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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of principal executive offices) (Zip Code)
(410) 865-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 138,187,356 shares of Common Stock of the
Registrant issued and outstanding as of October 31, 1999, excluding 3,362,959
shares of Common Stock held by affiliates of the Registrant was $4,659,531,160.
This amount is based on the average bid and asked price of the Common Stock on
the Nasdaq Stock Market of $34.56 per share on October 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2000 annual meeting of stockholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this report.
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PART I
The information in this Form 10-K contains certain forward-looking
statements, including statements related to markets for the Company's products
and trends in its business that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Risk Factors" and "Business" as
well as those discussed elsewhere in this Form 10-K.
ITEM 1. BUSINESS
COMPANY
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CIENA Corporation (the "Company" or "CIENA") was incorporated in Delaware
in November 1992. The Company completed its initial public offering on February
7, 1997 and a secondary offering on July 2, 1997.
The Company's principal executive offices are located at 1201 Winterson
Road, Linthicum, Maryland 21090. Its telephone number is (410) 865-8500.
GENERAL
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OVERVIEW
CIENA is a leader in the rapidly emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery systems that enable service providers to
provision, manage and deliver high-bandwidth services to their customers. The
Company has pursued a strategy to develop and leverage the power of disruptive
technologies to change the fundamental economics of building carrier-class tele-
and data-communications networks, thereby providing its customers with a
competitive advantage.
During its fiscal year 1999 CIENA significantly broadened its product
offerings and believes it has increased its addressable market opportunity
through internal developments, and through the acquisitions of Lightera
Networks, Inc. ("Lightera") of Cupertino, California and Omnia Communications,
Inc. ("Omnia") of Marlborough, Massachusetts. CIENA announced the acquisitions
of Omnia and Lightera simultaneously on March 15, 1999, in conjunction with
announcing its "LightWorks(TM) Initiative."
The acquisition of Lightera was completed on March 31, 1999 and was valued
at approximately $459 million. The acquisition of Omnia was completed on July 1,
1999, with a value of approximately $483 million. Since the acquisitions, the
Company has been working to bring Omnia's service delivery product, MultiWave
EdgeDirector(TM) and Lightera's optical core switch, MultiWave CoreDirector(TM),
to market.
The Company's research and development efforts and potential future
acquisition and partnership activities are targeted at capitalizing on its
installed base of carrier customers and leveraging its position as a leader in
the rapidly emerging optical networking market.
Historically, the significant majority of CIENA's revenues have come from
the sale of several products in a single product category: long-distance optical
transport equipment. CIENA believes it is one of the worldwide market leaders in
field deployment of open-architecture optical transport equipment with more than
7 million optical channel kilometers installed. For the fiscal year ended
October 31, 1999, the Company recorded revenue from sales of optical transport
equipment to a total of 27 customers, nearly double 1998's customer base of 14.
Three customers each represented more than 10% of CIENA's revenues for fiscal
1999. The majority of the Company's fiscal 1999 revenue was derived from sales
of its MultiWave Sentry 4000(TM) long-distance optical transport equipment. The
Company also recognized significant revenue from the sale of its next generation
long-distance optical transport system, MultiWave CoreStream(TM).
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The Company's results for fiscal 1999, show total revenues of $482.1
million. Though a slight decrease from 1998's total revenue of $508.1 million,
the Company believes its 1999 results represent a considerable achievement
following the challenges that surrounded the end of its fiscal year 1998. Since
its fourth fiscal quarter 1998, the Company has shown sequential quarterly
improvement in both sales and gross margins. Sales increased from $91.2 million
in fiscal fourth quarter 1998 to the $141.4 million reported in the fiscal
fourth quarter 1999. Gross margins improved from 31.2% of total revenue during
fiscal fourth quarter 1998 to 41.0% of total revenue during fiscal fourth
quarter 1999.
INDUSTRY BACKGROUND
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THE TELECOMMUNICATIONS MARKET
Service providers both domestically and internationally have widely
deployed fiber optic cable forming the backbone of their communication networks.
During the last several years carriers have faced several challenges resulting
from a combination of factors, including:
- Unprecedented traffic growth
- Changing traffic demands
- Growing competition
- Increased demand for reliability
- Network scalability challenges
- Escalating operational costs
Unprecedented Traffic Growth
Service providers have seen dramatic network traffic growth caused by
factors such as:
- the escalating use of the Internet, as well as increased use of
electronic commerce, distributed computing, electronic mail,
facsimile transmission, electronic transaction processing, video
conferencing, remote access telecommuting and local and wide area
networking;
- growing capacity and processing speed of data communications
equipment such as Asynchronous Transfer Mode (ATM) switches and
Internet Protocol (IP) routers; and
- development of high-bandwidth network access technologies, such as
cable modems, hybrid fiber coaxial architectures and digital
subscriber lines, that permit commercial and consumer users to
transmit and receive high volumes of information.
This increased network utilization can create transmission bottlenecks on
heavily used routes that were originally designed to handle significantly less
traffic. Although exact statistics are not available, the Company believes that
this volume increase has caused some telecommunications carriers to handle
traffic over certain long distance routes at or near the maximum capacity of the
existing installed fiber and electronic-based transmission systems currently in
use.
Changing Traffic Demands
In addition to more traffic, telecommunication carriers are seeing a shift
in the kind of traffic they are handling. Networks today are no longer carrying
purely telephone or voice traffic, but instead are carrying an ever increasing
volume of data traffic - traffic generated by computers that process and send
information far more quickly and in much larger quantities than voice-centric
networks were designed for. Carriers and equipment suppliers both have sought
more efficient ways to handle this traffic, adopting cell and packet based
protocols such as Frame Relay, ATM and IP. These protocols more efficiently
handle data traffic by organizing it either in packets, as is the case with
Frame Relay and IP, or in cells for ATM. Each packet or cell contains a header
with the destination information the network needs to efficiently route or
switch the packet/cell.
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Recently advances by data communications equipment suppliers have made it
possible for ATM switches and IP routers to operate at port speeds of
OC-48/STM-16, or 2.5 gigabits per second ("Gb/s"). Several suppliers have
announced their intention to provide equipment that operates at port speeds of
OC-192/STM-64 or 10 Gb/s, during the year 2000. An industry analyst has
estimated that the volume of data-centric traffic traveling in packets or cells
will reach 99% of all network traffic by 2004. Whether or not the estimate is
precisely accurate, the Company believes the trend of increasing cell and packet
based traffic is unmistakable and, as a result, carriers will increasingly look
for alternatives to the use of traditional voice-based or synchronous optical
network/synchronous digital hierarchy ("SONET/SDH") telecommunications equipment
in their network architecture. The Company expects that carriers will begin to
move toward a simpler, more cost effective network where data traffic from an
ATM switch or an IP router is directly fed to an optical transport device. The
Company believes its ability to connect directly to ATM switches and IP routers
through its DirectConnect(TM) feature positions it to benefit from this shift.
Growing Competition
Widespread deregulation of the United States telecommunications industry
has resulted in increased competition among service providers both in the
long-distance and local markets. In addition to heightened price competition,
carriers are increasingly looking for new ways to differentiate their services
from those offered by their competitors. Several new carriers have attempted to
leverage leading edge, high capacity technology as a market differentiator for
their networks. The Company believes this competition is itself a driver for
broader deployment of high capacity such as that enabled by the Company's
products throughout the network.
Increased Demand for Reliability
End-users are becoming more dependent on around-the-clock network
availability, not only for voice, but also for data traffic. The Company
believes these end-users are becoming less tolerant of service interruptions,
which can be caused by factors such as equipment failure, fiber cuts or high
traffic volume. Consequently, network service providers are faced with a
multi-pronged challenge: additional traffic, a different type of traffic, and a
growing demand for increased network reliability.
In many cases, this demand for greater reliability has led long distance
carriers to adopt a "ring architecture" in which long distance routes are linked
in a ring configuration so that in the event of a fiber optic cable cut or other
equipment failure between two points of the ring, the signal can be immediately
redirected through the reverse "protection path" of the ring. However, ring
architectures typically demand twice as much fiber capacity as non-ring based
architectures due to the need to maintain a redundant alternative path to serve
as a protection path for each fiber in use. Most, if not all, of the major
carriers have either already implemented or announced an intention to implement
ring architecture for their networks, which will place greater bandwidth demand
on their existing fiber optic networks.
Network Scalability Challenges
The bandwidth availability that dense wavelength division multiplexing
("DWDM") brought to the core of the network has created another network
challenge as carriers attempt to scale the rest of their networks at the same
pace at which they can now scale core bandwidth. DWDM replaces the single beam
of light that traverses fiberoptic cable with multiple colors of light, each of
which is capable of carrying tens of thousands of voice conversations or data
transmissions. Conventional network ring architectures can no longer efficiently
scale to match the bandwidth made possible by the application of DWDM.
Several years ago, network capacity - bandwidth - was the main bottleneck
in long-distance networks due to fiber exhaust. The widespread acceptance of
DWDM offered carriers an efficient and economical solution that relieved acute
fiber exhaustion. With the advent of DWDM, carriers could turn up additional
channels of bandwidth and gigabits of capacity as traffic dictated. With the
Company's equipment, this typically involves no more than the insertion of
additional channel cards into the existing MultiWave(R) optical transport
system.
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For the past several years DWDM has been implemented by carriers as a
point-to-point solution in long-distance networks. To construct a network using
DWDM equipment, a carrier must interconnect the point-to-point high-capacity
links and manage all traffic flowing through them. A critical component enabling
this interconnection in traditional architectures has been the SONET/SDH
add/drop multiplexers ("ADMs").
In most network architectures, a SONET ADM transmits and receives each
DWDM optical channel. This means that as optical channel counts escalate, the
corresponding number of SONET ADMs also grows. For instance, in order to receive
the traffic from an optical transport system running just 20 channels of DWDM, a
network operator would require a total of 40 SONET ADMs, one for each channel at
each end of the route. Every time an additional channel is turned up, two
additional SONET ADMs must be purchased and installed.
Historically this has been the only way to scale a network. Unfortunately,
this approach creates upwardly spiraling costs. In addition to the capital
equipment costs, 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 service provisioning and
network operation more difficult and cumbersome.
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 in United States
Securities and Exchange Commission reports by carriers, many service providers
are spending more on operating, growing, and managing their networks than they
are on capital expenditures. In some cases, service providers are spending two
to four dollars on network operations and support expenses for every dollar
spent on capital equipment. In addition, in many cases, network operations and
support expenses are growing faster than revenues. In one case, a carrier saw
its network expenses grow 72% since 1996, while its revenue only grew 18%. In
another, network expenses grew 806% since 1996, while revenue increased 126%.
CIENA LIGHTWORKS
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CIENA's LIGHTWORKS(TM) is an optical networking architecture designed to
change the fundamental economics of building service provider networks.
LightWorks focuses on the three critical areas of optical networking: optical
transport, core switching and service delivery. The products in CIENA's
LightWorks combine the functionality of several current network elements into a
single network element, thereby lowering the capital equipment requirements of a
service provider and simplifying the network, in order to reduce a carrier's
network operating costs. The components of CIENA's LightWorks architecture can
be sold together as a complete network solution or separately as best-of-breed
solutions.
OPTICAL TRANSPORT
CIENA's optical transport solutions are designed to alleviate capacity, or
bandwidth, constraints in high traffic, fiber optic routes without requiring the
installation of new fiber. CIENA's MultiWave(R) open architecture optical
transport systems enhance the transmission capacity of a single optical fiber
through systems that utilize DWDM, without requiring significant modification or
upgrade to existing transmission equipment.
All MultiWave optical transport systems are installed along segments of
fiber optic routes; the beginning and end of which are defined by the presence
of the customers' transmission equipment. CIENA's MultiWave optical transport
systems are designed with an open architecture that allows them to interoperate
with carriers' existing fiber optic transmission systems having a broad range of
transmission speeds and signal formats.
LONG-DISTANCE APPLICATIONS
CIENA has introduced four generations of its long-distance
optical transport product. In chronological order of introduction
they are: MULTIWAVE 1600(TM), MULTIWAVE SENTRY 1600(TM), MULTIWAVE
SENTRY 4000(TM) and MULTIWAVE CORESTREAM. Each subsequent generation
builds on the feature sets and capabilities of the previous
generation and previous generations are scalable to the latest
generation's capacity.
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MultiWave CoreStream is an advanced DWDM optical transport
system with a future capacity of up to 2 Terabits per second (2,000
Gb/s) over a single fiber. The first release of the MultiWave
CoreStream system enables simultaneous transmission of up to 96
optical channels on a single fiber at rates of up to 2.5 Gb/s per
channel or up to 48 optical channels at rates of up to 10 Gb/s per
channel, without opto-electronic regeneration.
MultiWave CoreStream's open architecture and DirectConnect
short reach interfaces provide flexible connectivity enabling
carriers to transport all types of traffic including voice, video
and data. MultiWave CoreStream has a modular DWDM architecture which
allows incremental, in-service capacity upgrades. Each optical
channel can be any mix of 622 megabits per second ("Mb/s")
(OC-12/STM-4), 2.5Gb/s (OC-48/STM-16) or 10Gb/s (OC-192/STM-64)
traffic.
The MultiWave CoreStream product family consists of optical
terminals, amplifiers and add/drop multiplexers. MultiWave
CoreStream incorporates a new generation of broadband optical
amplifiers that enable flexible bandwidth commissioning and
long-distance span designs. MultiWave CoreStream optical add/drop
multiplexers ("OADMs") enable flexible channel access in the middle
of optical transport spans. The OADMs can drop up to eight channels
of OC-12/STM-4, eight channels of OC-48/STM-16 or four channels of
OC-192/STM-64 traffic.
CIENA's SmartSpan(TM) software automates system operations and
ensures carrier-class reliability and performance by embedding
software intelligence within each MultiWave CoreStream element. Each
optical channel in a MultiWave CoreStream system is equipped with
intelligent digital performance monitoring to help carriers
troubleshoot and provide service level agreements. MultiWave
CoreStream is managed by CIENA's WaveWatcher(R) element management
system which has an easy-to-use graphical interface and allows
carriers to monitor and maintain their operations from a single
console.
In November 1999, the Company announced it was pursuing
enhancements to its MultiWave CoreStream product that enable the
system to offer the optimal combination of ultra long-distance
transport functionality and, channel count to further lower network
costs for service providers. Using forward error correction (FEC),
nonlinearity management, and dispersion mapping technologies, plus
embedded software intelligence, MultiWave CoreStream will be able to
support optical spans longer than 5,000 kilometers without
additional optical-to-electrical signal regeneration. The Company
expects to begin beta trails of the ultra long distance feature of
this product in the first half of calendar 2000. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors".
