, it
does not describe every aspect of the notes and the indenture. The following
summaries of certain provisions of the indenture do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
detailed provision of the notes and the indenture, including the definitions
therein of certain terms.
GENERAL
The notes will be senior, unsecured general obligations of CIENA. The notes
will be limited to $600.0 million aggregate principal amount or $690.0 million
if the underwriters exercise in full their right to purchase additional notes to
cover over-allotments. We are required to repay the principal amount of the
notes in full on February 1, 2008, unless they are redeemed or repurchased on an
earlier date. The notes will rank equally with our other senior unsecured
obligations.
The notes will bear interest at the rate per annum shown on the front cover
of this prospectus from February 9, 2001. We will pay interest on the notes on
February 1 and August 1 of each year, commencing on August 1, 2001. Interest
payable per $1,000 principal amount of notes for the period from February 9,
2001 to August 1, 2001 will be approximately $17.92.
You may convert the notes into shares of our common stock initially at the
conversion rate stated on the front cover of this prospectus at any time before
the close of business on February 1, 2008, unless the notes have been previously
redeemed or repurchased. Holders of notes called for redemption or submitted for
repurchase will be entitled to convert the notes up to and including the
business day immediately preceding the date fixed for redemption or repurchase,
as the case may be. The conversion rate may be adjusted as described below.
We may redeem the notes at our option at any time on or after the third
business day after February 1, 2004, in whole or in part, at the redemption
prices set forth below under "-- Optional Redemption by CIENA", plus accrued and
unpaid interest to the redemption date. If we undergo a change in control of us,
you will have the right to require us to repurchase your notes as described
below under "-- Repurchase at Option of Holders Upon a Change In Control".
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
The notes will be issued:
- only in fully registered form;
- without interest coupons; and
- in denominations of $1,000 and greater multiples.
The notes will be evidenced by one or more global notes, which will be
deposited with the trustee as custodian for the Depository Trust Company, or
DTC, and registered in the name of Cede & Co., as nominee of DTC. Except as set
forth below, record ownership of the global note may be transferred, in whole or
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
The global note will not be registered in the name of any person, or
exchanged for notes that are registered in the name of any person, other than
DTC or its nominee, unless either of the following occurs:
- DTC notifies us that it is unwilling, unable or no longer qualified to
continue acting as the depositary for the global note; or
- an event of default with respect to the notes represented by the global
note has occurred and is continuing.
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In those circumstances, DTC will determine in whose names any securities
issued in exchange for the global note will be registered.
DTC or its nominee will be considered the sole owner and holder of the
global note for all purposes, and as a result:
- you cannot receive notes registered in your name if they are represented
by the global note;
- you cannot receive physical certificated notes in exchange for your
beneficial interest in the global note;
- you will not be considered to be the owner or holder of the global note
or any note it represents for any purpose; and
- all payments on the global note will be made to DTC or its nominee.
The laws of some jurisdictions require that certain kinds of purchasers,
such as insurance companies, can only own securities in definitive, certificated
form. These laws may limit your ability to transfer your beneficial interests in
the global note to these types of purchasers.
Only institutions, such as a securities broker or dealer, that have
accounts with DTC or its nominee, called "participants", and persons that may
hold beneficial interests through participants can own a beneficial interest in
the global note. The only place where the ownership of beneficial interests in
the global note will appear and the only way the transfer of those interests can
be made will be on the records kept by DTC for their participants' interests and
the records kept by those participants for interests of persons held by
participants on their behalf.
Secondary trading in bonds and notes of corporate issuers is generally
settled in clearinghouse, that is, next-day, funds. In contrast, beneficial
interests in a global note usually trade in DTC's same-day funds settlement
system, and settle in immediately available funds. We make no representations as
to the effect that settlement in immediately available funds will have on
trading activity in those beneficial interests.
We will make cash payments of interest on and principal and the redemption
or repurchase price of the global note, as well as any payment of liquidated
damages, to Cede, the nominee for DTC, as the registered owner of the global
note. We will make these payments by wire transfer of immediately available
funds on each payment date.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the notes represented by the global note as
shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on that payment date. Payments by participants to owners of
beneficial interests in notes represented by the global note held through
participants will be the responsibility of those participants, as is now the
case with securities held for the accounts of customers registered in street
name.
We will send any redemption notices to Cede. We understand that if less
than all the notes are being redeemed, DTC's practice is to determine by lot the
amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date for
any vote or consent. The omnibus proxy assigns Cede's consenting or voting
rights to those participants to whose accounts the notes are credited on the
record date identified in a listing attached to the omnibus proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge the
interest to persons or entities that do not participate
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in the DTC book-entry system, or otherwise take actions in respect of that
interest, may be affected by the lack of a physical certificate evidencing its
interest.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange, only at the
direction of one or more participants to whose account with DTC interests in the
global note are credited and only in respect of such portion of the principal
amount of the notes represented by the global note as to which such participant
or participants has or have given such direction.
DTC has also advised us as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York, member of the Federal Reserve System, "clearing
corporation" within the meaning of the Uniform Commercial Code and
"clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act;
- DTC was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants;
- participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations;
- certain participants, or their representatives, together with other
entities, own DTC; and
- indirect access to the DTC system is available to other entities such as
banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
The policies and procedures of DTC, which may change periodically, will
apply to payments, transfers, exchanges and other matters relating to beneficial
interests in the global note. We and the trustee have no responsibility or
liability for any aspect of DTC's or any participant's records relating to
beneficial interests in the global note, including for payments made on the
global note. Further, we and the trustee are not responsible for maintaining,
supervising or reviewing any of those records.
CONVERSION RIGHTS
You have the option to convert any portion of the principal amount of any
note that is an integral multiple of $1,000 into shares of our common stock at
any time on or prior to the close of business on the maturity date, unless the
notes have been previously redeemed or repurchased. The conversion rate will be
equal to 9.5808 shares per $1,000 principal amount of notes. The conversion rate
is equivalent to a conversion price of approximately $104.38 per share. Your
right to convert a note called for redemption or delivered for repurchase will
terminate at the close of business on the business day immediately preceding the
redemption date or repurchase date for that note, unless we default in making
the payment due upon redemption or repurchase.
