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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
April 5, 1999
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Date of Report (Date of earliest event reported)
CIENA Corporation
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(Exact name of registrant as specified in its charter)
Delaware 0-21969 23-2725311
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
1201 Winterson Road, Linthicum, Maryland 21090
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(410) 865-8500
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Not applicable
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(Former name or former address, if changed since last report)
Exhibit Index on Page 2
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Item 5. Other Events.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, and following the closing of the
acquisition of Lightera Networks, Inc., CIENA Corporation is filing
cautionary statements identifying important factors that could cause CIENA's
actual results to differ materially from those projected in forward-looking
statements made by or on behalf of CIENA. A first group of these statements
relates primarily to CIENA's business prior to the acquisition of Lightera
Networks, Inc. and the pending acquisition of Omnia Communications, Inc.; a
second group of these statements address the ways in which certain risks are
magnified or newly introduced as a result of these acquisitions. These
statements amend and supersede prior cautionary statements filed by CIENA to
the extent that they are inconsistent with those statements, and are also
being re-formatted in response to the new "plain English" requirements of the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(99) Additional Exhibits
99.1 Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
CIENA CORPORATION
<S> <C>
Date: April 5, 1999 By: /s/ G. Eric Georgatos
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Sr. Vice President, General Counsel and
Secretary
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EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES REFORM ACT OF 1995
RISK FACTORS
COMPETITION IN THE RAPIDLY GROWING TELECOMMUNICATIONS INDUSTRY COULD HURT OUR
SALES AND PROFITABILITY.
We believe we have been able to achieve early product and market
leadership in the DWDM field because the global telecommunications industry had
not anticipated the rapidly growing need for higher and more cost-effective
bandwidth. We continue to believe that more than two years after our initial
shipments in 1996, our MultiWave 1600 and MultiWave Sentry 1600 and 4000 systems
are the only widely deployed and operational full 16-channel and 40-channel open
architecture DWDM systems anywhere in the world. We further believe that the
demonstrated commercial manufacturability of our MultiWave Sentry 4000 system
gives our high-capacity product offerings a level of credibility that our
competitors do not possess.
However, a small number of very large companies have historically
dominated the global telecommunications industry. Each of those companies have
greater financial, technical and marketing resources, greater manufacturing
capacity, broader product lines and more extensive and established customer
relationships with network operators than we do. Our competitors include Lucent,
Alcatel, Nortel, NEC, Pirelli, Siemens, Ericsson, Fujitsu, and Hitachi. Most of
these companies provide a full complement of switches, fiberoptic transmission
terminals and fiberoptic signal regenerators in addition to DWDM equipment. Many
of them have substantial economic interests in continuing sales of the legacy
equipment which has dominated the historical network architecture designed for
voice traffic. New market entrants like us, which achieve rapid and widespread
market acceptance of new equipment that displaces legacy equipment, can
represent a specific threat to these established companies. Our acquisitions of
Lightera Networks, Inc. ("Lightera") (which is completed) and of Omnia
Communications, Inc. ("Omnia") (which is expected to close in June or July), are
likely to increase this perceived threat. See "Lightera and Omnia Risk Factors".
As a result, we expect continued aggressive competitive moves from many of these
industry participants. In the past, such moves have included the following:
- - early announcement of competing or alternative products;
- - substantial and increasing price discounting;
- - customer financing assistance;
- - packaged, "one-stop-shopping" deals combining DWDM equipment with other
network equipment and supplies;
- - other tactics;
When competitors make early announcements of competing products, our
customers may delay their purchasing decisions, particularly if they believe the
truth of the claimed performance of the announced product, and the time within
which it will be available. For example, in January, 1998, Lucent announced a
proposed high-capacity DWDM system which it claimed would handle 400 Gb/s of
capacity per fiber, and which it further claimed would be commercially available
worldwide in the fourth quarter of 1998. We believe this announcement caused a
delay in some customer purchasing decisions and influenced customer negotiating
positions, which resulted in pressure on us to decrease prices.
Competitors may make similar announcements of competing products in
the future, which could influence customer purchasing decisions. Customer orders
for our MultiWave systems may diminish if competitors are able to develop these
announced products, if the products perform as advertised, and if they are
manufactured in sufficient volume. If customers delay purchasing our equipment
while they evaluate a competitor's product, we could experience substantial
revenue swings and potentially material and adverse effects on our quarterly
financial condition and results of operations.