SHORT-DISTANCE APPLICATIONS
CIENA's MULTIWAVE FIREFLY(TM) is an optical transport system
developed specifically for use by carriers in short distance,
point-to-point applications. This system multiplexes up to 24
channels at 2.5 Gb/s, over a single fiber pair, allowing a carrier
to transport up to 60 Gb/s. Multiwave Firefly allows carriers to mix
SONET/SDH, ATM & Fast IP traffic on a common optical network. The
product also enables overbuilds to the network for applications such
as new high speed data services that can be readily implemented on a
separate channel over the current fiber plant. This kind of
application allows the network to be partitioned by type of service
offered, for simpler network management structure. MultiWave Firefly
utilizes a standards-based, open system architecture, enabling it to
interface inexpensively with a wide variety of SONET/SDH, ATM & Fast
IP fiber optic transmission equipment and most embedded networks.
RING-BASED APPLICATIONS
The MULTIWAVE METRO(TM) is an optical transport system
designed for use in metropolitan ring applications. The MultiWave
Metro system consists of optical add/drop multiplexer nodes
connected together on a two fiber ring. It provides up to 24 duplex
channels over a single fiber pair, enabling a service provider to
transport up to 60 Gb/s.
MultiWave Metro is extremely flexible, supporting various
topologies, protocols and protection arrangements on the same fiber
pair and in the same node. MultiWave Metro can simultaneously
support point-to-point, star, ring, or mesh network configurations.
Its standards-based, open architecture allows it to interface easily
with a wide variety of SONET/SDH, ATM, and Fast IP equipment and
most embedded network management systems. MultiWave Metro provides
protection switching on signals where external protection, such as
SONET/SDH protection, is not provided. Furthermore, MultiWave Metro
allows
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various protection types to be supported simultaneously on the same
fiber pair. This flexibility removes uncertainty for incumbent and
emerging carriers by allowing them to rapidly support new services.
MultiWave Metro is specifically designed for short-distance
ring applications. It provides a cost effective alternative to time
division multiplexed (TDM) rings when the total aggregate ring
capacity is OC-12 or greater. Traditionally, carriers designate the
transmission speed for a metropolitan ring, i.e.-OC-48, and
transport all traffic on the ring at the transmission speed. Once
the ring capacity is fully utilized, the carrier is forced to
utilize another ring. As with point-to-point segments, this
significantly increases the complexity, deployment timing and cost
of a carrier's network. MultiWave Metro is an excellent alternative
to new fiber builds in access rings where fiber exhaust is a problem
because it allows carriers to utilize one fiber pair to create
virtual rings of varying capacity. In addition, MultiWave Metro
allows new services such as "virtual private SONET rings" to be
offered using the existing fiber plant. A PC-based network design
tool, which helps automate the design of the DWDM ring, is available
with the system.
WAVEWATCHER NETWORK MANAGEMENT SYSTEM
WAVEWATCHER(R) is the MultiWave system's integrated network management
software package. The Company's commitment to providing standards-compliant
network management interfaces at all levels, from individual network elements to
the element management system, affords rapid integration into existing
telecommunication management operations.
WaveWatcher operates on a UNIX platform and has been designed to adhere to
both existing and evolving open system network management standards such as
SNMP, TCP/IP and the ITU TMN standards.
WaveWatcher's network element manager uses a separate out-of-band optical
service channel to communicate network management information and provides a
single view of multiple CIENA systems through graphical user interfaces and
supported operating system interfaces. It provides customers with early warnings
of network problems and allows them to manage and monitor network performance.
WaveWatcher provides fault, performance, security and configuration management
of optical networking systems. When used with MultiWave Sentry systems,
WaveWatcher provides additional monitoring capabilities for channel
identification and transmission quality throughout a customer's MultiWave
network.
The Company believes its software development effort provides an important
differentiator for its optical networking systems.
CORE SWITCHING
MULTIWAVE COREDIRECTOR(TM) is an intelligent optical core switch, designed
to deliver a wide range of optical capacities with a variety of protection
options. MultiWave CoreDirector features the networking intelligence of CIENA's
LightWorks OS(TM), which enables network-wide optical provisioning and
management. With its scalability, flexibility, and advanced networking
capabilities, MultiWave CoreDirector dramatically reduces the cost of deploying,
operating, and scaling optical networks. MultiWave CoreDirector is currently in
the customer trial phase of development. CIENA expects field deployable units
will be available at the end of the first calendar quarter of 2000, with general
availability to follow. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors".
MultiWave CoreDirector provides up to 640 Gb/s of full duplex switching in
a single 7 foot bay. It supports up to 256 OC-48/STM-16 or 64 OC-192/STM-64
interfaces, with the ability to support OC-768/STM-256 in the future. MultiWave
CoreDirector also supports OC-12/STM-4 and OC-3/STM-1 optical interfaces to
accommodate legacy switches and routers without requiring standalone SONET/SDH
multiplexers. Any optical interface may be software-configured as concatenated
for "wavelength" switching or channelized down to STS-1 granularity. Because of
its scalability, range of optical interfaces, and software-definable switching
granularity, MultiWave CoreDirector eliminates the need for SONET/SDH Add/Drop
Multiplexers, Digital Cross-Connects, and Optical Cross Connects.
LightWorks OS is CIENA's feature-rich operating system engineered
specifically for intelligent optical networking. With LightWorks OS, carriers
can automatically provision circuits with a wide range of capacities, flexible
protection options, and rapid restoration from a single management console as
opposed to individually configuring each network element as was necessary in
legacy architectures. At the heart of LightWorks OS is Optical Signaling and
Routing Protocol (OSRP(TM)), which enables distributed, dynamic information
exchange between MultiWave CoreDirectors, allowing carriers to provision new
services automatically and in real-time.
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LightWorks OS allows carriers to decouple the growth of operations tasks from
the growth of network traffic.
To get the most from their diverse service offerings and varied physical
plant, carriers are looking beyond "one-size-fits-all" transport protection
options. Some applications call for ring protection, others for linear line
protection, while some broadband data applications are best served by path-level
fast mesh protection. MultiWave CoreDirector supports all these applications,
allowing multiple concurrent protection mechanisms. These include
software-defined rings (VLSR(TM)), standards-compliant linear APS protection,
and FastMesh(TM) path-level restoration.
SERVICE DELIVERY
The MULTIWAVE EDGEDIRECTOR 500(TM) is a multi-service transport platform
designed for the high capacity requirements of public carrier networks. The
MultiWave EdgeDirector 500 enables public carriers to efficiently transport
voice and data services such as Transparent LAN ("local area network"), Router
IP, VPN ("Virtual Private Networks"), Voice, and Private Line Services over a
single integrated fiber optic access and interoffice network. Previously, in
order to offer its customers ATM, IP and voice services a carrier would have to
purchase and deploy service-specific network elements such as ATM switches, IP
routers and SONET ADMs. MultiWave EdgeDirector is designed to lower network
equipment costs by enabling a carrier deliver ATM, IP and voice services from a
single network element. The initial release of MultiWave EdgeDirector is
commercially available. We expect to release additional versions of the
MultiWave EdgeDirector over the next year to expand upon the functionality
of the initial release to address specific customer and market requirements.
MultiWave EdgeDirector is designed to integrate support of a wide range
of traditional and new services onto a single platform. It also integrates the
functions of DLCs, SONET/SDH ADMs, DCSs, access concentrators and access
routers into one network element, including the TDM 3/1/0 grooming functions.
In addition, the MultiWave EdgeDirector supports up to 280 DS1s, 20 DS3s or
10/100Base-T interfaces.
When deployed, the MultiWave EdgeDirector 500:
- Frees up bandwidth wasted by SONET/SDH transport;
- Leverages the existing switching, routing, and fiber access
infrastructure;
- Accelerates service turn-up;
- Reduces operational expenses and net management overhead; and
- Reduces space, power, and cabling requirements.
PRODUCT DEVELOPMENT
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The Company believes 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. The Company also believes there may be
opportunities for it to develop products and technologies complementary to
existing optical networking technologies which may broaden the Company's ability
to provide, facilitate and/or interconnect with high bandwidth solutions offered
throughout fiber optic networks. The Company intends to focus its product
development efforts and possibly pursue strategic alliances or acquisitions to
address expected opportunities in these areas.
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CUSTOMERS
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CIENA has announced relationships with the following 26 customers:
DOMESTICALLY:
Alltell, Bell Atlantic, Bell South, Cable & Wireless USA, Digital
Teleport, Incorporated, Enron Communications, Inc., GST
Telecommunications, Inc., Intermedia Communications, Inc., IXC
Communications, Inc., MCI WorldCom, Inc., RCN Corporation, Sprint
Corporation, Williams Communications, Inc.
INTERNATIONALLY:
Cable & Wireless Communications, UK; Completel, France; Crosswave
Communications, Inc., Japan; Daini Deuden Inc., Japan; GTS Network
(Ireland) Ltd. (formerly Hermes Europe Railtel), UK; iaxis, Ltd.,
UK; Japan Telecom Co., Ltd., Japan; KDD/Teleway Japan Corporation,
Japan; Racal Telecom, UK; TANet, UK; Telecom Developpement, France;
Telia AB, Sweden, MobilCom AG, Germany.
In addition CIENA has several unannounced customer relationships.
PROSPECTIVE 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,
MCI WorldCom and AT&T have seen increased competition from emerging
long-distance carriers such as Qwest Communications ("Qwest"), Global Crossing,
IXC Communications Inc. ("IXC") and Level 3 Communications ("Level 3").
Consolidation in this space is happening at a rapid pace. Most recently MCI
WorldCom and Sprint have announced their intention to merge. 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.
COMPETITIVE LOCAL EXCHANGE CARRIERS (CLECS)
Deregulation has fueled the growth of U.S. competitive local exchange
carriers or CLECs. The Company believes that in the short-term, CLECs could
benefit from the hesitancy of incumbent local exchange carriers, such as the
Regional Bell Operation Companies ("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 1999 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.
INTERNATIONAL COMPETITIVE CARRIERS
New competitive carriers are emerging as a result of deregulation in the
international telecommunications markets as well. CIENA has concentrated its
sales efforts on these emerging carriers as opposed to the traditional carriers
or PTTs. During Fiscal 1999, CIENA increased its international customer base
from nine to fourteen 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 builds where
the service provider is physically constructing the network. The Company expects
that in the near-term, the majority of its international revenue will come from
these smaller, more aggressive competitive carriers, and will continue to
concentrate its sales efforts accordingly.
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,
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<PAGE> 10
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 networks along those rights-of-way. The transmission
capabilities of CIENA's optical networking equipment enables these new carriers
to provide competitive services while purchasing and laying a minimal amount of
fiber optic cable.
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. The Company
anticipates that one or more of the RBOCs will move aggressively to offer long
distance services, although the timing of that move is uncertain, and the
question of how such a move will be implemented is unclear -- e.g., 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, the Company believes there may
be limited opportunities for in-region deployment of the Company's long distance
optical transport products in certain RBOCs. RBOC mergers currently under
consideration could greatly expand the geographic reach of the combined
companies, such that opportunities for in-region deployment of the Company's
products could be enhanced.
MARKETING AND DISTRIBUTION
- --------------------------------------------------------------------------------
The Company's systems require a relatively large investment, and the
Company's 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 the Company and commitment to
purchase, and has further led CIENA to pursue sales efforts on a focused,
customer-by-customer basis. See Item 7. "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Risk Factors."
The Company 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, the Company currently pursues prospective customers
through direct sales efforts, as well as through distributors, independent
marketing representatives and independent sales consultants. The Company has
established CIENA Communications, Inc. as a wholly-owned subsidiary to
coordinate worldwide sales, marketing, customer service and installation support
functions. CIENA Communications Japan, Ltd. is a wholly-owned subsidiary
established to coordinate sales, marketing and customer service efforts in
Japan, the Pacific Rim and other Asian areas. The Company has established CIENA
Limited as a wholly-owned subsidiary in the U.K. to facilitate European, and
Middle Eastern sales. Through its subsidiaries, the Company has established
offices in the U.S., Europe and Latin America, including offices in the U.K.,
Germany, France, Spain, Mexico and Brazil. The Company 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, the Company conducts
marketing communications programs intended to position and promote its products
within the telecommunications industry. Marketing personnel also coordinate the
Company's participation in trade shows and conduct media relations activities
with trade and general business publications.
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<PAGE> 11
MANUFACTURING
- --------------------------------------------------------------------------------
The Company 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. It also manufactures the
in-fiber Bragg gratings and Erbium-doped fiber amplifiers used in its optical
transport product lines. The Company expects the majority of the manufacturing
associated with its MultiWave CoreDirector and MultiWave EdgeDirector products
will be performed by third-party manufacturers, with only final system test and
assembly performed at its offices in Cupertino, California and Marlborough,
Massachusetts. However, the Company continues to evaluate whether a portion of
the manufacturing of modules for its optical transport products can be done on a
reliable and cost-effective basis by third party manufacturers.
The Company believes that portions of its manufacturing technologies and
processes represent a key competitive advantage and has accordingly invested
significantly in automated production capabilities and manufacturing process
improvements and expects to further enhance its manufacturing process with
additional production process control systems. Certain critical manufacturing
functions require a highly skilled work force, and the Company puts significant
efforts into training and maintaining the quality of its manufacturing
personnel.
The Company's optical transport product lines utilize in excess of 1,400
parts, many of which are customized for the Company. 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. The Company regularly turns to component
suppliers that may not have had an opportunity to demonstrate the ability to
increase their production to keep pace with the Company's needs. Certain key
optical and electronic components used in the Company's optical transport
systems are currently available only from sole sources. The Company has from
time to time experienced minor delays in the receipt of these components,
variations in the quality of the components, and a lengthening of the lead times
for some components. Any future difficulty in obtaining sufficient and timely
delivery of components could result in delays or reductions in product shipments
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations. While alternative suppliers have
been identified for certain other key optical and electronic components, those
alternative sources have not been qualified. The time and expense involved in
qualifying each additional source are significant. Accordingly, the Company will
for the near term continue to be dependent on sole and single source suppliers
of certain key components. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Risk Factors."
COMPETITION
- --------------------------------------------------------------------------------
Competition in the telecommunications equipment industry is intense,
particularly in that portion of the industry devoted to delivering higher
bandwidth and more cost effective services throughout the telecommunications
network. The Company 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 current competitive
advantage and expects to leverage that advantage in bringing its core switching
and service delivery products to market. However, intensifying competition is a
material risk factor facing the Company in fiscal 2000. See Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Risk Factors."
The competition faced by the Company 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 the Company. Included among the Company's
competitors are Lucent Technologies Inc., ("Lucent"), Northern Telecom Inc.