You may convert all or part of any note by delivering the note at the
Corporate Trust Office of the trustee in the Borough of Manhattan, The City of
New York, accompanied by a duly signed and completed conversion notice, a copy
of which may be obtained from the trustee. The conversion date will be the date
on which the note and the duly signed and completed conversion notice are so
delivered.
As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of our common stock issuable upon conversion, together with payment in
lieu of any fraction of a share. The certificate or certificates will then be
sent by the trustee to the conversion agent for delivery to the holder of the
note being converted. The shares of our common stock issuable upon conversion of
the
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notes will be fully paid and nonassessable and will rank equally with the other
shares of our common stock.
If you surrender a note for conversion on a date that is not an interest
payment date, you will not be entitled to receive any interest for the period
from the immediately preceding interest payment date to the conversion date,
except as described below in this paragraph. Any note surrendered for conversion
during the period from the close of business on any regular record date to the
opening of business on the next succeeding interest payment date, except notes,
or portions thereof, called for redemption on a redemption date or to be
repurchased on a repurchase date for which the right to convert would terminate
during such period, must be accompanied by payment of an amount equal to the
interest payable on such interest payment date on the principal amount of notes
being surrendered for conversion. In the case of any note that has been
converted after any regular record date but before the next succeeding interest
payment date, interest payable on such interest payment date shall be payable on
such interest payment date notwithstanding such conversion, and such interest
shall be paid to the holder of such note on such regular record date.
No other payment or adjustment for interest, or for any dividends in
respect of our common stock, will be made upon conversion. Holders of our common
stock issued upon conversion will not be entitled to receive any dividends
payable to holders of our common stock as of any record time or date before the
close of business on the conversion date. We will not issue fractional shares
upon conversion. Instead, we will pay cash based on the market price of our
common stock at the close of business on the conversion date.
You will not be required to pay any taxes or duties relating to the issue
or delivery of our common stock on conversion, but you will be required to pay
any tax or duty relating to any transfer involved in the issue or delivery of
our common stock in a name other than yours. Certificates representing shares of
our common stock will not be issued or delivered unless all taxes and duties, if
any, payable by you have been paid.
The conversion rate will be subject to adjustment for, among other things:
- dividends and other distributions payable in our common stock on shares
of our capital stock;
- the issuance to all holders of our common stock of rights, options or
warrants entitling them to subscribe for or purchase our common stock at
less than the then current market price of such common stock as of the
record date for shareholders entitled to receive such rights, options or
warrants;
- subdivisions, combinations and reclassifications of our common stock;
- distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, cash or assets, including
securities, but excluding:
- those dividends, rights, options, warrants and distributions
referred to above;
- dividends and distributions paid exclusively in cash; and
- distributions upon mergers or consolidations discussed below;
- distributions consisting exclusively of cash, excluding any cash portion
of distributions referred to in the bullet point immediately above, or
cash distributed upon a merger or consolidation to which the next
succeeding bullet point applies, to all holders of our common stock in an
aggregate amount that, combined together with:
- other all-cash distributions made within the preceding 365-day
period in respect of which no adjustment has been made; and
- any cash and the fair market value of other consideration payable
in connection with any tender offer by us or any of our
subsidiaries for our common stock
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concluded within the preceding 365-day period in respect of which
no adjustment has been made,
exceeds 10% of our market capitalization, being the product of the
current market price per share of our common stock on the record date for
such distribution and the number of shares of common stock then
outstanding; and
- the successful completion of a tender offer made by us or any of our
subsidiaries for our common stock which involves an aggregate
consideration that, together with:
- any cash and other consideration payable in a tender offer by us or
any of our subsidiaries for our common stock expiring within the
365-day period preceding the expiration of that tender offer in
respect of which no adjustment has been made; and
- the aggregate amount of all cash distributions referred to in the
immediately preceding bullet point above to all holders of our
common stock within the 365-day period preceding the expiration of
that tender offer in respect of which no adjustments have been
made,
exceeds 10% of our market capitalization on the expiration of such tender
offer.
We reserve the right to effect such increases in the conversion rate in
addition to those required by the foregoing provisions as we consider to be
advisable so that any event treated for United States federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
recipients. We will not be required to make any adjustment to the conversion
rate until the cumulative adjustments amount to 1.0% or more of the conversion
rate. We will compute all adjustments to the conversion rate and will give
notice by mail to holders of the registered notes of any adjustments.
If we consolidate or merge with or into another entity or another entity is
merged into us, or in case of any sale or transfer of all or substantially all
of our assets, each note then outstanding will become convertible only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
common stock into which the notes were convertible immediately prior to the
consolidation or merger or sale or transfer. The preceding sentence will not
apply to a merger that does not result in any reclassification, conversion,
exchange or cancellation of our common stock.
We may increase the conversion rate for any period of at least 20 days,
upon at least 15 days notice, if our board of directors determines that the
increase would be in our best interest. The board of directors' determination in
this regard will be conclusive. We will give holders of notes at least 15 days'
notice of such an increase in the conversion rate. No such increase, however,
will be taken into account for purposes of determining whether the closing price
of our common stock exceeds the conversion price by 105% in connection with an
event that otherwise would be a change in control as defined below.
If at any time we make a distribution of property to our stockholders that
would be taxable to such stockholders as a dividend for United States federal
income tax purposes, such as distributions of evidences of indebtedness or
assets by us, but generally not stock dividends on common stock or rights to
subscribe for common stock, and, pursuant to the anti-dilution provisions of the
indenture, the number of shares into which notes are convertible is increased,
that increase may be deemed for United States federal income tax purposes to be
the payment of a taxable dividend to holders of notes. See "Important United
States Federal Income Tax Consequences -- U.S. Holders".