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While competition in general is broadly based on varying combinations
of price, manufacturing capacity, timely delivery, system reliability, service
commitment and installed customer base, as well as on the comprehensiveness of
the system solution in meeting immediate network needs and foreseeable
scaleability requirements, our customers are also under increasing competitive
pressure to deliver bandwidth to their customers at the lowest possible cost. As
a result of this pressure, the price of a DWDM system may become a more
important factor in customer decisions. This may favor larger competitors who
can spread the effect of price discounts in their DWDM product lines across an
array of products and services, and a customer base, which are larger than ours.
Our customers generally prefer to have at least two sources for key
network equipment such as DWDM systems, but we believe that until recently, we
have been the only supplier of 16 channel, or greater than 16 channel, open
architecture DWDM systems. As competitors catch up with manufacturable DWDM
systems which are realistic alternatives to ours, our customers may reduce their
DWDM purchases from us. For several quarters, Sprint has indicated it intends to
establish a second vendor for DWDM equipment. Although we recently negotiated a
contract with Sprint whereby we have "preferred vendor" status with them through
1999, the timing of Sprint's selection of a second vendor, and the impact a
selection might have on Sprint's purchases from us, are out of our control. This
decision may result in a reduction in future purchasing from us, which could in
turn have a material adverse effect on our financial condition and results of
operations.
Competitors may also engage in intellectual property disputes with us
as part of their effort to reduce our leadership position and limit our ability
to achieve greater market share. Some of our competitors are also key suppliers
of components for our systems, and could harm us through delay, interruption or
other failures to supply us with appropriate quality items. See "Certain of Our
Suppliers are Also Our Competitors".
We may not be able to compete successfully with our larger
competitors. Their aggressive competitive moves may result in lost sales,
significantly lower prices for our products, additional decreases in gross
profit margins, and otherwise have a material adverse effect on our business,
financial condition and results of operations. We have also observed an increase
in the funding of new companies intending to develop new products for the
rapidly evolving telecom industry. Although these companies' business and
product plans are not always well-known, they may nevertheless provide
additional competition as to our existing product lines as well as potential
future products.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS.
Our business and revenue growth potential historically depended on
two customers, Sprint and MCI WorldCom. While we expect that the scope of
commercial applications of our MultiWave Firefly and MultiWave Metro products
(and eventually, the products of Lightera and Omnia), will expand our potential
number of customers, there are relatively few additional potential customers
available to us. Our potential customers consist almost exclusively of
telecommunications carriers which use fiberoptic networks, and of those, a very
small number have revenue potential comparable to that of Sprint and MCI
WorldCom. One possible customer, AT&T, has already told us it will not purchase
our DWDM products at this time. Additionally, we expect that Sprint's purchasing
volume in 1999 will fall substantially below what it was for the last two fiscal
years, as Sprint focuses its purchases on filling out installed systems with
additional channel cards.
There is presently a low likelihood that MCI WorldCom will purchase
significant amounts of equipment from us in 1999. Our potential major customers
may also decrease if and as customers merge with or acquire one another. In May
1998, SBC and Ameritech announced an agreement to merge; in July 1998, Bell
Atlantic and GTE announced an agreement to merge. The distraction and/or
reorganization sometimes attendant to such mergers could delay, limit or
otherwise adversely affect the capital equipment purchasing patterns of the
parties to them. It could also have a corresponding adverse effect on our sales,
even if the customer is otherwise satisfied with or interested in our products.
Due to the size and complexity of our potential customers, and their
typically long and unpredictable sales cycles, we have to make considerable
early investments in:
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- - account management personnel;
- - product customization efforts in both engineering and manufacturing, and
- - in some cases, facilities in proximity to the customer's locations, without
assurance of future revenues.
We also intend to invest in developing significant customer
relationships with RBOCs and CLECs, as well as internationally. Over the last
year, such investments have caused an increase in operating expenses and a rise
in our manufacturing and general overhead structure. As a result, we may
experience operating losses even if our revenues increase. If we are unable to
generate significant revenue from these investment relationships, they could
materially and adversely affect our business, financial condition and results of
operations.
CHANGES IN OUR CUSTOMER MIX COULD IMPACT THE DEMAND FOR THE BANDWIDTH WE SUPPLY.
We are focusing our sales efforts on a greater number of smaller
sales opportunities now that:
- - Sprint has installed our equipment in much of its network;
- - MCI WorldCom is purchasing at modest levels; and
- - There is little likelihood of any additional, comparably sized customer.