("Nortel"), Alcatel Alsthom Group ("Alcatel"), NEC Corporation ("NEC"), Pirelli
SpA, Siemens AG ("Siemens"), Fujitsu Group ("Fujitsu"), Hitachi Ltd. ("Hitachi")
and Telefon AB LM Ericsson ("Ericsson"). The Company also believes that several
new companies will attempt to break into the rapidly emerging optical networking
market. Each of the Company's major competitors is believed to be in various
stages of development, introduction or deployment of products directly
competitive with the Company's optical transport, core switching and service
delivery systems.
In addition to optical networking equipment suppliers, traditional
TDM-based transmission equipment suppliers compete with the Company in the
market for transmission capacity. Lucent, Alcatel, Nortel, Fujitsu, Hitachi and
11
<PAGE> 12
NEC are already providers of a full complement of such equipment. These and
other competitors have introduced or are expected to introduce equipment which
will offer 10 Gb/s transmission capability.
Competition in the optical networking market 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 scalability requirements. The Company's 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 product lines across an array of products and services, and across a
customer base which are larger than the Company's.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding of new
companies intending to develop new products for the optical networking market.
These companies have time to market advantages due to the narrow and exclusive
focus of their efforts. In particular, a number of companies, including several
start-ups, have announced products that compete with our MultiWave CoreStream,
Multiwave Metro, MultiWave CoreDirector and MultiWave EdgeDirector products.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company has licensed certain 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. The Company also licenses from third parties certain software
components for its network management software. These software licenses are
perpetual but will generally terminate after an uncured breach of the agreement
by the Company. The Company has registered trademarks for CIENA, WaveWatcher,
MODULE SCOPE and CIENA Optical Communications. The Company also relies on
contractual rights, trade secrets and copyrights to establish and protect its
proprietary rights in its products.
The Company intends to enforce vigorously its intellectual property rights
if infringement or misappropriation occurs.
The Company'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 the Company. These agreements
acknowledge the Company's exclusive ownership of all intellectual property
developed by the individual during the course of his work with the Company and
require that all proprietary information disclosed to the individual will remain
confidential. The Company's employees generally also sign agreements not to
compete with the Company for a period of twelve months following any termination
of employment.
As of October 1999, the Company had received twenty-nine United States
patents, and had one hundred twenty-three pending patent applications. Of the
United States patents that have been issued to the Company, the earliest any
will expire is 2012. Pursuant to an agreement between the Company and General
Instrument Corporation dated March 10, 1997, the Company 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 Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Risk Factors." The Company has also acquired
from Tyco Submarine Systems, Ltd. (TSSL), U.S. Patent No. 5,173,957 and eight
corresponding foreign patents based thereon as well as a license to a portfolio
of seven U.S. patents owned by TSSL.
STRATEGY
- --------------------------------------------------------------------------------
CIENA's strategy has been and will continue to be to maintain and build
upon its market leadership in the deployment of optical networking systems and
to leverage the Company's high-bandwidth technologies in order to provide
solutions for both voice and data communications-based network architectures.
Important elements of CIENA's strategy include:
- - MAINTAIN LEADERSHIP IN DEPLOYMENT OF OPTICAL NETWORKING SOLUTIONS. The
Company believes that the technological, operational and cost benefits of
the Company's optical networking solutions create competitive advantages
for telecommunications carriers worldwide, which are being pressed by
their customers to deliver
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<PAGE> 13
services to address the dramatic growth in Internet and other data
communications traffic. The Company also believes that achieving early
widespread operational deployment of its systems in a particular carrier's
network will provide CIENA significant competitive advantages with respect
to additional optical networking deployments and will enhance its
marketing to other carriers as a field proven supplier. The Company
therefore intends to continue aggressively serving its existing customers
while actively pursuing additional optical networking deployment
opportunities among fiber optic carriers in domestic and foreign long
distance, interoffice and local exchange markets. The Company intends to
emphasize its global service and support excellence as a differentiating
factor in its efforts to maintain and enhance its market position.
- - CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. The Company
markets technically advanced systems to sophisticated customers. The
nature of the Company's systems and market require a high level of
technical support and customer service, including installation assistance.
The Company's efforts to develop substantial customer service and
installation support organization were significantly enhanced with the
acquisition of ATI Telecom International, Ltd. ("Alta") in February of
1998. Through the combination of its existing technical support and
customer service operations and Alta, CIENA offers complete engineering,
furnishing and installation services in addition to full-time customer
support from selected locations worldwide where it develops significant
customer relationships.
- - CONTINUE TO ENHANCE WORLD CLASS MANUFACTURING CAPABILITY. The Company's
MultiWave systems serve a mission critical role in its customers'
networks. Quality assurance and manufacturing excellence are necessary for
the Company to achieve success. CIENA believes it has developed a world
class manufacturing capability and that this capability provides the
Company with a significant competitive advantage. The Company achieved ISO
9001 certification in July 1997 in further support of this element of its
strategy. The Company expects to continue to invest in both the capital
and the human resources necessary to maintain and leverage this advantage.
- - EXPAND SALES AND MARKETING EFFORTS. The nature of the target customer base
for all MultiWave product lines requires a focused sales effort on a
customer-by-customer basis. The Company will continue to increase its
sales and marketing efforts by focusing on the worldwide market of fiber
optic carriers. The Company increased the number of optical transport
customers from fourteen in 1998 to twenty-seven during 1999. In addition,
CIENA significantly increased its international presence, particularly in
Europe, growing the number of international customers from nine to
fourteen and the percentage of revenues from international customers from
approximately 23% of total revenue in 1998 to approximately 44% of revenue
in 1999. The Company will continue to strengthen its marketing programs
and to increase its international presence through both direct sales and
international distributor relationships.
- - LEVERAGE THE COMPANY'S HIGH BANDWIDTH TECHNOLOGIES AND KNOW-HOW. The
Company believes the overall growth in demand for bandwidth and the need
for high bandwidth 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. The Company expects to
leverage the core competencies it has developed in the design, development
and manufacturing of the MultiWave product lines by pursuing new product
development efforts, and strategic alliances or acquisitions, to address
these expected opportunities. The Company intends to move aggressively to
maintain leadership in the design and development of communications
equipment and software which will both respond to customer needs and help
the customers move toward newer, higher capacity, more cost-efficient
network designs for the future.
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<PAGE> 14
EMPLOYEES
- --------------------------------------------------------------------------------
As of October 31, 1999, the Company and its subsidiaries employed 1,928
persons, of whom 416 were primarily engaged in research and development
activities, 682 in manufacturing, 404 in installation services, 251 in sales,
marketing, customer support and related activities and 175 in administration.
None of the Company's employees are currently represented by a labor union. The
Company considers its relations with its employees to be good.
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- ------- ----------------------------------------------------------
<S> <C> <C>
Patrick H. Nettles, Ph.D.(1) 56 President, Chief Executive Officer and Director
Gary B. Smith 39 Senior Vice President, Chief Operating Officer
Joseph R. Chinnici 45 Senior Vice President, Finance and Chief Financial Officer
Steve W. Chaddick 48 President, Core Switching Division
Michael A. Champa 48 President, Access Systems Division
Mark Cummings 48 Senior Vice President, Operations
Jesus Leon 55 Senior Vice President, Products and Technology
Rebecca K. Seidman 53 Senior Vice President, Human Resources Development
Stephen B. Alexander 40 Vice President, Chief Technology Officer
Charles Chi 33 Vice President, Marketing
Michael O. McCarthy 34 Vice President, General Counsel and Secretary
Andrew C. Petrik 36 Vice President, Controller and Treasurer
Michael J. Zak(1)(2)(3) 46 Director
Harvey B. Cash(1)(2) 61 Director
Billy B. Oliver(1)(2) 74 Director
Stephen P. Bradley, Ph.D.(1)(3) 58 Director
John R. Dillon(1)(3) 58 Director
</TABLE>
- ----------
(1) The Company's Directors hold staggered terms of office, expiring as
follows: Messrs Bradley and Oliver in 2000; Messrs Dillon and Nettles in
2001; and Messrs Cash and Zak in 2002
(2) Member of the Human Resources Committee
(3) Member of the Audit Committee
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<PAGE> 15
PATRICK H. NETTLES, PH.D., has served as Chief Executive Officer and
Director of the Company since February 1994, and as Director, President and
Chief Executive Officer since April 1994. Dr. Nettles serves as a Trustee for
the California Institute of Technology and also serves on the Advisory Board to
the President at Georgia Institute of Technology. From 1992 until 1994, Dr.
Nettles served as Executive Vice President and Chief Operating Officer of Blyth
Holdings Inc., a publicly-held supplier of client/server software. From late
1990 through 1992, Dr. Nettles was President and Chief Executive Officer of
Protocol Engines Inc., a development stage enterprise, formed as an outgrowth of
Silicon Graphics Inc., and targeted toward very large scale integration based
solutions for high-performance computer networking. From 1989 to 1990, Dr.
Nettles was Chief Financial Officer of Optilink, a venture start-up which was
acquired by DSC Communications. Dr. Nettles received his B.S. degree from the
Georgia Institute of Technology and his Ph.D. from the California Institute of
Technology.
GARY B. SMITH has served as Senior Vice President, Chief Operating Officer
since August 1999 and from September 1998 to August 1999, served as Senior Vice
President Worldwide Sales and was previously Vice President of International
Sales since joining the Company in November 1997. From June 1995 to October
1997, Mr. Smith served as Vice President, Sales and Marketing for Intelsat and
from August 1991 to May 1995, Mr. Smith served as Vice President of Sales and
Marketing for Cray Communications, Inc. Mr. Smith received an M.B.A. from
Ashridge Management College, U.K.
JOSEPH R. CHINNICI joined the Company in September 1994 as Controller, and
became Vice President, Finance and Chief Financial Officer in May 1995. He was
promoted to Senior Vice President Finance and Chief Financial Officer in August
1997. From 1993 through 1994, Mr. Chinnici served as a financial consultant for
Halston Borghese Inc. From 1977 to 1993, Mr. Chinnici held a variety of
accounting and finance assignments for Platex Apparel, Inc. (now a division of
Sara Lee Corporation), ending this period as Director of Operations Accounting
and Financial Analysis. Mr. Chinnici currently serves on the board of directors
for Online Technologies Group, Inc. Mr. Chinnici holds a B.S. in accounting from
Villanova University and an M.B.A. from Southern Illinois University.
STEVE W. CHADDICK has served as President, Core Switching Division since
September 1999 and from September 1998 to August 1999, served as Senior Vice
President, Strategy and Corporate Development., From September 1996 to August
1998, he served as Senior Vice President, Products and Technologies, and was
previously Vice President of Product Development for the Company since joining
it in 1994. Prior to joining the Company, Mr. Chaddick was Vice President of
Engineering at AT&T Tridom, a company he co-founded in 1983 and which was
acquired by AT&T in 1988. Mr. Chaddick holds several patents in the area of WDM
systems and techniques, and serves on the Advisory Board of the School of
Electrical and Computer Engineering at Georgia Institute of Technology. Mr.
Chaddick received both his B.S. and M.S. degrees in electrical engineering from
the Georgia Institute of Technology.
MICHAEL A. CHAMPA has served as President, Access Systems Division since
joining the Company in July 1999. From June 1997 to June 1999, Mr. Champa was
President and CEO of Omnia Communications, Inc., and a co-founder of that
company. From April 1992 to May 1997, Mr. Champa served as Vice President,
Worldwide Sales and Service at Cascade Communications. Mr. Champa has a B.A.
degree from the University of Massachusetts at Amherst as well as M.B.A. and
M.P.A. degrees from Suffolk University.
MARK CUMMINGS joined the Company in May 1996 as Vice President,
Manufacturing and was promoted to Senior Vice President, Operations in August
1997. From 1985 to 1996, Mr. Cummings was Vice President, Operations for Cray
Communications, Inc., an international manufacturer of communications equipment.
Mr. Cummings holds a B.S. in electronic technology from the State University of
New York at Buffalo, and is currently in the Masters program in advanced
manufacturing systems at the University of Maryland.
JESUS LEON has served as Senior Vice President Products and Technology
since September 1998 and Vice President, Access Products since joining the
Company in November 1996. From December 1995 to October 1996, Mr. Leon served as
Vice President, Engineering, for the Access Systems Division of Alcatel
("Alcatel"). Prior to December 1996, Mr. Leon served in various positions with
Alcatel with responsibility for over 1,200 engineers in Europe, Australia and
South Africa. Mr. Leon holds a B.S.E.E. and M.E. from the University of Florida,
an A.B.D. (all but doctoral dissertation) from the Georgia Institute of
Technology and an M.B.A. from Georgia State University.
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<PAGE> 16
REBECCA K. SEIDMAN joined the Company in April 1996 as Director of Human
Resources Development, and was promoted to Vice President, Human Resources
Development in June 1996. She was promoted to Senior Vice President, Human
Resources Development in August 1999. From 1984 until joining the Company, Ms.
Seidman served consecutively as Director of Marketing, Vice President,
Administration, and Principal of Walpert, Smullian & Blumenthal, P.A., a
regional accounting and consulting firm. Ms. Seidman holds a B.A. degree in
economics and political science from Goucher College and is the co-author of
Total Quality Distribution, a book discussing practical applications of Total
Quality in the wholesale distribution industry.
STEPHEN B. ALEXANDER has served as Vice President, Chief Technology
Officer since September 1998, and Vice President, Transport Products from
September 1996 to August 1998. He was previously Director of Lightwave Systems
at the Company since joining it in 1994. From 1982 until joining the Company, he
was employed at MIT Lincoln Laboratory, where he last held the position of
Assistant Leader of the Optical Communications Technology Group. Mr. Alexander
is an Associate Editor for the Journal of Lightwave Technology and a General
Chair of the conference on Optical Fiber Communication (OFC) for 1997. Mr.
Alexander received both his B.S. and M.S. degrees in electrical engineering from
the Georgia Institute of Technology.
CHARLES CHI has served as the Company's Vice President, Marketing since
April 1999. From March 1998 to March 1999 Mr. Chi served as Vice President of
Marketing and co-founder of Lightera Networks, Inc. From November 1997 to March
1998 Mr. Chi was Director of Partnership and Alliance Marketing with the
Company. From May 1995 to November 1997, Mr. Chi was with Cisco Systems in sales
and marketing, most recently as the Group Manager for carrier ATM systems. From
1988 to 1995, Mr. Chi held both technical and group management positions with
AT&T Canada and Bell Canada in marketing, sales and corporate engineering. Mr.
Chi earned his Bachelor of Engineering in Systems and Computer Engineering from
Carleton University in Ottawa.
MICHAEL O. MCCARTHY has served as the Company's Vice President & General
Counsel since July 1999 and previously served as the Assistant General Counsel
since joining the Company in September 1997. From June 1996 to September 1997,
Mr. McCarthy was a Corporate Counsel in MCI Communications Corporation's mergers
and acquisitions group. Prior to joining MCI, Mr. McCarthy was an attorney with
Hogan & Hartson's corporate and securities group where he served as outside
counsel for a variety of emerging companies. Mr. McCarthy holds a B.A. degree in
Mathematical Economics from Colgate University and a J.D. degree from Vanderbilt
University's School of Law.