OPTIONAL REDEMPTION BY CIENA
On or after the third business day after February 1, 2004, we may redeem
the notes in whole or in part, at our option, at the prices set forth below. If
we elect to redeem all or part of the notes, we will give at least 30, but no
more than 60, days notice to you.
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The redemption price, expressed as a percentage of principal amount, is as
follows for the following periods:
REDEMPTION
PERIOD PRICE
------ ----------
Beginning on the third business day after February 1, 2004
and ending on January 31, 2005............................ 102.143%
Beginning on February 1, 2005 and ending on January 31,
2006...................................................... 101.607%
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%
and thereafter is equal to 100% of the principal amount. In each case, we will
pay interest to, but excluding the redemption date.
No sinking fund is provided for the notes, which means that the indenture
does not require us to redeem or retire the notes periodically.
We may, to the extent permitted by applicable law, at any time purchase
notes in the open market, by tender at any price or by private agreement. Any
note that we purchase may, to the extent permitted by applicable law, be
re-issued or resold or may, at our option, be surrendered to the trustee for
cancellation. Any notes surrendered for cancellation may not be re-issued or
resold and will be canceled promptly.
PAYMENT AND CONVERSION
We will make all payments of principal and interest on the notes by dollar
check drawn on an account maintained at a bank in The City of New York. If you
hold registered notes with a face value greater than $2,000,000, at your request
we will make payments of principal or interest to you by wire transfer to an
account maintained by you at a bank in The City of New York. Payment of any
interest on the notes will be made to the person in whose name the note, or any
predecessor note, is registered at the close of business on January 15 or July
15, whether or not a business day, immediately preceding the relevant interest
payment date, a "regular record date". If you hold registered notes with a face
value in excess of $2,000,000 and you would like to receive payments by wire
transfer, you will be required to provide the trustee with wire transfer
instructions at least 15 days prior to the relevant payment date.
Payments on any global note registered in the name of DTC or its nominee
will be payable by the trustee to DTC or its nominee in its capacity as the
registered holder under the indenture. Under the terms of the indenture, we and
the trustee will treat the persons in whose names the notes, including any
global note, are registered as the owners for the purpose of receiving payments
and for all other purposes. Consequently, neither we, the trustee nor any of our
agents or the trustee's agents has or will have any responsibility or liability
for:
- any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of
beneficial ownership interests in the global note, or for maintaining,
supervising or reviewing any of DTC's records or any participant's or
indirect participant's records relating to the beneficial ownership
interests in the global note; or
- any other matter relating to the actions and practices of DTC, or any of
its participants or indirect participants.
We will not be required to make any payment on the notes due on any day
which is not a business day until the next succeeding business day. The payment
made on the next succeeding business day will be treated as though it were paid
on the original due date and no interest will accrue on the payment for the
additional period of time.
Notes may be surrendered for conversion at the Corporate Trust Office of
the trustee in the Borough of Manhattan, New York. Notes surrendered for
conversion must be accompanied by
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appropriate notices and any payments in respect of interest or taxes, as
applicable, as described above under "-- Conversion Rights".
We have initially appointed the trustee as paying agent and conversion
agent. We may terminate the appointment of any paying agent or conversion agent
and appoint additional or other paying agents and conversion agents. However,
until the notes have been delivered to the trustee for cancellation, or moneys
sufficient to pay the principal of, premium, if any, and interest on the notes
have been made available for payment, and either paid or returned to us as
provided in the indenture, the trustee will maintain an office or agency in the
Borough of Manhattan, New York for surrender of notes for conversion. Notice of
any termination or appointment and of any change in the office through which any
paying agent or conversion agent will act will be given in accordance with
"-- Notices" below.
All moneys deposited with the trustee or any paying agent, or then held by
us, in trust for the payment of principal of, premium, if any, or interest on
any notes which remain unclaimed at the end of two years after the payment has
become due and payable will be repaid to us, and you will then look only to us
for payment.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a "change in control" as defined below occurs, you will have the right,
at your option, to require us to repurchase all of your notes not previously
called for redemption, or any portion of the principal amount thereof, that is
equal to $1,000 or an integral multiple of $1,000. The price we are required to
pay is 100% of the principal amount of the notes to be repurchased, together
with interest accrued to, but excluding, the repurchase date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in our common stock valued at 95% of the average of the
closing prices of our common stock for the five trading days immediately
preceding and including the third trading day prior to the repurchase date. We
may only pay the repurchase price in our common stock if we satisfy conditions
provided in the indenture.
Within 30 days after the occurrence of a change in control, we are
obligated to give to you notice of the change in control and of the repurchase
right arising as a result of the change of control. We must also deliver a copy
of this notice to the trustee. To exercise the repurchase right, you must
deliver on or before the 30th day after the date of our notice irrevocable
written notice to the trustee of your exercise of your repurchase right,
together with the notes with respect to which that right is being exercised. We
are required to repurchase the notes on the date that is 45 days after the date
of our notice.
A change in control will be deemed to have occurred at the time after the
notes are originally issued that any of the following occurs:
- any person, as defined below, acquires beneficial ownership, directly or
indirectly, through a purchase, merger or other acquisition transaction
or series of transactions, of shares of our capital stock entitling that
person to exercise 50% or more of the total voting power of all shares of
our capital stock that is entitled to vote generally in elections of
directors, other than an acquisition by us, any of our subsidiaries or
any of our employee benefit plans; or
- we merge or consolidate with or into any other person, any merger of
another person into us or we convey, sell, transfer or lease all or
substantially all of our assets to another person, other than any such
transaction:
- that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital
stock;
- pursuant to which the holders of 50% or more of the total voting
power of all shares of our capital stock entitled to vote
generally in elections of directors immediately prior to such
transaction have the entitlement to exercise, directly
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or indirectly, 50% or more of the total voting power of all
shares of capital stock entitled to vote generally in the
election of directors of the continuing or surviving corporation
immediately after such transaction; or
- which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of our common stock into solely
shares of common stock of the surviving entity.