We believe the pace of bandwidth demand is strong enough to create a
number of smaller opportunities sufficient to support revenue growth over the
long-term. However, the smaller opportunities often represent new carriers
working aggressively to establish bandwidth that they can sell. These new
carriers face a number of problems which the established carriers do not. They
must attempt to balance the need to build their own customer base, acquire all
necessary rights of way and interconnections necessary to sell network service,
and build out new capacity sufficient to meet anticipated needs, while working
within capital budget constraints. These aspects of newer carriers tend to make
them even less predictable as to either timing or volume of purchasing than the
established carriers. This tends to exacerbate our problem of limited
visibility, one with which we regularly struggle in conducting sales
forecasting, materials and manufacturing planning, and in providing guidance to
analysts as part of investor relations activities. See "Our Stock Price May
Exhibit Volatility".
Unless and until our customer base broadens over the next several
quarters, there is a continuing likelihood that unanticipated changes in
customer purchasing plans could adversely impact our results relative to
investor expectations. Most of our anticipated revenue over the next several
quarters is comprised of less than $25 million orders from each of several
customers. Slips in timing of purchases, or changes in the amount of purchases
by one or more of these customers could have a material adverse effect on our
results of operations and relative to investor expectations.
WE CAN NOT PREDICT THE DEMAND FOR BANDWIDTH.
Our DWDM systems enable high capacity transmission over long
distance, and our MultiWave Firefly and MultiWave Metro will allow transmission
over certain short-haul portions of optical communications networks. Our
customers and target customers, however, determine:
- - the quantity of bandwidth needed;
- - the timing of its deployment; and
- - the equipment configurations they want.
We have encountered a wide variety of customer views regarding the
amount of bandwidth required over time, as well as how to convert bandwidth to
revenue. Those views reflect our customers' differing competitive strategies and
financial and marketing resources, and impact the patterns and timing of
evaluation, purchase, and deployment of our systems, other DWDM systems, or
other capacity solutions.
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Certain carriers believe the deployment of large-scale bandwidth
quickly is a competitive advantage. They believe the accelerating demand for
bandwidth will continue, and that existing bandwidth will be utilized quickly.
As a result, such carriers engage in prompt and widespread deployment of
high-channel count DWDM systems. Other carriers have adopted a wait-and-see
approach, which dictates a more gradual channel by channel deployment of higher
capacity systems. New carriers sometimes try to combine these viewpoints. They
favor rapid and widespread installation of the foundational elements of high
capacity systems, but employ pricing and other supply agreement features which
allow them to delay broader deployment until necessary.
Carriers' views in this regard are further influenced by the pace
at which the higher bandwidth available over long distance routes is
distributed or distributable over "the last mile" of the networks, and
carriers' willingness to aggressively lower their charges for services as a
means of accelerating consumption of the higher bandwidth. These views are also
subject to abrupt change as a result of competition and the evolving
marketplace. For example, in February, 1998, WorldCom informed us that it would
require substantially less DWDM systems in 1998 than it had the year before.
The previous year, WorldCom purchased $184.5 million of systems from us.
WorldCom told us that in 1997 it had purchased two years of DWDM systems
requirements, and that it would purchase substantially less in 1998. This
information from WorldCom demonstrates that there can be surprises as network
operators and their purchasing groups grapple with unprecedented changes and
challenges to network planning.
As a further example of the impact of the evolving marketplace, in
1998 we shipped equipment to and recognized revenue from several new customers
attempting to build out new networks. We had not even identified these customer
opportunities a year earlier. Under these circumstances, therefore, as long as
we depend on a few customers, we remain vulnerable to significant quarterly
fluctuations, and to difficulty in predicting the direction or magnitude of
future demand for our systems.
We believe growth in data communications and in commercial and
consumer use of the Internet remains solid. This growth causes an increased
market demand for bandwidth, which in turn fuels demand for DWDM systems and
other high-bandwidth solutions. We are also confident that our products are well
targeted toward the visible emerging choke points in the networks. We are less
certain whether we can accurately anticipate changes in direction or magnitude
of demand. Unanticipated reductions in demand would adversely affect our
profitability. Depending on the size of the gap between actual demand, reduced
demand, and investor expectation of such demand, we could experience changes in
our stock price, irrespective of our overall competitive position and long term
prospects.
CUSTOMER CAPITAL EQUIPMENT SPENDING AND THE ECONOMY MAY ALSO AFFECT OUR
PROFITABILITY.
Our business depends on large scale commitments to capital equipment
acquisition, which in turn depend upon the condition of the world and U.S.
economy. The overall economy, particularly in the U.S., has been very strong
from the time CIENA first began shipping equipment; however, hostilities in
Kosovo or other areas, if they escalate or spread, could create an element
of economic uncertainty. Established carriers may delay or reduce capital
equipment acquisition during times of economic uncertainty. New competitive
carriers may be less likely to delay or reduce capital equipment acquisition
because their ability to generate revenue depends on the prompt deployment of
service-providing equipment. But if the new competitive carrier lacks adequate
financing, economic uncertainty can limit its access to new financing sources
and cause a delay in capital equipment purchasing.