ANDREW C. PETRIK joined the Company in July 1996 as Controller, and became
Treasurer in December 1996 and was promoted to Vice President in August 1997.
From 1989 to 1996, Mr. Petrik was employed by Microdyne Corporation where he was
the Assistant Controller from 1989 to 1994 and Assistant Vice President of
Marketing and Product Planning from 1994 to 1996. Mr. Petrik holds a B.S. in
Accounting from the University of Maryland and is a Certified Public Accountant.
MICHAEL J. ZAK has been a Director of the Company since December 1994. He
has been employed by Charles River Ventures of Waltham, Massachusetts since
1991. From 1986 through 1991, he was a founder and corporate officer of Concord
Communications, Inc., a developer of network management software. He is a
director of four other private companies. Mr. Zak has a B.S. degree in
engineering from Cornell University and an M.B.A. from Harvard Business School.
HARVEY B. CASH has been a Director of the Company since April 1994. Mr.
Cash is a general partner of InterWest Partners, a venture capital firm in Menlo
Park, California which he joined in 1985. Mr. Cash serves on the board of
directors of Liberte, Inc., PANJA Corporation, and i2 Technologies Inc.. He is
also an advisor to Austin Ventures. Mr. Cash received a B.S. in electrical
engineering from Texas A&M University and an M.B.A. from Western Michigan
University. Mr. Cash served on the board of directors of Benchmarq
Microelectronics from 1990 to 1999, and on the board of directors of Aurora
Electronics, Inc. from 1991 to 1999.
BILLY B. OLIVER has been a Director of the Company since June 1996. Since
his retirement in 1985 after nearly 40 years of services at AT&T, Mr. Oliver has
worked as a self-employed communications consultant. During his last 15 years
with AT&T, he held the position of Vice President, Engineering Planning and
Design, where he was directly involved in and had significant responsibility for
the evolution of AT&T's long distance network during that period. He was a
co-recipient of the Alexander Graham Bell Medal for the conception and
implementation of
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<PAGE> 17
Nonhierarchical Routing in AT&T's network. Mr. Oliver is also a director of
Enterprise Network Services Inc. and Communications Network Enhancement Inc. Mr.
Oliver earned his B.S.E.E. degree from North Carolina State University.
STEPHEN P. BRADLEY, PH.D. became a Director of the Company in April 1998.
Professor Bradley is a William Ziegler Professor of Business Administration and
the Chairman of the Program for Management Development at the Harvard Business
School. A member of the Harvard faculty since 1968, Professor Bradley is also
Chairman of Harvard's Executive Program in Competition and Strategy and teaches
in Harvard's Delivering Information Services program. Professor Bradley has
written extensively on the telecommunications industry and the impact of
technology on competitive strategy. Professor Bradley received his B.E. in
Electrical Engineering from Yale University in 1963 and his M.S. and Ph.D. in
Operations Research from the University of California, Berkeley, in 1965 and
1968 respectively.
JOHN R. DILLON became a Director of the Company in October 1999. Mr.
Dillon's experience includes a variety of positions at such companies as The
Coca-Cola Company, Scientific Atlanta and Fuqua National, where he served as
President. Mr. Dillon was instrumental in taking Cox Communications private in
1985 and merging it with Cox Newspapers to form Cox Enterprises at which time he
was elected Senior Vice President, CFO and a member of the board of directors.
At Cox Enterprises, he was responsible for all corporate financial activities as
well as planning and development, until his retirement in December 1996. He
continued to serve on the Boards of TCG and Cox Communications for two years
following his retirement from Cox Enterprises. Mr. Dillon holds an MBA from
Harvard Business School and a BEE degree from Georgia Institute of Technology,
where he was elected to the Academy of Distinguished Engineering Alumni in 1997.
He was a founding director of the Georgia Center for Advanced Telecommunications
Technology and currently serves on the Georgia Institute of Technology National
Advisory Board.
ITEM 2. PROPERTIES
All of the Company's properties are leased. The Company's principal
executive offices, sales and marketing functions are located in Linthicum,
Maryland in a 68,000 square foot facility. The Company's product development
functions are located in a 96,000 square foot facility in Linthicum, Maryland; a
27,500 square foot facility in Alpharetta, Georgia; and a 8,700 square foot
facility in Santa Barbara, California. Combined product development and
manufacturing functions are also located in a 43,000 square foot facility in
Marlborough, Massachusetts; and in three facilities with a total of
approximately 27,000 square feet located in Cupertino, California. The Company
has leased an additional facility of approximately 109,000 square feet in
Cupertino, California, where it intends to transfer the current Cupertino
product development and manufacturing functions in the second quarter of fiscal
2000. The Company intends to sublease the vacated Cupertino facilities. The
Company also has manufacturing facilities located in both Savage and Linthicum,
Maryland which consist of four facilities with a total of approximately 210,000
square feet that are used for such functions as manufacturing production,
systems integration and test, pilot production and customer service and support.
The Company's primary engineering, furnishment and installation facility is
located in a 26,000 square foot facility located in Duluth, Georgia. The Company
has sales, marketing and customer support offices located in Overland Park,
Kansas; Richardson, Texas; Tulsa, Oklahoma; Middletown, New Jersey; Boca Raton,
Florida; Denver, Colorado; Minneapolis, Minnesota; Portland, Oregon; Bellevue,
Washington; Edmonton, Canada; London, England; Paris, France; Brussels, Belgium;
Frankfurt, Germany; Tokyo, Japan; Sao Paulo, Brazil; and Mexico City, Mexico.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
A class action complaint was filed on August 26, 1998 in U.S. District
Court for the District of Maryland entitled Witkin et al. v. CIENA Corporation
et al. (Case No. Y-98-2946). Several other complaints, substantially similar in
content were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. On July 19, 1999 the
United States District Court dismissed the suit with leave to amend before any
discovery had been taken. On August 20, 1999, plaintiffs filed a second amended
class action complaint alleging that CIENA and certain officers and directors
violated certain provisions of the federal securities laws, including Section
10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other actions
intending to artificially inflate and maintain the market price of CIENA's
common stock during the Class Period of May 21, 1998 to September 14, 1998,
inclusive. The plaintiffs intend to seek certification of the suit as a class
action on behalf of all persons who purchased shares of CIENA's common stock
during the Class Period and the awarding of compensatory damages in
17
<PAGE> 18
an amount to have been determined at trial together with attorneys' fees. CIENA
has filed, and the parties have fully briefed, a motion to dismiss the second
amended complaint. CIENA believes the suit is without merit and CIENA intends
to continue to defend the case vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
since the Company's initial public offering on February 7, 1997 under the Nasdaq
symbol CIEN. The following table sets forth for the fiscal periods indicated the
high and low sales prices of the Common Stock, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Price Range of Common Stock
High Low
------ ------
<S> <C> <C>
Fiscal Year 1998
First Quarter ended January 31, 1998 ............... $63.56 $47.44
Second Quarter ended April 30, 1998 ................ $58.25 $37.25
Third Quarter ended July 31, 1998 .................. $92.38 $46.88
Fourth Quarter ended October 31, 1998............... $75.88 $ 8.13
Fiscal Year 1999
First Quarter ended January 31, 1999 ............... $23.00 $12.44
Second Quarter ended April 30, 1999 ................ $29.25 $16.63
Third Quarter ended July 31, 1999 .................. $37.75 $22.69
Fourth Quarter ended October 31, 1999............... $42.81 $29.06
</TABLE>
The closing sale price for the Common Stock on October 29, 1999 was
$35.25.
The market price of the Company's Common Stock has fluctuated
significantly and may be subject to significant fluctuations in the future. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Overview and Risk Factors."
As of October 31, 1999, there were approximately 1,661 holders of record
of the Company's Common Stock and 138,187,356 shares of Common Stock
outstanding.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
18
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto included in Item 8. "Financial Statements and
Supplementary Data". The Company 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 1995, 1997, 1998 and 1999 comprised 52 weeks and fiscal
1996 comprised 53 weeks.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................................... $ 21,691 $ 88,463 $ 413,215 $ 508,087 $ 482,085
Cost of goods sold ......................... 16,185 47,315 166,472 256,014 299,769
--------- --------- --------- --------- ---------
Gross profit ............................. 5,506 41,148 246,743 252,073 182,316
--------- --------- --------- --------- ---------
Operating expenses:
Research and development ................. 6,361 8,922 23,773 73,756 104,641
Selling and marketing .................... 1,907 5,641 22,627 47,343 61,603
General and administrative ............... 3,034 6,422 11,965 19,274 22,986
Purchased research and development ....... - - - 9,503 -
Pirelli litigation ....................... - - 7,500 30,579 -
Merger related costs ..................... - - - 2,548 13,021
--------- --------- --------- --------- ---------
Total operating expenses ................... 11,302 20,985 65,865 183,003 202,251
--------- --------- --------- --------- ---------
Income (loss) from operations .............. (5,796) 20,163 180,878 69,070 (19,935)
Other income (expense), net ................ 172 653 7,178 12,830 13,944
--------- --------- --------- --------- ---------
Income (loss) before income taxes .......... (5,624) 20,816 188,056 81,900 (5,991)
Provision (benefit) for income taxes ....... 824 3,553 72,488 36,200 (2,067)
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (6,448) $ 17,263 $ 115,568 $ 45,700 $ (3,924)
========= ========= ========= ========= =========
Basic net income (loss) per common
share ................................... $ (0.51) $ 1.25 $ 1.52 $ 0.39 $ (0.03)
========= ========= ========= ========= =========
Diluted net income (loss) per common
and dilutive potential common share .... $ (0.51) $ 0.19 $ 1.10 $ 0.36 $ (0.03)
========= ========= ========= ========= =========
Weighted average basic common shares
outstanding ........................... 12,717 13,817 75,964 117,990 133,521
========= ========= ========= ========= =========
Weighted average basic common and
dilutive potential common shares
outstanding ............................ 12,717 92,407 104,843 127,894 133,521
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................. $ 8,261 $ 24,040 $273,286 $250,714 $143,440
Working capital ........................... 7,221 42,240 338,078 391,305 427,471
Total assets .............................. 17,706 79,676 468,247 602,809 677,835
Long-term obligations, excluding
current portion ......................... 2,074 3,465 1,900 3,029 4,881
Mandatorily redeemable preferred stock .... 14,454 40,404 - - -
Stockholders' equity (deficit) ............ (6,662) 10,783 377,278 501,036 530,473
</TABLE>
19
<PAGE> 20
ITEM 7. 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" and the Company's consolidated financial
statements and notes thereto included elsewhere in this report on Form 10-K.
OVERVIEW
CIENA is a leader in the rapidly emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery systems that enable service providers to
provision, manage and deliver high-bandwidth services to their customers. The
Company has pursued a strategy to develop and leverage the power of disruptive
technologies to change the fundamental economics of building carrier-class tele-
and data-communications networks, providing its customers with a competitive
advantage.
In conjunction with the agreements to acquire Lightera and Omnia, CIENA
announced its LightWorks(TM) Initiative, CIENA's vision of how to change the
fundamental economics of optical telecommunication service provider networks.
The eventual addition of Lightera's and Omnia's products to CIENA's product
suite will make it possible for CIENA to offer telecommunications service
providers a comprehensive next-generation optical network architecture that
dramatically reduces the total number of network elements, thereby lowering
network costs.
On March 31, 1999 the Company completed a merger with Lightera in a
transaction valued at approximately $459 million. Lightera is a developer of
carrier class optical core switches for fiberoptic communications networks.
Under the terms of the agreement, the Company acquired all of the outstanding
shares and assumed outstanding stock options and warrants of Lightera in
exchange for approximately 17.5 million shares of CIENA common stock and 2.9
million CIENA shares issuable upon exercise of stock options and warrants. The
transaction constituted a tax-free reorganization and has been accounted for as
a pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Lightera as though it had been a part of CIENA.
On July 1, 1999 the Company completed a merger with Omnia in a transaction
valued at approximately $483 million. Omnia is a telecommunications equipment
supplier which focuses on developing solutions to allow public telephone network
operators to offer services cost effectively over integrated metropolitan
fiberoptic access and transport networks. Under the terms of the agreement, the
Company acquired all of the outstanding shares and assumed the stock options of
Omnia in exchange for approximately 15.2 million shares of CIENA common stock
and 0.8 million CIENA shares issuable upon exercise of stock options. The
transaction constituted a tax-free reorganization and has been accounted for as
a pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Omnia as though it had been a part of CIENA.
On August 3, 1999, CIENA announced that the Omnia AXR 500 multi-service
transport platform had been integrated into the CIENA LightWorks architecture
and that CIENA had renamed the product the MultiWave EdgeDirector(TM) 500.
CIENA's MultiWave EdgeDirector 500 is a next generation multi-service transport
platform that combines the functions of traditional transport equipment with
advanced data networking. The MultiWave EdgeDirector 500 utilizes packet and
cell technology to enable service providers to cost effectively deliver
traditional voice and new high-speed data services over a single optical
network. The initial release of the MultiWave EdgeDirector 500 became
commercially available during the fourth quarter of fiscal 1999.
During the third quarter of fiscal 1999 both the MultiWave(R) Metro(TM),
CIENA's system designed for use in metropolitan ring applications, and the
MultiWave CoreStream(TM), CIENA's next generation long-distance optical
transport system capable of up to 96channels of 2.5 Gb/s, became available for
commercial shipments. During the fourth quarter of fiscal 1999, 10 Gb/s
transmission capability of up to 48-channel configuration for its MultiWave
CoreStream system became commercially available.
CIENA intends to continue the development of the MultiWave
CoreDirector(TM) product. MultiWave CoreDirector is believed to be the world's
first intelligent optical core. The MultiWave CoreDirector allows carriers to
deliver a
20
<PAGE> 21
full range of transport services, without costly SONET/SDH multiplexers or
inflexible "wavelength only" devices. We expect that field deployable units of
the MultiWave CoreDirector will be available at the end of the first calendar
quarter 2000. See "Risk Factors".
In November 1999, the Company announced it was pursuing enhancements to
its MultiWave CoreStream product that enable the system to offer the optimal
combination of ultra long-distance transport functionality and, channel count to
further lower network costs for service providers. Using forward error
correction (FEC), nonlinearity management, and dispersion mapping technologies,
plus embedded software intelligence, MultiWave CoreStream will be able to
support optical spans longer than 5,000 kilometers without additional
optical-to-electrical signal regeneration. The Company expects to begin beta
trails of the ultra long distance feature of this product in the first half of
calendar 2000. See "Risk Factors".