However, a change in control will not be deemed to have occurred if either:
- the closing price per share of our common stock for any five trading days
within the period of 10 consecutive trading days ending immediately after
the later of the change in control or the public announcement of the
change in control, in the case of a change in control relating to an
acquisition of capital stock, or the period of 10 consecutive trading
days ending immediately before the change in control, in the case of
change in control relating to a merger, consolidation or asset sale,
equals or exceeds 105% of the conversion price of the notes in effect on
each of those five trading days; or
- all of the consideration, excluding cash payments for fractional shares
and cash payments made pursuant to dissenters' appraisal rights, in a
merger or consolidation otherwise constituting a change of control under
the first and second bullet points in the preceding paragraph above
consists of shares of common stock traded on a national securities
exchange or quoted on the Nasdaq National Market, or will be so traded or
quoted immediately following such merger or consolidation, and as a
result of such merger or consolidation the notes become convertible
solely into such common stock.
For purposes of these provisions:
- the conversion price is equal to $1,000 divided by the conversion rate;
- whether a person is a "beneficial owner" will be determined in accordance
with Rule 13d-3 under the Exchange Act; and
- a "person" includes any syndicate or group that would be deemed to be a
person under Section 13(d)(3) of the Exchange Act.
The rules and regulations promulgated under the Exchange Act require the
dissemination of prescribed information to security holders in the event of an
issuer tender offer and may apply if the repurchase option becomes available to
you. We will comply with these rules to the extent they apply to us at that
time.
The definition of change in control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of all or substantially all of
our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, your ability to require
us to repurchase your notes as a result of conveyance, transfer, sale, lease or
other disposition of less than all of our assets may be uncertain.
The foregoing provisions would not necessarily provide you with the
protection if we are involved in a highly leveraged or other transaction that
may adversely affect you.
Our ability to repurchase notes upon the occurrence of a change in control
is subject to important limitations. Some of the events constituting a change in
control could result in an event of default under, or be prohibited or limited
by, the terms of our then existing borrowing arrangements. Further, although we
have the right to repurchase the notes with our common stock, subject to certain
conditions, we cannot assure you that we would have the financial resources, or
would be able to arrange financing, to pay the repurchase price in cash for all
the notes that might be delivered by holders of notes seeking to exercise the
repurchase right. If we were to fail to repurchase the notes when required
following a change in control, an event of default under the indenture would
occur, whether or not such repurchase is permitted by the terms of our then
existing borrowing arrangements. Any such default may, in turn, cause a default
under our other debt.
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MERGERS AND SALES OF ASSETS BY CIENA
We may not consolidate with or merge into any other person or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any person, and we may not permit any person to consolidate with or merge
into us or convey, transfer, sell or lease such person's properties and assets
substantially as an entirety to us unless:
- the person formed by such consolidation or into or with which we are
merged or the person to which our properties and assets are so conveyed,
transferred, sold or leased, shall be a corporation, limited liability
company, partnership or trust organized and validly existing under the
laws of the United States, any State within the United States or the
District of Columbia and, if we are not the surviving person, the
surviving person files a supplement to the indenture and expressly
assumes the payment of the principal of, premium, if any, and interest on
the notes and the performance of our other covenants under the indenture;
- immediately after giving effect to the transaction, no event of default,
and no event that, after notice or lapse of time or both, would become an
event of default, will have occurred and be continuing; and
- other requirements as described in the indenture are met.
EVENTS OF DEFAULT
The following will be events of default under the indenture:
- we fail to pay principal of or premium, if any, on any note when due;
- we fail to pay any interest on any note when due, which failure continues
for 30 days;
- we fail to provide notice of a change in control;
- we fail to perform any other covenant in the indenture, which failure
continues for 60 days after written notice as provided in the indenture;
- any indebtedness under any bonds, debentures, notes or other evidences of
indebtedness for money borrowed, or any guarantee thereof, by us or any
of our significant subsidiaries in an aggregate principal amount in
excess of $25 million is not paid when due either at its stated maturity
or upon acceleration thereof, and such indebtedness is not discharged, or
such acceleration is not rescinded or annulled, within a period of 30
days after notice as provided in the indenture; and
- certain events of bankruptcy, insolvency or reorganization involving us
or any of our significant subsidiaries.
Subject to the provisions of the indenture relating to the duties of the
trustee in case an event of default shall occur and be continuing, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any holder, unless the holder shall
have furnished reasonable indemnity to the trustee. Subject to providing
indemnification of the trustee, the holders of a majority in aggregate principal
amount of the outstanding notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee.
If an event of default other than an event of default arising from events
of insolvency, bankruptcy or reorganization occurs and is continuing, either the
trustee or the holders of at least 25% in principal amount of the outstanding
notes may accelerate the maturity of all notes. However, after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding notes may, under
certain circumstances, rescind and annul the acceleration if all events of
default, other than the non-payment of principal of the notes that have become
due solely by such declaration of acceleration, have been cured or waived as
provided in the indenture. If an event of default
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arising from events of insolvency, bankruptcy or reorganization occurs, then the
principal of, and accrued interest on, all the notes will automatically become
immediately due and payable without any declaration or other act on the part of
the holders of the notes or the trustee. For information as to waiver of
defaults, see "-- Meetings, Modification and Waiver" below.
You will not have any right to institute any proceeding with respect to the
indenture, or for any remedy under the indenture, unless:
- you give the trustee written notice of a continuing event of default;
- the holders of at least 25% in aggregate principal amount of the
outstanding notes have made written request and offered reasonable
indemnity to the trustee to institute proceedings;
- the trustee has not received from the holders of a majority in aggregate
principal amount of the outstanding notes a direction inconsistent with
the written request; and
- the trustee shall have failed to institute such proceeding within 60 days
of the written request.
However, these limitations do not apply to a suit instituted by you for the
enforcement of payment of the principal of, premium, if any, or interest on your
note on or after the respective due dates expressed in your note or your right
to convert your note in accordance with the indenture.
We will be required to furnish to the trustee annually a statement as to
our performance of certain of our obligations under the indenture and as to any
default in such performance.