Deterioration of current economic conditions which negatively impacts
the purchasing decisions of established or new carriers, or both, will adversely
affect our business. Deteriorating economic conditions may also result in
demands for vendor-supplied financing, particularly among less well-financed new
carriers. Our larger competitors may be able to provide more attractive
financing than we can, which may give them a competitive advantage over us in
this segment of the market. Additionally, if deflationary expectations become
broadly embedded in the world economy, they could magnify our pricing and gross
margin pressures.
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DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS COULD IMPACT OUR ABILITY TO REMAIN A
MARKET LEADER.
Our ability to remain a market leader in the DWDM field depends on
our ability to:
- - anticipate changes in technology, industry standards, customer requirements,
and product offerings; and
- - develop and introduce new and enhanced products in a timely fashion
relative to customer expectations of increasingly short product development
cycles.
We could also experience unanticipated delays as a result of the
complexity of technology involved in product development efforts in the DWDM and
related optical communications fields, including product customization efforts
for individual customers. Qualification and ramping up of new suppliers for new
or customized products requires extensive planning and can result in
unanticipated delays which affect our ability to deliver such products in a
timely fashion. The software certification process for new telecom equipment
used in RBOC networks, which is a process traditionally conducted by Telcordia
(formerly, Bellcore) on behalf of the RBOCs, can also result in unanticipated
delays, and has somewhat delayed the commercial introduction of MultiWave Sentry
and Firefly for the RBOC market. Our failure to deliver new and improved
products or appropriately customized products, in a timely fashion relative to
customer expectations can be influenced by our competitors' announcements of
competing products. Failure to deliver new and improved products would have a
material adverse effect on our competitive position and financial condition. See
"Competition in the Rapidly Growing Telecommunications Industry Could Hurt Our
Sales and Profitability".
We have committed to producing MultiWave Metro within the next
several months, and expect that Omnia's complementary "edge services" delivery
product will become available at about the same time. We have also indicated
we will have OC-192 capability in our MultiWave Sentry line of products in the
second half of the year. Enhanced optical amplifiers necessary for the
operation of a fully-configured 96-channel MultiWave system are also expected
to be available in the second half of this year. Our ability to meet customer
expectations relative to these commitments will likely have a material impact
on our ability to further solidify our position in the communications industry
as a credible, long-term supplier of multiple products and successive
next-generation solutions. We believe we will succeed in this effort, but make
no assurance of that. There will likely be few objective "leading indicators"
of our success or failure, other than the level of purchasing by customers.
OUR NEW PRODUCTS COULD EXPERIENCE OCCASIONAL PROBLEMS AS THEIR TECHNOLOGY AND
MANUFACTURING METHODS MATURE.
The MultiWave 1600 has been operational and carrying live traffic for
approximately two years. The MultiWave Sentry 1600 and MultiWave Sentry 4000
have been operational for about a year, and the MultiWave Firefly has recently
been introduced into the field. The in-service reliability of our equipment has
to date substantially exceeded statistical standards for equipment of this kind.
However, the production of new fiberoptic systems with high technology content
involves occasional problems as the technology and manufacturing methods mature.
Our history of installation activity indicates that the newness and
high precision nature of DWDM equipment may require us to provide enhanced
customer training and installation support. We are aware of instances
domestically and internationally, of delayed installation and activation of
certain MultiWave systems due to faulty components found in certain portions of
these systems. We are aware of few performance issues once the systems are
installed and operational. However, if recurring or material reliability,
quality or network monitoring problems should develop, a number of material and
adverse effects could result. Those effects include:
- - manufacturing rework costs;
- - high service and warranty expense;
- - high levels of product returns;
- - delays in collecting accounts receivable;
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- - reduced orders from existing customers; and
- - declining level of interest from potential customers.
Although we maintain accruals for product warranties, we can not make
any assurances that actual costs will not exceed these amounts. The pace at
which the customer requires upgrades from 16 to 40 to higher channel count
systems can further complicate the assessment of appropriate product warranty
reserves.
From time to time, we expect to experience interruptions or delays in
the activation of the systems and the addition of channels, particularly because
we do not control all aspects of the installation and activation activities. We
believe we have a good track record to date of problem identification, diagnosis
and resolution. However, in the event we experience significant interruptions or
delays that we can not promptly identify, diagnose and resolve, confidence in
the MultiWave systems could be undermined. Undermined confidence in the
MultiWave systems would have a material adverse effect on our customer
relationships, business, financial condition and results of operations.