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is probable. For transactions where CIENA has yet
to obtain customer acceptance, revenue is deferred until the terms of acceptance
are satisfied. Revenue for installation services is recognized as the services
are performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying balance sheets. For distributor sales where risks of
ownership have not transferred, CIENA recognizes revenue when the product is
shipped through to the end user.
CIENA increased the number of its revenue generating optical transport
equipment customers from a total of fourteen during fiscal 1998 to twenty-seven
for fiscal 1999. CIENA's gross margin percentage decreased from 49.6% in fiscal
1998 to 37.8% in fiscal 1999. While this gross margin pressure continues, CIENA
believes that its product and service quality, manufacturing experience, and
proven track record of delivery will enable it to be successful while it
concentrates on efforts to reduce product costs and maximize production
efficiencies. CIENA's gross margin percentage improved each quarter of fiscal
1999 as a result of its product cost reductions and production efficiencies.
Gross margin percentage improved from 31.2% in the fourth quarter fiscal 1998 to
41.0% in the fourth quarter fiscal 1999. CIENA intends to preserve and enhance
its market leadership and eventually build on its installed base with new and
additional products.
Pursuit of these strategies, in conjunction with increased investments in
research and development, selling, marketing, and customer service activities,
will likely continue to limit CIENA's operating profitability during the first
six months of fiscal 2000. CIENA intends to continue to pursue new or
complementary technologies either through ongoing internal development or by
acquisition in order to further broaden CIENA's product line.
As of October 31, 1999 the Company and its subsidiaries employed
approximately 1,928 persons, which was an increase of 452 persons over the
approximate 1,476 employed on October 31, 1998.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 1997, 1998 AND 1999
REVENUE. The Company recognized $482.1 million, $508.1 million and $413.2
million in revenue for the fiscal years ended October 31, 1999, 1998 and 1997,
respectively. 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. The
approximate $94.9 million or 23.0% increase in revenue from fiscal 1997 to
fiscal 1998 was primarily due to an increase in product shipments.
CIENA recognized revenues from a total of twenty-seven, fourteen, and five
optical equipment customers during fiscal 1999, 1998, and 1997, respectively.
During fiscal year 1999 Sprint, MCIWorldCom, and GTS Network Ltd. (formerly
Hermes Europe Railtel) 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 and fiscal 1997
where both MCIWorldCom and Sprint were 10% customers and combined accounted for
88.0% of CIENA's fiscal 1997 revenue. Revenue derived from foreign sales
accounted for approximately 44.3%, 23.0%, and 2.8% of the Company's revenues
during fiscal 1999, 1998 and 1997, respectively.
21
<PAGE> 22
For fiscal 1999 CIENA's optical network equipment revenues were derived
from sales of the MultiWave Sentry 4000, MultiWave Sentry 1600, MultiWave 1600,
MultiWave Metro, MultiWave Firefly, MultiWave EdgeDirector 500 and MultiWave
CoreStream systems. During fiscal 1998 the Company recognized revenues from
sales of MultiWave Sentry 1600, MultiWave 1600, MultiWave Firefly, and MultiWave
Sentry 4000 systems. For fiscal year 1997 all of the Company's optical network
equipment revenues were derived from the MultiWave 1600 product. The amount of
revenue recognized from MultiWave Sentry 1600 and MultiWave 1600 sales declined
in fiscal 1999 as compared to fiscal 1998 and also declined in fiscal 1998 as
compared to fiscal 1997. This decline in MultiWave Sentry 1600 sales in fiscal
1999 was offset by the introduction of new revenues from the MultiWave
CoreStream, MultiWave EdgeDirector 500 and MultiWave Metro products in fiscal
1999 and in fiscal 1998. The decline was offset by revenue recognized from sales
of MultiWave Firefly, and MultiWave Sentry 4000 systems. 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
12.1%, 9.2% and 7.0% for the fiscal years 1999, 1998, and 1997, respectively.
Based on overall new bid activity, as well as expected network deployment
plans of existing customers, the Company believes revenue growth in fiscal 2000
over fiscal 1999 is possible, but will be highly dependent on winning new bids
from new and existing customers for shipments of the existing products as well
as for the MultiWave CoreDirector and MultiWave EdgeDirector 500 systems. CIENA
expects that field deployable units of the MultiWave CoreDirector will be
available at the end of the first calendar quarter 2000. CIENA also expects the
percentage of fiscal 2000 revenue derived from foreign sales to be comparable to
the levels obtained during fiscal 1999. Competition of new bids is intense, and
there is no assurance the Company will be successful in winning enough new bids
and new customers to achieve year over year sequential growth. See "Risk
Factors".
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to the Company's
manufacturing and engineering, furnishing and installation operations. Gross
profit was $182.3 million, $252.1 million, and $246.7 million for fiscal years
1999, 1998, and 1997, respectively. Gross margin was 37.8%, 49.6%, and 59.7%
for fiscal 1999, 1998, and 1997, respectively. The decrease in gross profit
from fiscal 1998 to fiscal 1999 and from fiscal 1997 to fiscal 1998 was largely
attributable to lower selling prices.
CIENA's gross margins may be affected by a number of factors, including
continued competitive market pricing, lower manufacturing volumes and
efficiencies and fluctuations in component costs. During fiscal 2000, CIENA
expects to face continued pressure on gross margins, primarily as a result of
substantial price discounting by competitors seeking to acquire market share.
CIENA intends to counter this pressure with the addition of new products and
continued product cost reduction and production efficiency programs. See "Risk
Factors".
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$104.6 million, $73.8 million, and $23.8 million for fiscal 1999, 1998, and
1997, respectively. The approximate $30.9 million or 41.9% increase from fiscal
1998 to 1999 and the approximate $50.0 million or 210.3% increase from fiscal
1997 to 1998 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 1999, 1998, and 1997 research and development
expenses were 21.7%, 14.5%, and 5.8% 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 2000 to
support the continued development of the various 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 $61.6
million, $47.3 million, and $22.6 million for fiscal 1999, 1998, and 1997,
respectively. The approximate $14.3 million or 30.1% increase from fiscal 1998
to 1999 and the approximate $24.7 million or 109.2% increase from fiscal 1997 to
1998 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 1999, 1998, and 1997 selling and marketing expenses were
12.8%, 9.3%, and 5.5% of revenue, respectively. The Company anticipates that its
selling and marketing expenses may increase in absolute dollars and perhaps as a
percentage of revenue during fiscal 2000 as additional personnel are hired and
additional offices are opened to allow the Company to pursue new customers and
market opportunities. The Company also expects the portion of selling and
marketing expenses attributable to technical assistance and field support,
specifically in Europe and Asia, will increase as the Company's installed base
of operational MultiWave systems increases.
22
<PAGE> 23
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $23.0 million, $19.3 million, and $12.0 million for fiscal 1999, 1998, and
1997, respectively. The approximate $3.7 million or 19.3% increase from fiscal
year 1998 to 1999 and the approximate $7.3 million or 61.1% increase from fiscal
1997 to 1998 in general and administrative expenses was primarily the result of
increased staffing levels and outside consulting services. During fiscal 1999,
1998 and 1997, general and administrative expenses were 4.8%, 3.8%, and 2.9% of
revenue, respectively. The Company believes that its general and administrative
expenses will increase in absolute dollars and perhaps as a percentage of
revenue during fiscal 2000 as a result of the expansion of the Company's
administrative staff required to support its expanding operations.
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. The Pirelli
litigation expense in fiscal 1997 was primarily the result of a $7.5 million
charge for actual and estimated legal and related costs associated with the
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 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.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on the Company's cash, cash equivalents and marketable
debt securities, net of interest expense associated with the Company's debt
obligations. Other income (expense), net, was $13.9 million, $12.8 million, and
$7.2 million for fiscal 1999, 1998, and 1997, respectively. The year to year
increase in other income (expense), net, was primarily the result of the
investment of the net proceeds of the Company's stock offerings and net
earnings.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's benefit for income
taxes was $2.1 million or 34.5% of pre-tax losses for fiscal 1999 and provision
was $36.2 million and $72.5 million or 44.2% and 38.5% of pre-tax earnings for
fiscal 1998 and 1997, respectively. The benefit for fiscal 1999 was less than
the expected statutory benefit of 35% due to non-deductible merger costs. The
increase in the tax rate from fiscal 1997 to fiscal 1998 was primarily the
result of charges for purchased research and development expenses recorded in
fiscal 1998 and an adjustment to the estimated prior year state income tax
liability associated with Alta operations. Purchased research and development
charges are not deductible for tax purposes. Exclusive of the effect of these
charges, the Company's provision for income taxes was 38.6% of income before
income taxes in fiscal 1998.
23
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth the operating results and percentage of revenue
represented by certain items in the Company's statements of operations for each
of the eight quarters in the period ended October 31, 1999. This information is
unaudited, but in the opinion of the Company reflects all adjustments
(consisting only of normal recurring adjustments) that the Company 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.
<TABLE>
<CAPTION>
Jan. 31, April 30, Jul. 31, Oct. 31, Jan. 31, April 30,
1998 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue ............................... $ 145,092 $ 142,718 $ 129,116 $ 91,161 $ 100,417 $ 111,490
Cost of goods sold .................... 58,980 63,915 70,431 62,688 65,778 71,238
--------- --------- --------- --------- --------- ---------
Gross profit ...................... 86,112 78,803 58,685 28,473 34,639 40,252
--------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development .......... 11,245 17,986 21,965 22,560 22,218 24,094
Selling and marketing ............. 9,975 11,107 12,937 13,324 13,608 13,092
General and administrative ........ 3,984 4,757 4,186 6,347 5,036 5,849
Purchased research & development .. - 9,503 - - - -
Pirelli litigation ................ - 10,000 20,579 - - -
Merger related costs .............. - - 2,017 531 - 2,253
--------- --------- --------- --------- --------- ---------
Total operating expenses .............. 25,204 53,353 61,684 42,762 40,862 45,288
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ......... 60,908 25,450 (2,999) (14,289) (6,223) (5,036)
Other income (expense), net ........... 3,697 3,350 2,769 3,014 3,301 3,583
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ..... 64,605 28,800 (230) (11,275) (2,922) (1,453)
Provision (benefit) for income taxes .. 25,710 14,607 20 (4,137) (1,041) (468)
--------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 38,895 $ 14,193 $ (250) $ (7,138) $ (1,881) $ (985)
========= ========= ========= ========= ========= =========
Basic net income (loss) per
common share .......................... $ 0.37 $ 0.13 $ 0.00 $ (0.06) $ (0.01) $ (0.01)
========= ========= ========= ========= ========= =========
Diluted net income (loss) per
common share and dilutive
potential common share .............. $ 0.33 $ 0.12 $ 0.00 $ (0.06) $ (0.01) $ (0.01)
========= ========= ========= ========= ========= =========
Weighted average basic common share ... 106,405 112,302 121,820 128,384 131,202 132,530
========= ========= ========= ========= ========= =========
Weighted average basic common and
dilutive potential common share .... 116,875 122,483 121,820 128,384 131,202 132,530
========= ========= ========= ========= ========= =========
<CAPTION>
Jul. 31, Oct. 31,
1999 1999
--------- ---------
<S> <C> <C>
Revenue ............................... $ 128,826 $ 141,352
Cost of goods sold .................... 79,361 83,392
--------- ---------
Gross profit ...................... 49,465 57,960
--------- ---------
Operating expenses:
Research and development .......... 28,402 29,927
Selling and marketing ............. 16,839 18,064
General and administrative ........ 5,433 6,668
Purchased research & development .. - -
Pirelli litigation ................ - -
Merger related costs .............. 10,768 -
--------- ---------
Total operating expenses .............. 61,442 54,659
--------- ---------
Income (loss) from operations ......... (11,977) 3,301
Other income (expense), net ........... 3,492 3,568
--------- ---------
Income (loss) before income taxes ..... (8,485) 6,869
Provision (benefit) for income taxes .. (2,928) 2,370
--------- ---------
Net income (loss) ..................... $ (5,557) $ 4,499
========= =========
Basic net income (loss) per
common share .......................... $ (0.04) $ 0.03
========= =========
Diluted net income (loss) per
common share and dilutive
potential common share .............. $ (0.04) $ 0.03
========= =========
Weighted average basic common share ... 133,016 133,808
========= =========
Weighted average basic common and
dilutive potential common share .... 133,016 145,302
========= =========
</TABLE>
<TABLE>
<CAPTION>
Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31, Oct. 31,
1998 1998 1998 1998 1999 1999 1999 1999
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ...................... 40.7 44.8 54.5 68.8 65.5 63.9 61.6 59.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ...................... 59.3 55.2 45.5 31.2 34.5 36.1 38.4 41.0
Operating expenses:
Research and development .......... 7.8 12.6 17.0 24.7 22.1 21.6 22.1 21.2
Selling and marketing ............. 6.9 7.8 10.0 14.6 13.6 11.7 13.1 12.8
General and administrative ........ 2.7 3.3 3.3 7.0 5.0 5.3 4.2 4.7
Purchased research & development .. - 6.7 - - - - - -
Pirelli litigation ................ - 7.0 15.9 - - - - -
Merger related costs .............. - - 1.6 0.6 - 2.0 8.4 -
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses ................ 17.4 37.4 47.8 46.9 40.7 40.6 47.8 38.7
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations ........... 41.9 17.8 (2.3) (15.7) (6.2) (4.5) (9.4) 2.3
Other income (expense), net ............. 2.6 2.3 2.1 3.3 3.3 3.2 2.7 2.5
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes ....... 44.5 20.1 (0.2) (12.4) (2.9) (1.3) (6.7) 4.8
Provision (benefit) for income taxes .... 17.7 10.2 - (4.6) (1.0) (0.4) (2.3) 1.7
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ....................... 26.8% 9.9% (0.2)% (7.8)% (1.9)% (0.9)% (4.4)% 3.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 25
CIENA's quarterly operating results have varied and are expected to vary
significantly in the future. The Company'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". In addition to those
factors, in fiscal 1998, the distraction attendant to the aborted Tellabs merger
had a significant, though difficult to quantify impact on CIENA's operations in
the third and fourth quarter. But apart from the distraction factor, CIENA
believes the single most significant trend affecting CIENA's financial
performance is the material effect of very aggressive price discounting by
competitors seeking to acquire market share in the market for high-capacity
solutions. CIENA chose in the face of this pressure to continue to build market
share in fiscal 1998 at the cost of declining margins. CIENA's gross margin
percentage improved each quarter of fiscal 1999 as a result of its product cost
reductions and production efficiencies. Gross margin percentage improved from
31.2% in the fourth quarter fiscal 1998 to 41.0% in the fourth quarter fiscal
1999. While this gross margin pressure continues, CIENA believes that its
product and service quality, manufacturing experience, and proven track record
of delivery will enable it to be successful while it concentrates on efforts to
reduce product costs and maximize production efficiencies. The Company intends
to continue this strategy in order to preserve and enhance its market leadership
and eventually build on its installed base with new and additional products.