MEETINGS, MODIFICATION AND WAIVER
The indenture contains provisions for convening meetings of the holders of
notes to consider matters affecting their interests.
Certain limited modifications of the indenture may be made without the
necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the indenture may be made, and certain past
defaults by us may be waived, either:
- with the written consent of the holders of not less than a majority in
aggregate principal amount of the notes at the time outstanding; or
- by the adoption of a resolution, at a meeting of holders of the notes at
which a quorum is present, by the holders of at least 66 2/3% in
aggregate principal amount of the notes represented at such meeting.
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes at
the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
However, a modification or amendment requires the consent of the holder of
each outstanding note affected if it would:
- change the stated maturity of the principal or interest of a note;
- reduce the principal amount of, or any premium or interest on, any note;
- reduce the amount payable upon a redemption or mandatory repurchase;
- modify the provisions with respect to the repurchase rights of holders of
notes in a manner adverse to the holders;
- change the place or currency of payment on a note;
- impair the right to institute suit for the enforcement of any payment on
any note;
- modify our obligation to maintain an office or agency in New York City;
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- adversely affect the right to convert the notes;
- reduce the above-stated percentage of the principal amount of the holders
whose consent is needed to modify or amend the indenture;
- reduce the percentage of the principal amount of the holders whose
consent is needed to waive compliance with certain provisions of the
indenture or to waive certain defaults; or
- reduce the percentage required for the adoption of a resolution or the
quorum required at any meeting of holders of notes at which a resolution
is adopted.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by us with certain restrictive provisions of the
indenture by written consent. Holders of at least 66 2/3% in aggregate of the
principal amount of notes represented at a meeting may also waive compliance by
us with certain restrictive provisions of the indenture by the adoption of a
resolution at the meeting if a quorum of holders are present and certain other
conditions are met. The holders of a majority in aggregate principal amount of
the outstanding notes also may waive by written consent any past default under
the indenture, except a default in the payment of principal, premium, if any, or
interest.
NOTICES
Notice to holders of the registered notes will be given by mail to the
addresses as they appear in the security register. Notices will be deemed to
have been given on the date of such mailing.
Notice of a redemption of notes will be given not less than 30 nor more
than 60 days prior to the redemption date and will specify the redemption date.
A notice of redemption of the notes will be irrevocable.
REPLACEMENT OF NOTES
We will replace any note that becomes mutilated, destroyed, stolen or lost
at the expense of the holder upon delivery to the trustee of the mutilated notes
or evidence of the loss, theft or destruction satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity satisfactory
to the trustee and us may be required at the expense of the holder of the note
before a replacement note will be issued.
PAYMENT OF STAMP AND OTHER TAXES
We will pay all stamp and other duties, if any, that may be imposed by the
United States or any political subdivision thereof or taxing authority thereof
or therein with respect to the issuance of the notes or of shares of stock upon
conversion of the notes. We will not be required to make any payment with
respect to any other tax, assessment or governmental charge imposed by any
government or any political subdivision thereof or taxing authority thereof or
therein.
GOVERNING LAW
The indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York, United States of America.
THE TRUSTEE
If an event of default occurs and is continuing, the trustee will be
required to use the degree of care of a prudent person in the conduct of his own
affairs in the exercise of its powers. Subject to such provisions, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request of any of the holders of notes, unless they shall have
furnished to the trustee reasonable security or indemnity.
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IMPORTANT UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of some U.S. federal income tax considerations
relating to the purchase, ownership and disposition of the notes and common
stock into which the notes may be converted, but does not purport to be a
complete analysis of all the potential tax considerations relating to the notes.
This summary is based on laws, regulations, rulings and decisions now in effect,
all of which are subject to change or differing interpretation, possibly with
retroactive effect. This summary applies only to beneficial owners that will
hold notes and common stock into which notes may be converted as "capital
assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986,
or the "Code". For purposes of this discussion, U.S. Holders are holders who,
for U.S. federal income tax purposes, are: (1) individual citizens or residents
of the U.S.; (2) corporations, partnerships or other entities created or
organized in or under the laws of the U.S. or of any political subdivision
thereof unless, in the case of a partnership, Treasury Regulations otherwise
provide; (3) estates, the incomes of which are subject to U.S. federal income
taxation regardless of the source of such income or; (4) trusts subject to the
primary supervision of a U.S. court and the control of one or more U.S. persons
(collectively, "U.S. Holders").
Persons other than U.S. Holders ("Non-U.S. Holders") are subject to special
U.S. federal income tax considerations, some of which are discussed below. This
discussion does not address tax considerations applicable to an investor's
particular circumstances or to investors that may be subject to special tax
rules, such as: banks; holders subject to the alternative minimum tax;
tax-exempt organizations; insurance companies; foreign persons or entities,
except to the extent specifically set forth below; dealers in securities or
currencies; persons that will hold notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes; or persons deemed to
sell notes or common stock under the constructive sale provisions of the Code.
This summary discusses the tax considerations applicable to initial
purchasers of the notes who purchase the notes at their "issue price" as defined
in Section 1273 of the Code and does not discuss the tax considerations
applicable to subsequent purchasers of the notes. We have not sought any ruling
from the Internal Revenue Service, or the IRS, or an opinion of counsel with
respect to the statements made and the conclusions reached in the following
summary. We cannot assure you that the IRS will agree with these statements and
conclusions. In addition, the IRS is not precluded from successfully adopting a
contrary position. This summary does not consider the effect of the federal
estate or gift tax laws, except as set forth below with respect to Non-U.S.