OUR QUARTERLY AND ANNUAL RESULTS HAVE FLUCTUATED IN RECENT PERIODS.
Our revenue and operating results have varied and are likely to
continue to vary significantly from quarter to quarter and from year to year as
a result of a number of factors, including the size and timing of orders,
product mix and shipments of systems. The timing of order placement, size of
orders, satisfaction of contractual customer acceptance criteria, as well as
order delays or deferrals and shipment delays and deferrals, have caused and may
continue to cause material fluctuations in revenue. See "Competition in the
Rapidly Growing Telecommunications Industry Could Impact Our Sales and
Profitability" and "Changes in Our Customer Mix Could Impact the Demand For The
Bandwidth We Supply". Delays or deferrals in purchasing decisions may increase
as competitors introduce new competing products, customers change purchasing
practices, and we develop and introduce new DWDM products or move to
next-generation versions of existing products, such as the MultiWave Sentry
1600, MultiWave Sentry 4000, MultiWave Firefly and MultiWave Metro.
Consolidation among our customers and target customers, and the distraction
and/or reorganization attendant to such consolidation and after its
consummation, may also lead to delay or deferral of purchasing decisions. We
believe our present limited visibility into MCI WorldCom's purchasing plan is in
part a reflection of this phenomenon. See "We Depend on a Relatively Small
Number of Customers".
Changes in our customers' approaches to bandwidth deployment can also
materially impact our purchasing decisions. See "We Can Not Predict the Demand
for Bandwidth". The ongoing shift in our customer mix also affects the
likelihood of fluctuating results, as do general economic conditions. See
"Changes in Our Customer Mix Could Impact the Demand For The Bandwidth We
Supply"; "Customer Capital Equipment Spending and the Economy May Also Affect
Our Profitability". The fact that we depend on a small number of existing and
potential customers increases the revenue impact of each customer's actions
relative to these factors. Our expense levels in the future will be partially
based on our expectations of long term future revenue and net income for any
quarterly period in which material orders are delayed or not forthcoming.
Our expense levels to some extent reflect our substantial investment in
financial, engineering, manufacturing and logistics support resources to
position ourselves for successful commercial relationships with large potential
customers, even though there is no assurance as to the volume, duration or
timing of any purchases which might ensue from them. See "We Depend on a
Relatively Small Number of Customers". As a result of this investment of
resources over the near term, we have experienced:
- - increased inventory levels and operating expenses;
- - a rise in manufacturing and general overhead and expense structure.
Accordingly, near term results of operations may be only modestly profitable or
may involve operating losses, even if revenues sequentially increase. In
general, quarter-to-quarter sequential revenue and operating results over the
next 12 months are likely to fluctuate and therefore may not be reliable
indicators of annual performance. The addition of Lightera and Omnia will likely
increase the potential for fluctuating results. See "Lightera and Omnia
Acquisition Risk Factors".
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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. We believe our heritage as an entrepreneurial startup
has been an important factor in our success in attracting and retaining key
personnel. However, as we have grown and matured, competitors' efforts to
entice our employees to leave have intensified, particularly among competitive
startups and other early stage companies seeking to replicate CIENA's
experience. We can make no assurances that the we will be able to retain all of
our key contributors or attract new personnel to add to or replace them. The
loss of key personnel would likely have a material adverse effect on our
business, financial condition and results of operations.
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Recently, shareholder class action lawsuits were filed against us and
certain of our officers and directors. A discussion of these lawsuits can be
found in our Form 10-Q for the quarter ended January 31, 1999. We believe the
lawsuits are without merit and are defending vigorously against them. However,
because the lawsuits are at an early stage, it is not possible to predict the
outcome at this time; therefore, they could have a material adverse effect on
our financial condition and results of operations.
CERTAIN OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS.
Certain of our component suppliers are both primary sources for such
components and major competitors in the market for system equipment. For
example, we buy certain key components from:
- - Lucent
- - Alcatel
- - Nortel
- - NEC and
- - Siemens.
Each of these companies offers optical communications systems and
equipment which are competitive with our MultiWave systems. Lucent is the sole
source of two integrated circuits and is one of two suppliers of Erbium-doped
fiber. Alcatel and Nortel are suppliers of lasers used in MultiWave systems. NEC
is a supplier of certain testing equipment. A decline in reliability or other
adverse change in these supply relationships could materially and adversely
affect our business, financial condition and results of operations. To date, we
have not experienced any general decline in reliability among these vendors, but
the intensifying competition described above makes this risk factor increasingly
important.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR LONG AND UNPREDICTABLE SALES CYCLES.