Pursuit of this strategy, in conjunction with increased investments in selling,
marketing, and customer service activities, will likely continue to limit the
Company's operating profitability over at least the first half of fiscal 2000.
See "Risk Factors".
LIQUIDITY AND CAPITAL RESOURCES
CIENA completed its initial public offering of Common Stock in February
1997 and realized net proceeds of approximately $121.8 million with an
additional $0.6 million received from the exercise of certain outstanding
warrants. In July 1997, CIENA completed a public offering of Common Stock and
realized net proceeds of approximately $52.2 million. During fiscal 1997, 1998,
and 1999 CIENA also realized approximately $53.1 million, $22.6 million and
$11.0 million in tax benefits from the exercise of stock options and certain
stock warrants, respectively. Also during fiscal 1997 and fiscal 1998 CIENA
received approximately $5.2 million and $12.8 million, respectively, from
issuance of stock associated with the initial capitalization of Omnia. During
fiscal 1998 CIENA received approximately $15.5 million from the issuance of
stock associated with the initial capitalization of Lightera. As of October 31,
1999, the Company had $143.4 million in cash and cash equivalents, and $119.0
million in corporate debt securities and U.S. Government obligations, with
contractual maturities of six months or less.
The Company's operating activities provided cash of $17.7 million, $26.2
million and $84.7 million for fiscal 1999, 1998 and 1997, respectively. Cash
provided by operations in fiscal 1999 was primarily attributable to a net loss
adjusted for the non-cash charges of depreciation amortization, provisions for
inventory obsolescence and warranty, a decrease in prepaid income taxes,
increases in accounts payable, and accrued expenses; offset by increases in
accounts receivable and inventories. Cash provided by operations in fiscal 1997
and 1998 was principally attributable to net income adjusted for the non-cash
charges of depreciation, amortization, provisions for 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 1999, 1998 and 1997 was $149.7
million, $107.0 million and $67.0 million, respectively. Included in investment
activities were additions to capital equipment and leasehold improvements in
fiscal 1999, 1998 and 1997 of $46.8 million, $88.9 million and $67.0 million,
respectively. The capital equipment expenditures were primarily for test,
manufacturing and computer equipment. The Company expects additional combined
capital equipment and leasehold improvement expenditures of approximately $55.0
million to be made during fiscal 2000 to support selling and marketing,
manufacturing and product development activities and the construction of
leasehold improvements for its facilities
The Company believes that its existing cash balance and cash flows
expected from future operations will be sufficient to meet the Company's capital
requirements for at least the next 18 to 24 months.
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<PAGE> 26
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 will be effective
for the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
YEAR 2000 READINESS
Many computer systems were not designed to handle any dates beyond the
year 1999; accordingly, affected hardware and software will need to be modified
prior to the year 2000 in order to remain functional. CIENA's operations make
use of a variety of computer equipment and software. If the computer equipment
and software used in the operation of CIENA and its products do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on CIENA's operations.
CIENA has taken actions to understand the nature and extent of work
required, if any, to make its systems, products and infrastructure Year 2000
compliant. Based on internal testing performed to date and completed by CIENA,
CIENA currently believes and warrants to its customers that its products are
Year 2000 compliant. However, since all customer situations cannot be
anticipated, particularly those involving interaction of CIENA's products with
third party products, CIENA may experience warranty and other claims as a result
of the Year 2000 transition. The impact of customer claims, if broader than
anticipated, could have a material adverse impact on CIENA's results of
operations or financial condition.
CIENA has concluded a comprehensive inventory and evaluation of both
information technology ("IT") or software systems and non-IT systems used to run
its systems. Non-IT systems typically include embedded technology such as
microcontrollers. Examples of CIENA's Non-IT systems include certain equipment
used for production, research, testing and measurement processes and
calibration. CIENA has completed the process of upgrading or replacing those
identified non-compliant systems. For the Year 2000 non-compliance systems
identified, the cost of remediation was not material to CIENA's financial
condition or operating results. However, if significant new noncompliance issues
are identified, CIENA's results of operations or financial condition may be
materially adversely affected.
CIENA changed its main financial, manufacturing and information system to
a company-wide Year 2000 compliant enterprise resource planning ("ERP")
computer-based system during the fourth quarter of fiscal 1998. CIENA estimates
that it has spent approximately $4.5 million on its ERP implementation. During
fiscal 1999, CIENA spent approximately $400,000 to address identified Year 2000
issues. CIENA used cash from operations for Year 2000 remediation and
replacement costs. Approximately less than 2% of the information technology
budget was used for remediation. No other information technology projects have
been deferred due to the Year 2000 efforts. CIENA has employed an independent
verification consultant to validate CIENA's processes in order to assure the
reliability of CIENA's risk estimates. The consultant's findings identify
CIENA's processes as sufficient and our risk of negative impact as low.
CIENA has contacted its critical suppliers to determine whether a
supplier's operations, products and services are Year 2000 compliant. To date,
CIENA's optical suppliers have represented that their products are Year 2000
compliant or have represented that they are in the process of becoming fully
compliant by December 31, 1999. If these suppliers fail to adequately address
the Year 2000 issue for the products they provide to CIENA, this could have a
material adverse impact on CIENA's operations and financial results. Initial
contingency plans have been developed in case CIENA or its key suppliers will
not be Year 2000 compliant, and such noncompliance is expected to have a
material adverse impact on CIENA's operations.
The risks to CIENA resulting from the failure of third parties in the
public and private sector to attain Year 2000 readiness are generally similar to
those faced by other firms in CIENA's industry or other business enterprises
generally. The following are representative of the types of risks that could
result in the event of one or more major failures of CIENA's information
systems, factories or facilities to be Year 2000 ready, or similar major
failures by one or more major third party suppliers to CIENA: (1) information
systems - could include interruptions or
26
<PAGE> 27
disruptions of business and transaction processing such as customer billing,
payroll, accounts payable and other operating and information processes, until
systems can be remedied or replaced; (2) factories and facilities - could
include interruptions or disruptions of manufacturing processes and facilities
with delays in delivery of products, until non-compliant conditions or
components can be remedied or replaced; and (3) major suppliers to CIENA - could
include interruptions or disruptions of the supply of raw materials, supplies
and Year 2000 ready components which could cause interruptions or disruptions of
manufacturing and delays in delivery of products, until the third party supplier
remedied the problem or contingency measures were implemented. Risks of major
failures of CIENA's principal products could include adverse functional impacts
experienced by customers, the costs and resources for CIENA to remedy problems
or replace products where CIENA is obligated or undertakes to take such action,
and delays in delivery of new products.
RISK FACTORS
OUR RESULTS CAN BE UNPREDICTABLE
Our near term results may be break-even or may involve losses. In general,
sequential revenue and operating results over the next 12 months are likely to
fluctuate and may continue to fluctuate in the future due to factors including:
- timing and size of orders from customers
- the introduction of new products
- satisfaction of contractual customer acceptance criteria
- manufacturing and shipment delays and deferrals
Our products require a relatively large investment and our target
customers are highly demanding and technically sophisticated. There are only a
small number of 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 introduction to the customer and their
commitment to purchase.
We budget expense levels on our expectations of long-term future revenue.
These levels reflect our substantial investment in 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. As a result, we may continue to experience increased
inventory levels, operating expenses and general overhead.
Additionally, our Core Switching Division and Access Systems Division have
ongoing development and operating expenses but are not expected to contribute
materially to revenues until calendar 2000.
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 in the telecommunications industry likely
will intensify the competition for improved technology. Our ability to
successfully develop and introduce new and enhanced products will depend upon
our ability to successfully anticipate changes in technology, industry standards
and customer requirements. If we fail to deploy new and improved products in a
timely manner, our competitive position and financial condition would be
materially and adversely affected. The complexity of the technology involved
with several of our new products including the MultiWave CoreDirector and the
MultiWave CoreStream products using 10 Gb/s transmission capability or ultra
long-distance transport functionality could result in unanticipated delays in
development and manufacturing. In addition, the complexity of technology
associated with support equipment for these products could result in
unanticipated delays in the deployment of these products. These delays could
adversely affect our competitive and financial condition.
The introduction of new products embodying new technologies or the
emergence of new industry standards 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. The certification process for new
telecommunications equipment used in RBOC networks, which is a process
traditionally
27
<PAGE> 28
conducted by Telcordia Technologies, 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.
Any delays in component availability could result in delays in deployment
of these products and in recognizing revenues. These delays could adversely
affect our customer relationships.
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 market is broadly based on varying
combinations of price, manufacturing capability, comprehensiveness of the system
solution meeting immediate network needs and foreseeable scalability
requirements. A small number of very large companies have historically dominated
the telecommunications equipment industry including Lucent, Alcatel, Nortel,
NEC, Pirelli, Siemens, Ericsson, Fujitsu, and Hitachi. 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. We sell systems which compete directly with
product offerings of these companies and in some cases displace their legacy
equipment. As such, we represent a specific threat to these companies. The
continued expansion of our product offerings with products such as the MultiWave
CoreDirector and MultiWave EdgeDirector likely will increase this perceived
threat. We expect continued aggressive tactics from many of these competitors,
including:
- substantial price discounting
- early announcements of competing products
- "one-stop shopping" appeals
- customer financing assistance
- 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 product lines across
an array of products and services and across a customer base which is larger
than ours. Our inability to compete successfully against our competitors would
have a material adverse effect on our business, financial condition and results
of operations.
Several of our customers have indicated that they intend to establish a
second vendor for optical transport products. We do not know when or if these
customers will select a second vendor or what impact the selection might have on
purchases from us. These customers could reduce their purchases from us, which
could in turn have a material adverse effect on us.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding of new
companies intending to develop new products for the optical networking market.
These companies have time to market advantages due to the narrow and exclusive
focus of their efforts. In particular, a number of companies, including several
start-ups, have announced products that compete with our MultiWave CoreStream,
Multiwave Metro, MultiWave CoreDirector and MultiWave EdgeDirector products.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL
ACCEPTANCE OF NEW PRODUCTS
The MultiWave CoreDirector is in the customer trials phase and has not
matured into commercially manufacturable units suitable for field deployment. We
expect that field deployable units of the Multiwave CoreDirector will be
available in the end of the first calendar quarter 2000. The MultiWave
CoreStream product with ultra long-distance transport functionality is in the
laboratory testing phase and has not matured into commercially manufacturable
units suitable for field deployment. We expect that the MultiWave CoreStream
product with ultra long-distance transport functionality will be available for
customer trials in the first half of calendar 2000. The
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<PAGE> 29
maturing process from laboratory prototype to customer trials to commercial
acceptance involves a number of steps, including:
- successful completion of product development
- the qualification and multiple sourcing of critical components,
including application-specific integrated circuits ("ASIC's") which
are not yet finalized
- validation of manufacturing methods
- extensive quality assurance and reliability testing, and staffing of
testing infrastructure
- software validation
- establishment of systems integration and burn in 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 materially and adversely affect the speed and
scope of product introduction and marketplace acceptance of the products.
Specialized ASIC's and intensive software testing and validation, in particular,
are key to the timely introduction of the MultiWave CoreDirector, and schedule
delays are common in the final software and 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 these products in a timely manner, our competitive
position and financial condition could be adversely affected. The markets for
the MultiWave CoreDirector and MultiWave EdgeDirector products are relatively
new. Commercial acceptance of these products also is not established and there
is no assurance 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 competitive position and financial condition
could be adversely affected.
We are in the laboratory testing phase for future releases of the
MultiWave EdgeDirector product. These releases expand upon the limited
functionality of the initial release of the MultiWave EdgeDirector and address
anticipated market requirement. We can make no assurances about the market
acceptance for the initial release of the MultiWave EdgeDirector or our ability
to introduce future releases of the MultiWave EdgeDirector in a timely manner.
If market acceptance of the initial or future releases of the MultiWave
EdgeDirector is limited or we are unable to successfully develop future
releases of the MultiWave EdgeDirector, our competitive position and financial
condition could be adversely affected.
SMALLER CUSTOMERS MAY INCREASE FLUCTUATION IN OUR RESULTS
As we continue to address smaller 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 capital budget constraints. This increases the
unpredictability of our financial results because even these carriers purchase
our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. Most 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 involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
these carriers will be impacted by their financial condition. Further, we will
need to evaluate the collectibility of receivables from these carriers if their
financial condition deteriorates in the future. Additionally, purchasing delays
or changes in the amount of purchases by any of these customers, could have a
material adverse effect on us.
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<PAGE> 30
WE MAY EXPERIENCE DELAYS FROM OUR SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE
SUBSTITUTE SUPPLIERS
We depend on a small number of suppliers for components of our products,
as well as equipment used to manufacture and test our products. Our highest
capacity product currently being shipped, the MultiWave CoreStream which
currently is capable of up to 96 channels at 2.5 Gb/s or 48 channels at 10.0
Gb/s transmission speeds, includes several higher performance components for
which reliable, high volume suppliers are particularly limited. On occasion, we
have experienced delays in receipt of 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. Delayed
deliveries of key components from these sources could have a material adverse
effect on CIENA's near-term results of operations.
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 Lightera and Omnia have received a substantial number of CIENA
shares and vested options that can be sold at substantial gains. In many cases,
these individuals could become financially independent through these sales,
before CIENA's future products have matured into commercially deliverable
products. Under the circumstances, we face a difficult and significant task of
retaining and motivating these key personnel. As CIENA has 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. CIENA and its employees are parties to
agreements that limit the employee's ability to work for a competitor and to
solicit CIENA employees and customers following termination of employment. We
expect our competitors will respect these agreements and not interfere with
them. However, CIENA has in the past been required and may in the future, be
required to resort to legal actions to enforce these agreements. We could incur
substantial costs in enforcing these claims. We can make no assurances that we
will be successful in these suits, or that 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.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new fiberoptic products and systems with high technology
content involves occasional problems as the technology and manufacturing methods
mature. We are aware of instances domestically and internationally of delayed
installation and activation of some of our products due to faulty components. If
significant reliability, quality or network monitoring problems develop, a
number of material adverse effects could result, including:
- manufacturing rework costs
- high service and warranty 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 and the addition of channels, particularly because we do not
control all aspects of the installation and activation activities. If we
experience significant interruptions or delays that we can not promptly resolve,
confidence in our products could be undermined, which could have a material
adverse effect on us.
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<PAGE> 31
OUR PROSPECTS DEPEND ON DEMAND WHICH WE CANNOT PREDICT OR CONTROL
We may not anticipate changes in direction or magnitude of demand for
bandwidth. Unanticipated reductions in bandwidth demand would adversely affect
us.