Holders, or of any applicable foreign, state, local or other jurisdiction.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL TAX LAWS
TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE
FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
U.S. HOLDERS
TAXATION OF INTEREST
Interest paid on the notes will be included in the income of a U.S. Holder
as ordinary income at the time it is treated as received or accrued, in
accordance with such holder's regular method of accounting for U.S. federal
income tax purposes. Under Treasury Regulations, the possibility of differences
in the amount and/or timing of payments under a note in the event of certain
contingencies may be disregarded for purposes of determining the amount of
interest income to be recognized by a holder in respect of such note, or the
timing of such recognition, if the likelihood of the contingency, as of the date
the notes are issued, is remote. We intend to take the position that an early
redemption or repurchase of the notes by us, including a required redemption of
the notes by us at the option of the holder in the event of a change of control,
is
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remote under the Treasury Regulations, and do not intend to treat such
contingencies as affecting the yield to maturity of any note. In the event any
such contingency occurs, it would affect the amount and timing of the income
that must be recognized by a U.S. Holder of notes. We cannot assure you that the
IRS will agree with this position.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the sale, exchange, other than a conversion, or redemption of a note,
a U.S. Holder generally will recognize capital gain or loss equal to the
difference between (1) the amount of cash proceeds and the fair market value of
any property received on the sale, exchange or redemption, except to the extent
this amount is attributable to accrued interest income not previously included
in income, which will be taxable as ordinary income, or is attributable to
accrued interest that was previously included in income, which amount may be
received without generating further income, and (2) the holder's adjusted tax
basis in the note. A U.S. Holder's adjusted tax basis in a note generally will
equal the cost of the note to the holder. This capital gain or loss will be
long-term capital gain or loss if the U.S. Holder's holding period in the note
is more than one year at the time of sale, exchange or redemption. Long-term
capital gains recognized by some non-corporate U.S. Holders, including
individuals, will generally be subject to a maximum rate of tax of 20%, except
in the case of long-term capital gains from notes held more than five years, in
which case the maximum tax rate is 18%. The deductibility of capital losses is
subject to limitations.
CONVERSION OF THE NOTES
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except with respect to (i) common stock
received with respect to interest that has accrued but was not included in
income and (ii) cash received in lieu of a fractional share of common stock.
Common stock received with respect to interest that has accrued but was not
included in income will be taxable to a U.S. Holder as ordinary interest income.
A U.S. Holder's tax basis in the common stock received on conversion of a note
will be the same as the holder's adjusted tax basis in the note at the time of
conversion, reduced by any basis allocable to a fractional share interest, and
the holding period for the common stock received on conversion will generally
include the holding period of the note converted. However, a U.S. Holder's tax
basis in shares of common stock considered attributable to accrued interest
generally will equal the amount of the accrued interest included in income, and
the holding period for the shares shall begin on the date of conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss, measured by the difference
between the cash received for the fractional share and the holder's adjusted tax
basis in the fractional share.
ADJUSTMENTS TO CONVERSION PRICE OF NOTES
Holders of convertible debt instruments such as the notes may, in some
circumstances, be deemed to have received distributions of stock if the
conversion price of these instruments is adjusted. Adjustments to the conversion
price made pursuant to a bona fide reasonable adjustment formula that has the
effect of preventing the dilution of the interest of the holders of the debt
instruments, however, will generally not be considered to result in a
constructive distribution of stock. Some of the possible adjustments provided in
the notes, including, without limitation, adjustments in respect of taxable
dividends to our stockholders, will not qualify as being pursuant to a bona fide
reasonable adjustment formula. If these adjustments are made, the U.S. Holders
of notes will be deemed to have received constructive distributions taxable as
dividends to the extent of our current and accumulated earnings and profits even
though they have not received any cash or property as a result of these
adjustments. In some circumstances, the failure to provide for an adjustment may
result in taxable dividend income to the U.S. Holders of common stock.
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DIVIDENDS ON COMMON STOCK
Distributions, if any, made on the common stock after a conversion
generally will be included in the income of a U.S. Holder as ordinary dividend
income to the extent of our current or accumulated earnings and profits.
Distributions in excess of our current and accumulated earnings and profits will
be treated as a return of capital to the extent of the U.S. Holder's basis in
the common stock and thereafter as capital gain. A dividend distribution to a
corporate U.S. Holder may qualify for a dividends received deduction.
SALE OF COMMON STOCK
Upon the sale or exchange of common stock, a U.S. Holder generally will
recognize capital gain or loss equal to the difference between (1) the amount of
cash and the fair market value of any property received on the sale or exchange
and (2) the U.S. Holder's adjusted tax basis in the common stock. This capital
gain or loss will be long-term capital gain or loss if the U.S. Holder's holding
period in common stock is more than one year at the time of the sale or
exchange. Long-term capital gains recognized by some non-corporate U.S. Holders,
including individuals, will generally be subject to a maximum rate of tax of
20%, except in the case of common stock held for more than five years, in which
case the maximum tax rate is 18%. A U.S. Holder's basis and holding period in
common stock received upon conversion of a note are determined as discussed
above under "Conversion of the Notes". The deductibility of capital losses is
subject to limitations.
SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) Payments of principal or interest on the notes by us or any paying
agent to a beneficial owner of a note that is a Non-U.S. Holder will not be
subject to U.S. withholding tax, provided that, in the case of interest,
(1) the Non-U.S. Holder does not own, actually or constructively, 10%
or more of the total combined voting power of all classes of our stock
entitled to vote within the meaning of Section 871(h)(3) of the Code,
(2) the Non-U.S. Holder is not a "controlled foreign corporation" with
respect to which we are a "related person" within the meaning of the Code,
(3) the Non-U.S. Holder is not a bank receiving interest described in
Section 881 (c)(3)(A) of the Code, and
(4) the U.S. payor of interest does not have actual knowledge or
reason to know that you are a United States person and the certification
requirements under Section 871(h) or Section 881(c) of the Code and related
Treasury Regulations, discussed below, are satisfied;
(b) A Non-U.S. Holder of a note or common stock will not be subject to U.S.
federal income tax on gains realized on the sale, exchange or other disposition
of such note or common stock unless
(1) the Non-U.S. Holder is an individual who is present in the U.S.
for 183 days or more in the taxable year of sale, exchange or other
disposition, and certain conditions are met,
(2) the gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the U.S. and, if certain U.S. income tax
treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder,
(3) the Non-U.S. Holder is subject to Code provisions applicable to
some U.S. expatriates, or
(4) in the case of a Non-U.S. Holder who holds more than 5% of the
notes or the common stock, we are or have been, at any time within the
shorter of the five-year period preceding the sale or other disposition or
the period such Non-U.S. Holder held the note or common stock, a U.S. real
property holding corporation, or a USRPHC for U.S. federal
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income tax purposes. We do not believe that we are currently a USRPHC or
that we will become one in the future;
(c) Interest on notes not excluded from U.S. withholding tax as described
in (a) above and dividends on common stock after conversion generally will be
subject to U.S. withholding tax at a 30% rate, except where an applicable tax
treaty provides for the reduction or elimination of such withholding tax.