Network operators typically purchase network equipment such as DWDM
equipment pursuant to multiyear purchasing programs which may increase or
decrease annually as the operators adjust their capital equipment budgets and
purchasing priorities. Our customers often do not share detailed information on
the duration or magnitude of planned purchasing programs, nor do they
consistently give us advance notice of contemplated changes in their capital
equipment budgets and purchasing priorities. Such changes may occur due to
factors unique to the individual customer or in response to general economic
conditions. See "Customer Capital Equipment Spending and the Economy May Also
Affect Our Profitability".
Additionally, to the extent that our customers follow budgeting
cycles which generally correspond to the calendar year, we may experience a slow
down in demand toward the calendar year end. Further, we are experiencing a
shift in our customer mix which may add to the length and unpredictable nature
of the sales cycle. See "Changes in Our Customer Mix Could Impact the Demand For
The Bandwidth We Supply". These uncertainties
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substantially complicate our manufacturing planning, and may cause substantial
and unanticipated fluctuations in the timing of orders and revenue. We have in
fact experienced unanticipated fluctuations in prior quarters. However, until
the third fiscal quarter of 1998, any unanticipated reduction in orders from one
customer was offset in part or in whole by unanticipated increases in orders for
other routes with the same customer or in orders from another customer. We can
make no assurances that we will be able to offset such reductions in the future.
The following could also have a material adverse effect on the predictability of
our business and on our financial condition and results of operations:
- - any curtailment or termination of customer purchasing programs;
- - decreases in customer capital budgets;
- - reduction in the purchasing priority assigned to equipment such as DWDM
equipment, particularly if significant and unanticipated by us and not
offset by increased purchasing from other customers.
Further, as is the case with most manufacturing companies, we have manufactured,
and likely will continue to manufacture a portion of our finished products on
the basis of non-binding customer forecasts rather than actual purchase orders.
However, unlike most manufacturing companies, we depend on very few customers,
and our DWDM systems are relatively costly. As a result, the financial
consequences of mismatches between what is built and what is actually ordered
can be magnified.
Customers may also encounter delays in their build out of new routes
or in their installation of new equipment in existing routes, with the result
that orders for the MultiWave systems may be delayed or deferred. Any such delay
with any major customer, as well as any other delay, deferral or unanticipated
change in the configuration of orders for MultiWave systems, could materially
fluctuate the timing of orders and revenue, and could have a material adverse
effect on our business, financial condition and results of operations.
OUR STOCK PRICE MAY EXHIBIT VOLATILITY.
Our common stock price has experienced substantial volatility in the
past, and is likely to remain volatile in the future. Volatility can arise as a
result of the activities of short sellers and risk arbitrageurs, and may have
little relationship to our financial results or prospects. Volatility can also
result from any divergence between our actual or anticipated financial results
and published expectations of analysts, and announcements we may make. This
occurred in 1998. We attempt to address this possible divergence through our
public announcements and reports; however, the degree of specificity we can
offer in such announcements, and the likelihood that any forward-looking
statements we make will prove correct in actual results, can and will vary. This
is due primarily to:
- - the uncertainties associated with our dependence on a small number of
existing and potential customers;
- - the impact of changes in the customer mix;
- - the actions of competitors;
- - long and unpredictable sales cycles and customer purchasing programs;
- - the absence of unconditional minimum purchase commitments from any customer;
- - a lack of visibility into our customers' deployment plans over the course of
the capital equipment procurement year, and
- - the lack of reliable data on which to anticipate core demand for high
bandwidth transmission capacity.
This uncertainty is exemplified by the February 1998 communication
from WorldCom that its DWDM system requirements for 1998 would be substantially
less than its purchases for 1997, due to a change in its purchasing policies.
See "We Depend on a Relatively Small Number of Customers". A further example of
this uncertainty occurred the third fiscal quarter of 1998, as an expected order
of $25 million or more from a customer was unexpectedly delayed late in the
quarter. This delayed order was later withheld entirely as the result of the
customer's new commitments to purchase DWDM equipment from a competitor. See
"Competition in the Rapidly Growing Telecommunications Industry Could Hurt Our
Sales and Profitability" and "Changes in Our Customer Mix Could Impact the
Demand For the Bandwidth We Supply".