Our products enable high capacity transmission over long distance, and
certain short-haul portions, of optical communications networks. Our Multiwave
CoreDirector product is targeted to high capacity applications and our Multiwave
EdgeDirector product is targeted to providers of integrated fiberoptic access
and transport networks. Customers, however, determine:
- the quantity of bandwidth needed
- the timing of its deployment, and
- the equipment configurations and network architectures they want
Customer determinations are subject to abrupt change in response to their
own competitive pressures, pressures to raise capital and financial performance
expectations.
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
these 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 and for demand for edge service
delivery and optical switching products such as our MultiWave
CoreDirector.
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
relatively few customers, and particularly when a substantial majority of their
purchases consist of newly-introduced products like the MultiWave CoreStream,
Multiwave EdgeDirector and MultiWave Metro, there is substantial risk of widely
varying quarterly results.
LEGAL PROCEEDINGS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
In August 1998, shareholder class action lawsuits were filed against us
and certain of our officers and directors. These lawsuits, which were
consolidated into one amended complaint, which was dismissed by the United
States District Court on July 19, 1999, with leave to amend. On August 20, 1999
plaintiffs filed the second amended class action complaint. We have filed and
briefed a motion asking the Court to dismiss the second amended complaint. We
believe the allegations in the complaint are without merit and intend to defend
the case vigorously. If, after discovery
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<PAGE> 32
and trial, the case is decided adversely to CIENA, it could have a material
adverse effect on our financial condition and results of operations.
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
certain components from:
- Lucent
- Alcatel
- Nortel
- NEC, and
- Siemens
Each of these companies offers optical communications systems and
equipment which are competitive with our products. Also, Lucent is the sole
source of two components and is one of two suppliers of two others. 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 materially and adversely affect our
business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency discount notes with an average maturity of less than six months. These
held-to-maturity securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at October 31,
1999, the fair value of the portfolio would decline by approximately $7.9
million. The Company has the ability to hold its fixed income investments until
maturity, and therefore the Company would not expect its operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union began during the Company's fiscal year 1999. The foreign
currency exposure resulting from the introduction of the Euro has been
immaterial to the operating results of the Company. The Company is prepared to
hedge against fluctuations in the Euro if this exposure becomes material. As of
October 31, 1999 the assets and liabilities of the Company related to non-dollar
denominated currencies was not material. Therefore an increase or decrease of 10
percent in the foreign exchange rate would not have a material impact on the
Company's financial position.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following is an index to the consolidated financial statements and
supplementary data:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Accountants................................. 34
Consolidated Balance Sheets....................................... 35
Consolidated Statements of Operations............................. 36
Consolidated Statements of Changes in Stockholders' Equity........ 37
Consolidated Statements of Cash Flows............................. 38
Notes to Consolidated Financial Statements........................ 39
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CIENA Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of CIENA
Corporation and its subsidiaries at October 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
McLean, VA
November 24, 1999
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 31,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 250,714 $ 143,440
Marketable debt securities ................................................... 15,993 118,956
Accounts receivable (net of allowance of $1,528 and $1,703) .................. 78,791 144,348
Inventories, net ............................................................. 70,908 79,608
Deferred income taxes ........................................................ 16,421 25,385
Prepaid income taxes ......................................................... 11,688 -
Prepaid expenses and other ................................................... 11,409 21,262
--------- ---------
Total current assets ....................................................... 455,924 532,999
Equipment, furniture and fixtures, net ........................................... 125,767 125,252
Goodwill and other intangible assets, net ........................................ 16,270 12,635
Other assets ..................................................................... 4,848 6,949
--------- ---------
Total assets ................................................................. $ 602,809 $ 677,835
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 27,893 $ 34,399
Accrued liabilities .......................................................... 34,437 58,486
Income taxes payable ......................................................... - 8,697
Deferred revenue ............................................................. 1,084 2,954
Other current obligations .................................................... 1,205 992
--------- ---------
Total current liabilities .................................................. 64,619 105,528
Deferred income taxes ........................................................ 34,125 36,953
Other long-term obligations .................................................. 3,029 4,881
--------- ---------
Total liabilities .......................................................... 101,773 147,362
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized; zero shares
issued and outstanding ..................................................... - -
Common stock - par value $.01; 360,000,000 shares authorized;
134,605,491 and 138,187,356 shares issued and outstanding .................. 1,346 1,382
Additional paid-in capital ................................................... 328,821 360,082
Notes receivable from stockholders ........................................... (586) (210)
Accumulated other comprehensive income ....................................... (107) (40)
Retained earnings ............................................................ 171,562 169,259
--------- ---------
Total stockholders' equity ................................................. 501,036 530,473
--------- ---------
Total liabilities and stockholders' equity ................................... $ 602,809 $ 677,835
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
35
<PAGE> 36
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue ........................................... $ 413,215 $ 508,087 $ 482,085
Cost of goods sold ................................ 166,472 256,014 299,769
--------- --------- ---------
Gross profit ............................... 246,743 252,073 182,316
--------- --------- ---------
Operating expenses:
Research and development ................... 23,773 73,756 104,641
Selling and marketing ...................... 22,627 47,343 61,603
General and administrative ................. 11,965 19,274 22,986
Purchased research and development ......... - 9,503 -
Pirelli litigation ......................... 7,500 30,579 -
Merger related costs ....................... - 2,548 13,021
--------- --------- ---------
Total operating expenses ............ 65,865 183,003 202,251
--------- --------- ---------
Income (loss) from operations ..................... 180,878 69,070 (19,935)
Interest and other income (expense), net .......... 7,586 13,143 14,448
Interest expense .................................. (408) (313) (504)
--------- --------- ---------
Income (loss) before income taxes ................. 188,056 81,900 (5,991)
Provision (benefit) for income taxes .............. 72,488 36,200 (2,067)
--------- --------- ---------
Net income (loss) ................................. $ 115,568 $ 45,700 $ (3,924)
========= ========= =========
Basic net income (loss) per common share .......... $ 1.52 $ 0.39 $ (0.03)
========= ========= =========
Diluted net income (loss) per common share and
dilutive potential common share ............ $ 1.10 $ 0.36 $ (0.03)
========= ========= =========
Weighted average basic common shares outstanding .. 75,964 117,990 133,521
========= ========= =========
Weighted average basic common and dilutive
potential common shares outstanding ........ 104,843 127,894 133,521
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
36
<PAGE> 37
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Notes Accumulated
Additional Receivable Other
Common Stock Paid-in- From Comprehensive
Shares Amount Capital Stockholders Income
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance of October 31, 1996 .......... 14,191,585 $ 142 $ 407 $ (60) $ -
Net income ........................... - - - - -
Translation adjustment ............... - - - - (5)
Comprehensive income
Exercise of warrants ................. 666,086 7 - - -
Exercise of stock options ............ 3,612,182 36 859 (73) -
Compensation cost of stock options ... - - 85 - -
Issuance of common stock, net of
issuance costs ..................... 16,413,677 164 179,076 (4) -
Conversion of Preferred Stock ........ 74,815,740 748 40,256 - -
Tax benefit from the exercise of
stock options ...................... - - 29,709 - -
Repayment of receivables from
stockholders ....................... - - - 69 -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1997 .......... 109,699,270 1,097 250,392 (68) (5)
Net income ........................... - - - - -
Translation adjustment ............... - - - - (102)
Comprehensive income
Exercise of stock options ............ 2,647,907 26 6,215 (392) -
Compensation of stock options ........ - - 54 - -
Issuance of common stock, net of
issuance costs ..................... 21,954,170 220 28,474 (225) -
Tax benefit from the exercise of ..... -
stock options ...................... - - 22,634 - -
Repayment of receivables from
stockholders ....................... - - - 99 -
Purchase acquisitions, net of
transaction costs .................. 304,144 3 20,817 - -
Issuance of warrants for technology
rights ............................. - - 235 - -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1998 .......... 134,605,491 1,346 328,821 (586) (107)
Net loss ............................. - - - - -
Translation adjustment ............... - - - - 67
Comprehensive loss
Exercise of warrants ................. 403,951 4 - -
Exercise of stock options ............ 1,721,384 17 8,219 - -
Compensation cost of stock options
and warrants ....................... - - 8,521 - -
Issuance of common stock, net of
issuance costs ..................... 1,456,530 15 3,517 (481) -
Tax benefit from the exercise of
stock options ...................... - - 11,004 - -
Repayment of receivables from
stockholders ....................... - - - 857 -
Adjustment to conform fiscal year
ends of pooled acquisition ......... - - - - -
- -------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1999 .......... 138,187,356 $ 1,382 $ 360,082 $ (210) $ (40)
============ ============ ============ ============ ============
<CAPTION>
Total
Retained Stockholders'
Earnings Equity
------------ ------------
<S> <C> <C>
Balance of October 31, 1996 .......... $ 10,294 $ 10,783
Net income ........................... 115,568 115,568
Translation adjustment ............... - (5)
------------
Comprehensive income 115,563
Exercise of warrants ................. - 7
Exercise of stock options ............ - 822
Compensation cost of stock options ... - 85
Issuance of common stock, net of
issuance costs ..................... - 179,236
Conversion of Preferred Stock ........ - 41,004
Tax benefit from the exercise of
stock options ...................... - 29,709
Repayment of receivables from
stockholders ....................... - 69
- -------------------------------------- ------------ ------------
Balance at October 31, 1997 .......... 125,862 377,278
Net income ........................... 45,700 45,700
Translation adjustment ............... - (102)
------------
Comprehensive income 45,598
Exercise of stock options ............ - 5,849
Compensation of stock options ........ - 54
Issuance of common stock, net of
issuance costs ..................... - 28,469
Tax benefit from the exercise of .....
stock options ...................... - 22,634
Repayment of receivables from
stockholders ....................... - 99
Purchase acquisitions, net of
transaction costs .................. - 20,820
Issuance of warrants for technology
rights ............................. - 235
- -------------------------------------- ------------ ------------
Balance at October 31, 1998 .......... 171,562 501,036
Net loss ............................. (3,924) (3,924)
Translation adjustment ............... - 67
------------
Comprehensive loss ................... (3,857)
Exercise of warrants ................. - 4
Exercise of stock options ............ - 8,236
Compensation cost of stock options
and warrants ....................... - 8,521
Issuance of common stock, net of
issuance costs ..................... - 3,051
Tax benefit from the exercise of
stock options ...................... - 11,004
Repayment of receivables from
stockholders ....................... - 857
Adjustment to conform fiscal year
ends of pooled acquisition ......... 1,621 1,621
- -------------------------------------- ------------ ------------
Balance at October 31, 1999 .......... $ 169,259 $ 530,473
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
37
<PAGE> 38
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ 115,568 $ 45,700 $ (3,924)
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to conform fiscal year ends of pooled acquisitions ..... - - 1,621
Non-cash charges from equity transactions ......................... 85 289 8,521
Amortization of premiums on marketable debt securities ............ - 464 1,776
Effect of translation adjustment .................................. (5) (102) 67
Purchased research and development ................................ - 9,503 -
Write down of leasehold improvements and equipment ................ 923 1,605 -
Depreciation and amortization ..................................... 10,256 33,623 50,418
Provision for doubtful accounts ................................... 489 806 250
Provision for inventory excess and obsolescence ................... 7,585 9,617 6,534
Provision for warranty and other contractual obligations .......... 11,866 10,523 8,396
Changes in assets and liabilities:
Increase in accounts receivable ................................ (46,309) (7,026) (65,807)
Increase in inventories ........................................ (35,466) (39,416) (15,234)
Increase in deferred income tax assets ......................... (7,305) (7,282) (8,964)
(Increase) decrease in prepaid income taxes .................... - (11,688) 11,688
Increase in prepaid expenses and other assets .................. (2,468) (18,528) (13,222)
Increase (decrease) in accounts payable and accrued expenses ... 30,608 (6,288) 22,159
Increase (decrease) in income taxes payable .................... (3,916) (46) 8,697
Increase in deferred income tax liabilities .................... 4,793 5,958 2,828
Increase (decrease) in deferred revenue and other obligations .. (2,007) (1,507) 1,870
--------- --------- ---------
Net cash provided by operating activities .......................... 84,697 26,205 17,674
--------- --------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures ..................... (67,030) (88,913) (46,776)
Purchase of marketable debt securities ............................. - (93,869) (274,897)
Maturities of marketable debt securities ........................... - 77,876 171,934
Net cash paid for business combinations ............................ - (2,070) -
--------- --------- ---------
Net cash used in investing activities .......................... (67,030) (106,976) (149,739)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations ................. (2,238) 1,148 1,639
Net proceeds from issuance of common stock ......................... 180,665 34,318 11,291
Tax benefit related to exercise of stock options and warrants ...... 53,083 22,634 11,004
Repayment of notes receivable from stockholders .................... 69 99 857
--------- --------- ---------
Net cash provided by financing activities ...................... 231,579 58,199 24,791
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 249,246 (22,572) (107,274)
Cash and cash equivalents at beginning of period ....................... 24,040 273,286 250,714
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 273,286 $ 250,714 $ 143,440
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................ $ 405 $ 265 $ 504
========= ========= =========
Income taxes .................................................... $ 27,455 $ 30,203 $ 313
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from stockholders ..... $ 77 $ 617 $ 481
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these supplemental consolidated financial statements.
38
<PAGE> 39
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CIENA is a leader in the rapidly emerging optical networking equipment
market. The Company offers a comprehensive portfolio of products for tele- and
data-communications service providers worldwide. CIENA's customers include
long-distance carriers, competitive local exchange carriers, Internet service
providers and wholesale carriers. CIENA offers optical transport, intelligent
switching and multi-service delivery systems that enable service providers to
provision, manage and deliver high-bandwidth services to their customers. The
Company has pursued a strategy to develop and leverage the power of disruptive
technologies to change the fundamental economics of building carrier-class tele-
and data-communications networks, providing its customers with a competitive
advantage.
Principles of Consolidation
The Company has twelve wholly owned U.S. and international subsidiaries
which have been consolidated in the accompanying financial statements. The
Company completed a merger with Omnia Communications, Inc. ("Omnia") a Delaware
company headquartered in Marlborough, Massachusetts on July 1, 1999. On March
31, 1999 the Company completed a merger with Lightera Networks, Inc.
("Lightera") a Delaware company headquartered in Cupertino, California. On
February 19, 1998, the Company completed a merger with ATI Telecom International
Ltd., ("Alta"). Each of these transactions constituted a tax-free reorganization
and have been accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of each of the
companies as though they had been a part of CIENA.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company has a 52 or 53 week fiscal year which ends on the Saturday
nearest to the last day of October in each year (October 30, 1999; October 31,
1998; and November 1, 1997). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 1999, 1998
and 1997 comprised 52 weeks. Omnia's fiscal year ended on December 31.