The conversion price of the notes is subject to adjustment in some
circumstances. Any such adjustment could, in some circumstances, give rise to a
deemed distribution to Non-U.S. Holders of the notes. See "U.S.
Holders -- Adjustments to Conversion Price" above. In such case, the deemed
distribution would be subject to the rules described above regarding U.S.
withholding tax on dividends.
A Non-U.S. Holder generally should not be subject to U.S. federal income
tax on the conversion of a note into common stock. To the extent a non-U.S.
holder receives cash in lieu of a fractional share of common stock upon
conversion, such cash may give rise to gain that would subject to the rules
described above with respect to the sale, exchange or redemption of a note or
common stock. To the extent a Non-U.S. Holder receives upon conversion common
stock that is attributable to accrued interest not previously included in
income, such stock may give rise to income that would subject to the rules
described above with respect to the taxation of interest.
To satisfy the certification requirements referred to in (a)(4) above,
Sections 871(h) and 881(c) of the Code and the Treasury Regulations thereunder
require that either (1) the beneficial owner of a note must certify, under
penalties of perjury, to us or our paying agent, as the case may be, that the
owner is a Non-U.S. Holder and must provide the owner's name and address, and
U.S. taxpayer identification number, or TIN, if any, on Form W-8BEN, or a
suitable substitute form; or (2) an intermediary payee (such as a withholding
foreign partnership, qualified intermediary or U.S. branch of a non-U.S. bank or
of a non-U.S. insurance company) provides to us, or our paying agent, as the
case may be, a Form W-8IMY, signed under penalties of perjury and such
intermediary payee has obtained appropriate certification from the beneficial
owner on Form W-8IMY, W-8BEN or W-8ECI, as to the beneficial owners U.S. status;
or (3) a securities clearing organization, bank or other financial institution
that holds customer securities in the ordinary course of its trade or business,
which we refer to as a "Financial Institution", and holds the note on behalf of
the beneficial owner must certify, under penalties of perjury, to us or our
paying agent, as the case may be, that a Form W-8BEN or a suitable substitute
form has been received from the beneficial owner and must furnish the payor with
a copy thereof.
If a Non-U.S. Holder of a note or common stock is engaged in a trade or
business in the U.S. and if interest on the note, dividends on the common stock,
or gain realized on the sale, exchange or other disposition of the note or
common stock is effectively connected with the conduct of the trade or business
(and, if certain tax treaties apply, is attributable to a U.S. permanent
establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S.
Holder, although exempt from U.S. withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such interest, dividends or
gain on a net income basis in the same manner as if it were a U.S. Holder. In
lieu of the certificate described above, such a Non-U.S. Holder will be required
to provide us with a properly executed IRS Form W-8ECI or successor form in
order to claim an exemption from withholding tax. In addition, if such Non-U.S.
Holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30%, or any lower rate provided by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to adjustment.
A note held by an individual who at the time of death is not a citizen or
resident of the U.S., as specially defined for U.S. federal estate tax purposes,
will not be subject to U.S. federal estate tax if the individual did not
actually or constructively own 10% or more of the total combined voting power of
all classes of our stock and, at the time of the individual's death, payments
with respect to the note would not have been effectively connected with the
conduct by such
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individual of a trade or business in the U.S. Common stock held by an individual
who at the time of death is not a citizen or resident of the U.S., as specially
defined for U.S. federal estate tax purposes, will be included in such
individual's estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty otherwise applies.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the notes and common stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments pursuant to the terms of a note or common stock to a U.S. Holder that
is not an "exempt recipient" and that fails to provide certain identifying
information, such as the holder's TIN, in the manner required. Generally,
individuals are not exempt recipients, whereas corporations and some other
entities are exempt recipients. Payments made in respect of a note or common
stock must be reported to the IRS, unless the U.S. holder is an exempt recipient
or otherwise establishes an exemption.
In the case of payments of interest on a note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established, provided that
neither we nor a paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not in fact satisfied.
Dividends on the common stock paid to Non-U.S. Holders that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax.
Payments of the proceeds of the sale of a note or common stock to or
through a foreign office of a U.S. broker or a foreign office of a broker that
is a U.S. related person are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or the broker has the
requisite certification or documentary evidence in its records that the payee is
a Non-U.S. Holder and no actual knowledge that the evidence is false and certain
other conditions are met. Temporary Treasury Regulations indicate that these
payments are not currently subject to backup withholding.
Under current Treasury Regulations, payments of the proceeds of a sale of a
note or common stock to or through the U.S. office of a broker will be subject
to information reporting and backup withholding unless the payee certifies under
penalties of perjury as to his or her status as a Non-U.S. Holder and satisfies
certain other qualifications (and no agent of the broker who is responsible for
receiving or viewing such statement has actual knowledge that it is incorrect)
and provides his or her name and address or the payee otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a note or common stock will be allowed as a refund or credit against
such holder's U.S. federal income tax provided that the required information is
furnished to the IRS in a timely manner. THE PRECEDING DISCUSSION OF CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY
AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS
OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND COMMON STOCK
OF CIENA. TAX ADVISORS SHOULD ALSO BE CONSULTED AS TO THE U.S. ESTATE AND GIFT
TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE NOTES AND COMMON STOCK OF CIENA, AS WELL AS THE CONSEQUENCES OF
ANY PROPOSED CHANGE IN APPLICABLE LAWS.