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The WorldCom example in 1998, and the example of the third fiscal
quarter indicate that our actual or anticipated financial results can diverge
from published expectations of stock analysts notwithstanding our efforts to
address those expectations through public announcements and reports. Such
divergence 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 few customers, and
particularly in years like 1998, when a substantial majority of their purchases
consist of newly-introduced products such as MultiWave Sentry 4000, and
MultiWave Firefly, there is substantial risk of widely varying quarterly
results, including the so-called "missed quarter" relative to investor
expectations. Because these quarterly results do not account for factors such as
our dependence on a few customers and for years like 1998, they pose an
attendant risk of higher volatility in our stock price. See "We Depend on a
Relatively Small Number of Customers"; and "We Can Not Predict the Demand for
Bandwidth".
TECHNOLOGICAL CHANGE AND NEW PRODUCTS COULD RESULT IN COMPETITION.
We expect that new technologies will emerge, and existing
technologies will rapidly evolve, as competition in the telecommunications
industry increases and the need for higher and more cost efficient bandwidth
expands. Our ability to anticipate changes in technology, industry standards,
customer requirements and product offerings, and to develop and introduce new
and enhanced products will impact our ability to remain the leader in the
deployment of open architecture DWDM systems and other high-capacity solutions.
We can not make any assurances that we will succeed in doing so.
The telecommunications equipment market is characterized by
substantial capital investment and diverse and competing technologies such as
fiberoptic, cable, wireless and satellite technologies. The accelerating pace of
deregulation in the telecommunications industry will likely intensify the
competition for improved technology. Many of our competitors have substantially
greater financial, technical and marketing resources and manufacturing capacity
with which to develop or acquire new technologies. As a result, they are better
able to compete for market acceptance of their products. As new products
embodying new technologies or new industry standards emerge, they could render
our existing products uncompetitive from a pricing standpoint, obsolete or
unmarketable. Any of these outcomes would have a material adverse effect on our
business, financial condition and results of operations.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS FOR OUR SYSTEMS.
Suppliers in the specialized, high technology sector of the optical
communications industry are generally not as plentiful or as reliable as
suppliers in more mature industries. We depend on a limited number of suppliers
for key components of our MultiWave systems as well as equipment used to
manufacture the MultiWave systems. Our highest capacity Sentry product, capable
of 96-channel configurations, includes several higher capacity components for
which reliable, high volume suppliers are particularly limited. MultiWave
systems collectively utilize approximately 1,400 components, and certain key
optical and electronic components are currently available only from a sole
source. While we have identified alternative suppliers for certain key optical
and electronic components, we have not yet qualified all of them. To date, we
have conducted most of our business with suppliers by issuing conventional
purchase orders against our forecasted requirements. We also pursue long-term
supply agreements with some key suppliers, but we continue to conduct a large
majority of our business with vendors without such agreements. On occasion, we
have experienced delays in receipt of key components. Any future difficulty in
obtaining sufficient and timely delivery of them could result in delays or
reductions in product shipments which, in turn, could have a material adverse
effect on our business, financial condition and results of operations. Uniphase
Corporation and JDS FITEL, Inc., both of which are our significant suppliers,
recently announced a planned merger. We have enjoyed positive relationships
with both companies, and believe the merger can be beneficial to our interests
as a customer. If, however, the merger and related integration activities were
to result in delayed deliveries of key components from either of these sources,
such delays could have a material adverse effect on our near-term results of
operations.
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LIGHTERA AND OMNIA ACQUISITION RISK FACTORS
OUR ACQUISITIONS OF LIGHTERA AND OMNIA REPRESENT AGGRESSIVE STRATEGIC MOVES THAT
CARRY CERTAIN RISKS.
We believe that our acquisitions of Lightera Networks, Inc. (which is
now completed) and Omnia Communications, Inc. (which is currently expected to be
completed in June or July) represent aggressive strategic moves which can
position us as a more complete provider of revolutionary high capacity solutions
for the operators of fiberoptic networks worldwide. The moves are aggressive
because the prices paid are on the high side of the valuations traditionally
assigned to development stage companies which, like Lightera and Omnia, do not
yet have their products ready for sale, installation and operation in a customer
network. These are strategic moves because we believe the fit of the two
companies' intended products with CIENA's will create a first-to-market,
optically-centered, cost-effective and broad-based solution for transporting,
managing and delivering high bandwidth capacity through the access, local
exchange and long distance segments of fiberoptic networks.
We believe that if we can effectively execute product rollout and
delivery with Lightera and Omnia, within two to three years the combined
contribution of these two acquisitions will account for more than 25% of our
revenues and earnings. If so, we believe the prices we paid for the two
companies will be amply returned. But effective execution of product rollout and
delivery is subject to a number of risks in addition to those we already faced
in our continuing operations. Set forth below is a summary of the key new risks.
We encourage investors to review these new risks in the context of
the risks we already face, as set forth elsewhere in this Form 8-K.
WE MAY NOT BE ABLE TO RETAIN KEY EMPLOYEES OF LIGHTERA AND OMNIA.
Because of the high valuation we placed on Lightera and Omnia, their
key founders and employees have received or will receive a substantial number of
CIENA shares and can sell these shares at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before the products of either company have fully matured into commercially
deliverable products commanding reasonable market share. Additionally, startup
and other companies will seek out these individuals due to the financial result
they have achieved for their investors. Under the circumstances, we face a
difficult and significant task of retaining and motivating the key personnel of
both companies to stay committed to us. We do not have employment contracts with
these personnel. We may not be successful in retaining them.
OUR ABILITY TO MANUFACTURE LIGHTERA AND OMNIA PRODUCTS COULD IMPACT THE
SPEED AND SCOPE OF THEIR INTRODUCTION TO THE MARKET.
Both Lightera and Omnia's products are in the laboratory testing
phase but the products have not matured into commercially manufacturable units
suitable for field deployment. We expect that field deployable units of Omnia's
products will be available in the second half of calendar 1999, and Lightera's
products by the end of the first quarter of calendar 2000. The maturing process
from laboratory prototype to manufacturable units involves a number of steps,
including:
- - the qualification and multiple sourcing of critical components, including
application specific integrated circuit ("ASIC's") which are not yet
finalized;
- - validation of manufacturing methods;
- - extensive quality assurance and reliability testing;
- - software validation, and
- - establishment of systems integration and burn in requirements.
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<PAGE> 11
Each of these steps in turn presents serious risks of failure, rework
or delay, any one of which could materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's, in particular, are key to the timely introduction of
Lightera's and Omnia's products, and schedule delays are common in the final
testing and manufacture of such components. 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.
THE SUCCESS OF OUR ACQUISITIONS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE
LIGHTERA, OMNIA, AND CIENA.
Lightera is based in Cupertino, California and has approximately 75
employees; Omnia is based in Boston, Massachusetts and has approximately 80
employees; and CIENA is based in Linthicum, Maryland and has approximately 1000
employees in Maryland (1400 employees overall). We face the significant task of
efficiently integrating the people at these sites operationally and culturally,
while preserving the focus and momentum of their individual efforts. Our ability
to do so will be a key determiner of the success or failure of the acquisitions.
We have limited experience with this type of integration, and can make no
assurances that we will succeed in so doing.
WE MAY FACE GREATER COMPETITION AS A RESULT OF OUR ACQUISITIONS OF LIGHTERA AND
OMNIA.
The telecom equipment industry is intensely competitive, and
dominated by very large, long-established suppliers such as Lucent, Northern
Telecom, Alcatel, Fujitsu, NEC and others. We believe our acquisitions of
Lightera and Omnia give us a broader, state-of-the-art product line that can be
a significant and economically attractive alternative to the legacy equipment
suppliers. If so, we expect the competitive response to be intense and
wide-ranging, and more intensive than the competition we faced when we were more
narrowly focused on the DWDM transport sector of the market. Competitive
responses may include, among other things:
- - early announcement of new or different competing products
- - substantial price discounting
- - customer financing assistance
- - intellectual property disputes
- - packaged, "one-stop-shopping" deals combining next generation equipment with
legacy equipment and supplies, and
- - other tactics
We can make no assurances that we will succeed against the kind of
tactics large competitors may employ.
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WE EXPECT THAT OUR ACQUISITIONS OF LIGHTERA AND OMNIA WILL MAKE OUR STOCK PRICE
MORE VOLATILE.
We have historically experienced substantial stock price volatility.
The range of stock prices has not tracked with valuations based on traditional
price/earnings multiples, and takeover speculation appears to have been an
influence on the stock price at various times. However, both Lightera and Omnia
are at a development stage, and we do not expect either of them to generate any
revenue or earnings for at least several months. As a result, we expect to
report no better than breakeven results of operations, and may report operating
losses, for the next three or four quarters. Under these circumstances, we can
expect significant volatility over the next several quarters as investors make
judgments as to our relative progress in:
- - bringing the Lightera and Omnia products to market
- - integrating the two companies
- - managing retention issues, and
- - generally executing on the strategic vision.
Additionally, the vast majority of the shares issued to Lightera and
Omnia shareholders are likely to become eligible for sale in the May to July
1999 time period. Together, these shares will account for approximately 25% of
the outstanding shares of CIENA. If a large proportion of these shares are sold
during that time period, the stock price will likely experience further
volatility and may decline.
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