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UNDERWRITING
CIENA and the underwriters named below have entered into an underwriting
agreement with respect to the notes being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the aggregate
principal amount at maturity of notes indicated in the following table. Goldman,
Sachs & Co., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC
and Robertson Stephens, Inc. are the representatives of the underwriters.
AGGREGATE PRINCIPAL
AMOUNT AT MATURITY
UNDERWRITERS OF NOTES
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Goldman, Sachs & Co. ....................................... $390,000,000
Morgan Stanley & Co. Incorporated........................... 90,000,000
Banc of America Securities LLC.............................. 60,000,000
Robertson Stephens, Inc. ................................... 60,000,000
------------
Total.................................................. $600,000,000
============
If the underwriters sell more notes than the total principal amount set
forth in the table above, the underwriters have an option to buy up to an
additional $90.0 million principal amount of notes from CIENA to cover such
sales. They may exercise that option for 30 days. If any notes are purchased
pursuant to this option, the underwriters will severally purchase notes in
approximately the same proportion as set forth in the table above.
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
from the initial public offering price of up to 1.8% of the principal amount of
the notes. Any such securities dealers may resell any notes purchased from the
underwriters to certain other brokers or dealers at a discount from the initial
public offering price of up to 0.01% of the principal amount of the notes. If
all the notes are not sold at the initial public offering price, the
underwriters may change the offering price and the other selling terms.
CIENA and some of its officers and directors have agreed with the
underwriters not to dispose of or hedge any of our common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 90 days after the
date of this prospectus, except with the prior written consent of Goldman, Sachs
& Co. CIENA's agreement does not apply to any securities issued: (i) under
employee benefit plans or dividend reinvestment plans, (ii) upon exercise of
currently outstanding stock options, (iii) upon conversion or exchange of
currently outstanding convertible or exchangeable securities, (iv) in connection
with the acquisition of Cyras Systems, Inc. or (v) in connection with other
mergers, acquisitions or similar transactions so long as the parties agree to be
bound by the terms of the lock-up. This agreement does not restrict us from
filing a shelf registration statement which includes equity securities. CIENA
will issue approximately 27 million shares of common stock if the Cyras
acquisition is consummated, almost all of which shares will be freely tradeable.
The notes are a new issue of securities with no established trading market.
CIENA has been advised by the underwriters that the underwriters intend to make
a market in the notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the notes.
In connection with the offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
notes than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the notes while the
offering is in progress.
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The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the other underwriters have repurchased notes
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
CIENA has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
CIENA estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$305,000.
Some of the underwriters have from time to time performed, and may in the
future perform, certain investment banking and advisory services for CIENA for
which they have received, and may in the future receive, customary fees and
expenses.
Lawton W. Fitt, a director of CIENA, is a Managing Director of Goldman,
Sachs & Co., one of the underwriters in this offering.
LEGAL MATTERS
Hogan & Hartson L.L.P., Baltimore, Maryland, will provide CIENA with an
opinion as to legal matters in connection with the notes and common stock
issuable upon conversion of the notes offered by this prospectus. Certain legal
matters in connection with this offering will be passed on for the underwriters
by Hale and Dorr LLP, Reston, Virginia.
EXPERTS
The consolidated financial statements of CIENA Corporation as of October
31, 2000 and 1999 and for each of the three years in the period ended October
31, 2000 incorporated in this prospectus by reference to CIENA's Annual Report
on Form 10-K for the year ended October 31, 2000, as amended January 18, 2001,
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, given on the authority of said firm as experts in auditing and accounting.
The financial statements of Cyras Systems, Inc. as of December 31, 1998 and
1999 and for the period from July 24, 1998 (inception) to December 31, 1998 and
for the year ended December 31, 1999, incorporated in this prospectus by
reference to the current report on Form 8-K of CIENA Corporation filed January
18, 2001, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated by reference in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC under the Securities Act a registration
statement on Form S-3. This prospectus does not contain all of the information
contained in the registration statement, certain portions of which have been
omitted under the rules of the SEC. We also file annual, quarterly and special
reports, proxy statements and other information with the SEC under the Exchange
Act. The Exchange Act file number for our SEC filings is 000-21969. You may read
and
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copy the registration statement and any other document we file at the following
SEC public reference rooms:
Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W. 14th Floor Suite 1300
Rm. 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330. We file information
electronically with the SEC. Our SEC filings are available from the SEC's
Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers that file
electronically. You may read and copy our SEC filings and other information at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the documents we file with
it, which means that we can disclose important information to you by referring
you to those documents instead of reproducing that information in this
prospectus. The information incorporated by reference is considered to be part
of this prospectus, and information in documents that we file later with the SEC
will automatically update and supersede information in this prospectus. We
incorporate by reference the documents listed below:
- Our Annual Report on Form 10-K for the fiscal year ended October 31,
2000, as amended on January 18, 2001;
- Our Form 8-K filed on January 18, 2001;
- All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 after the date of this prospectus
and before the termination of the offering; and
- The description of common stock contained in our Form 8-A filed on
January 13, 1997, as amended.
We will provide a copy of the documents we incorporate by reference, at no
cost, to any person who receives this prospectus. To request a copy of any or
all of these documents, you should write or telephone us at: 1201 Winterson
Road, Linthicum, MD, (410) 865-8500, Attention: Director, Investor Relations.
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell only the notes offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
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TABLE OF CONTENTS
Page
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Prospectus Summary....................... 3
Risk Factors............................. 8
Forward Looking Statements............... 18
Use of Proceeds.......................... 18
Selected Consolidated Financial Data..... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 20
Business................................. 27
Description of Notes..................... 40
Important United States Federal Income
Tax Consequences....................... 51
Underwriting............................. 56
Legal Matters............................ 57
Experts.................................. 57
Where You Can Find More Information...... 57
Incorporation by Reference............... 58
$600,000,000
CIENA CORPORATION
3.75% Convertible
Notes due February 1, 2008
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[Ciena logo]
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GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
ROBERTSON STEPHENS
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