Since the fiscal years for CIENA and Omnia differ, the periods combined
for the purposes of the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
CIENA Omnia
<S> <C>
Fiscal year ended October 31, 1997 June 3, 1997 (date of inception) to December 31, 1997
Fiscal year ended October 31, 1998 January 1, 1998 to December 31, 1998
</TABLE>
The fiscal year ended October 31, 1999, contain two months of Omnia's
financial results, which are also recorded in the fiscal year ending October 31,
1998. The net loss for these two months, November and December 1998 was
$1,621,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates,
judgements and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, together with amounts disclosed in the
related notes to the financial statements. Actual results could differ from the
recorded estimates.
39
<PAGE> 40
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Marketable Debt Securities
The Company has classified its investments in marketable debt securities
as held-to-maturity securities as defined by Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Such investments are recorded at their amortized cost in the
accompanying consolidated balance sheets. All of the marketable debt securities
are corporate debt securities with contractual maturities of six months or less
and have $60,000 and $11,000 of unrealized gains and $9,000 and $108,000 of
unrealized loss, as of October 31, 1998 and 1999, respectively. See Note 3.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. The Company records a provision for
excess and obsolete inventory whenever such an impairment has been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and
amortization are computed using the straight-line method over useful lives of
2-5 years for equipment, furniture and fixtures and of 6-10 years for leasehold
improvements.
Goodwill
The Company has recorded goodwill from two purchase transactions. See Note
2. It is the Company's policy to continually assess the carrying amount of its
goodwill to determine if there has been an impairment to its carrying value. The
Company would record any such impairment when identified.
Concentrations
Substantially all of the Company's cash and cash equivalents are custodied
at four major U.S. financial institutions. The majority of the Company's cash
equivalents include U.S. Government Federal Agency Securities, short-term
marketable securities, and overnight repurchase agreements. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally
these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Historically, the Company has relied on a limited number of customers for
a substantial portion of its revenue. During fiscal year 1999 Sprint, MCI
WorldCom, and GTS Network Ltd. (formerly Hermes Europe Railtel) each accounted
for at least 10% or more of CIENA's revenue and all three combined accounted for
46.2% of the Company's fiscal 1999 revenue. During fiscal 1998 Sprint was the
only 10% customer and in total accounted for 52.5 % of the Company's fiscal 1998
revenue. During 1997 both WorldCom and Sprint were 10% customers and combined
accounted for 88% of the Company's fiscal 1997 revenue. The Company expects that
a significant portion of its future revenue will continue to be generated by a
limited number of customers. The loss of any one of these customers or any
substantial reduction in orders by any one of these customers could materially
adversely affect the Company's financial condition or operating results.
Additionally, the Company's access to certain raw materials is dependent upon
single and sole source suppliers. The inability of any supplier to fulfill
supply requirements of the Company could impact future results.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Company maintains
an allowance for potential losses when identified. As of October 31, 1999 the
trade accounts receivable included three customers who each accounted for 30%,
14%, and 12% of the trade accounts receivable, respectively. As of October 31,
1998 the trade accounts receivable included four customers who each accounted
for 10%, 11%, 25%, and 26% of the trade accounts receivable, respectively.
40
<PAGE> 41
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is probable. For transactions where CIENA has yet
to obtain customer acceptance, revenue is deferred until the terms of acceptance
are satisfied. Revenue for installation services is recognized as the services
are performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying balance sheets. For distributor sales where risks of
ownership have not transferred, CIENA recognizes revenue when the product is
shipped through to the end user.
Revenue-Related Accruals
The Company provides for the estimated costs to fulfill customer warranty
and other contractual obligations upon the recognition of the related revenue.
Such reserves are determined based upon actual warranty cost experience,
estimates of component failure rates, and management's industry experience. The
Company's contractual sales arrangements generally do not permit the right of
return of product by the customer after the product has been accepted.
Research and Development
The Company charges all research and development costs to expense as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences attributable to differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their respective tax bases,
and for operating loss and tax credit carryforwards. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than the enactment of changes in tax laws or rates. Tax savings resulting from
deductions associated with stock options and certain stock warrants are credited
directly to additional paid in capital when realization of such benefit is fully
assured and to deferred tax liabilities prior to such point. See Note 9.
Foreign Currency Translation
The majority of the Company's foreign branches and subsidiaries use the
U.S. dollar as their functional currency as the U.S. parent exclusively funds
the branches and subsidiaries' operations with U.S. dollars. For those
subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet
date. Resulting translation adjustments are recorded directly to a separate
component of stockholders' equity. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in other income. The net gain
(loss) on foreign currency remeasurement and exchange rate changes for fiscal
1997, 1998 and 1999 was immaterial for separate financial statement
presentation.
Computation of Basic Net Income per Common Share and Diluted Net Income per
Common and Dilutive Potential Common Share
The Company calculates earnings per share in accordance with the Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 simplifies the earnings per share (EPS) computation and replaces
the presentation of primary EPS with a presentation of basic EPS. This statement
also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with a complex capital structure and requires a
reconciliation of the numerator and denominator used for the basic and diluted
EPS computations. See Note 7.
41
<PAGE> 42
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires
the capitalization of certain software development costs incurred subsequent to
the date technological feasibility is established and prior to the date the
product is generally available for sale. The capitalized cost is then amortized
over the estimated product life. The Company defines technological feasibility
as being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation", which is effective for the Company's consolidated
financial statements for fiscal years 1997, 1998, and 1999. SFAS No. 123 allows
companies to either account for stock-based compensation under the new
provisions of SFAS No. 123 or using the intrinsic value method provided by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees", but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. The Company has elected to continue to account for its stock based
compensation in accordance with the provisions of APB No. 25 and present the pro
forma disclosures required by SFAS No. 123. See Note 8.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Comprehensive Income".
SFAS No. 130 became effective for the Company's fiscal year 1999. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires that changes in the amounts of certain
items, including foreign currency translation adjustments and gains and losses
on certain securities be shown in the financial statements. CIENA's accumulated
other comprehensive income is comprised entirely of accumulated foreign currency
translation adjustments and is shown as a separate amount on CIENA's
Consolidated Balance Sheets.
The components of comprehensive income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
October 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Net income (loss) ............................... $ 45,700 $ (3,924)
Change in accumulated translation adjustments ... (102) 67
-------- --------
Total comprehensive income (loss) ............... $ 45,598 $ (3,857)
======== ========
</TABLE>
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information". The Statement is effective
for the Company's fiscal year 1999. SFAS No. 131 establishes annual and interim
reporting standards for operating segments of a company. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Company is not organized by multiple operating segments for the
purpose of making operating decisions or assessing performance. Accordingly, the
Company operates in one operating segment and reports only certain
enterprise-wide disclosures.
42
<PAGE> 43
Newly Issued Accounting Standards
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 133 will be effective for
the Company's fiscal year ending October 31, 2000. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year consolidated financial statement presentation.
(2) BUSINESS COMBINATIONS
Omnia
On July 1, 1999, the Company completed a merger with Omnia in a
transaction valued at approximately $483 million. Omnia is a telecommunications
equipment supplier which focuses on developing solutions to allow public
telephone network operators to offer services cost effectively over integrated
metropolitan fiberoptic access and transport networks. Under the terms of the
merger, the Company acquired all of the outstanding shares and assumed the stock
options of Omnia in exchange for approximately 15.2 million shares of CIENA
common stock and 0.8 million CIENA shares issuable upon exercise of stock
options. The transaction constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Omnia as though it had been a part of
CIENA.
The following table shows the separate historical results of CIENA and
Omnia for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal year ended
1996 as Omnia did not commence operations until June 1997. Omnia's fiscal year
end is December 31. CIENA's results for the years ended October 31, 1997 and
1998 include Omnia's financial results from June 3, 1997 (date of inception) to
December 31, 1997 and January 1, 1998 to December 31, 1998, respectively (in
thousands).
<TABLE>
<CAPTION>
Nine Months
Year Ended October 31, Ended July 31,
1997 1998 1999
--------- --------- --------------
<S> <C> <C> <C>
Revenues:
CIENA $ 413,215 $ 508,087 $ 340,733
Omnia - - -
Intercompany elimination's - - -
--------- --------- ---------
Consolidated revenues $ 413,215 $ 508,087 $ 340,733
========= ========= =========
Net Income (loss):
CIENA $ 115,967 $ 51,113 $ (1,020)
Omnia (399) (5,413) (7,403)
--------- --------- ---------
Consolidated net income (loss) $ 115,568 $ 45,700 $ (8,423)
========= ========= =========
</TABLE>
43
<PAGE> 44
Lightera
On March 31, 1999 the Company completed a merger with Lightera in a
transaction valued at approximately $459 million. Lightera is a developer of
carrier class optical core switches for fiberoptic communications networks.
Under the terms of the merger agreement, the Company acquired all of the
outstanding shares and assumed outstanding stock options and warrants of
Lightera in exchange for approximately 17.5 million shares of CIENA common stock
and 2.9 million CIENA shares issuable upon exercise of stock options and
warrants. The transaction constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Lightera as though it had been a part of
CIENA.
The following table shows the separate historical results of CIENA and
Lightera for the periods prior to the consummation of the merger of the two
entities. No financial information has been presented for the fiscal year ended
1997 as Lightera did not commence operations until April 1998 (in thousands).
<TABLE>
<CAPTION>
Year Ended Six Months
October 31, Ended
1998 April 30, 1999
----------- --------------
<S> <C> <C>
Revenues:
CIENA $ 508,087 $ 211,907
Lightera - -
Intercompany eliminations - -
--------- ---------
Consolidated revenues $ 508,087 $ 211,907
========= =========
Net Income (loss):
CIENA $ 53,194 $ 8,046
Lightera (2,081) (6,169)
--------- ---------
Consolidated net income $ 51,113 $ 1,877
========= =========
</TABLE>
Terabit
During April 1998 the Company completed an Agreement and Plan of
Reorganization with Terabit Technology, Inc. ("Terabit"), a developer of optical
components known as photodetectors or optical receivers. Terabit is located in
Santa Barbara, California. The purchase price was approximately $11.5 million
and consisted of the issuance of 134,390 shares of CIENA common stock, the
payment of $1.1 million in cash, and the assumption of certain stock options.
The transaction was recorded using the purchase accounting method with the
purchase price representing approximately $9.5 million in purchased research and
development, $1.8 million in goodwill and other intangibles, and approximately
$0.2 million in net assets assumed. The amortization period for the intangibles,
based on management's estimate of the useful life of the acquired technology, is
five years. The operations of Terabit are not material to the consolidated
financial statements of the Company and, accordingly, separate pro forma
financial information has not been presented.
In connection with the Terabit acquisition, the Company recorded a $9.5
million charge in the year ended October 31, 1998 for purchased research and
development. This generally represents the estimated value of purchased
in-process technology related to Terabit's avalanche photodiodes (APD) that have
not yet reached technological feasibility and have no alternative future use.
The amount of purchase price allocated to in-process research and
development was determined using the discounted cash flow method. This method
consisted of estimating future net cash flows attributable in-process APD
technology for a discrete projection period and discounting the net cash flows
back to their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the purchased
in-process technology. The estimated revenue associated with the APD technology
future net cash flows assumed a five year compound annual growth rate of between
5% to 43%. The revenue growth rates were developed considering, among other
things, the current and expected industry trends and acceptance of the
technologies in historical growth rates for similar industry products.
Management's estimates or projections were based upon an estimated period of ten
years with revenues reaching a peak in 2002 and declining through 2008.
44
<PAGE> 45
The estimated net cash flows were discounted to present value at a rate of
return which considers the relative risk of achieving the net cash flows and the
time value of money. A 30% was used to effect the risk associated with Terabits
APD technology. This rate is higher than the Company's normal discount rate due
to inherent uncertainties surrounding the successful development of purchase
in-process technology, the useful life of the technology, and the profitability
levels of such technology.
The resulting net cash flows from the APD project was based on
management's estimates of revenues, cost of sales, research and development
costs, selling general and administrative costs, and income taxes associated
with the project.
Alta
On February 19, 1998, the Company completed a merger with ATI Telecom
International Ltd., ("Alta"), a Canadian corporation headquartered near Atlanta,
Georgia, in a transaction valued at approximately $52.5 million. Alta provides a
range of engineering, furnishing and installation services for
telecommunications service providers in the areas of transport, switching and
wireless communications. Under the terms of the agreement the Company exchanged
1,000,000 shares of its common stock for all the common stock of Alta. The
merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Alta as though it had been a part of CIENA.
Prior to the merger, Alta's year ended on December 31. In recording the
business combination, Alta's prior period financial statements have been
restated to conform to CIENA's fiscal year end.
All intercompany transactions between CIENA and Alta have been eliminated
in consolidation. Certain reclassifications were made to Alta financial
statements to conform to CIENA's presentation. No material adjustments were made
to conform to CIENA's accounting policies.
The following table shows the separate historical results of CIENA and
Alta for the periods prior to the consummation of the merger of the two entities
(in thousands):
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues:
CIENA $ 54,838 $ 373,827
Alta 33,625 39,531
Intercompany eliminations - (143)
--------- ---------
Consolidated revenues $ 88,463 $ 413,215
========= =========
Net Income (loss):
CIENA $ 14,718 $ 112,945
Alta 2,545 3,022
--------- ---------
Consolidated net income $ 17,263 $ 115,967
========= =========
</TABLE>
Astracom
During December 1997, the Company completed an Agreement and Plan of
Merger with Astracom, Inc. ("Astracom"), an early stage telecommunications
company located in Atlanta, Georgia. The purchase price was approximately $13.1
million and consisted of the issuance of 169,754 shares of CIENA common stock,
the payment of $2.4 million in cash, and the assumption of certain stock
options. The transaction was recorded using the purchase accounting method with
the purchase price representing approximately $11.4 million in goodwill and
other intangibles, and approximately $1.7 million in net assets assumed. The
amortization period for the intangibles, based on management's estimate of the
useful life of the acquired technology, is five years. The operations of
Astracom are not material to the consolidated financial statements of the
Company and, accordingly, separate pro forma financial information has not been
presented.
45
<PAGE> 46
(3) MARKETABLE DEBT SECURITIES
Marketable debt securities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Commercial paper .............. $ 15,993 $105,215
U.S. Government obligations ... - 13,741
-------- --------
$ 15,993 $118,956
======== ========
</TABLE>
(4) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials ...................... $ 43,268 $ 49,298
Work-in-process .................... 8,592 16,386
Finished goods ..................... 30,202 26,369
-------- --------
82,062 92,053
Reserve for excess and obsolescence .. (11,154) (12,445)
-------- --------
$ 70,908 $ 79,608
======== ========
</TABLE>
The following is a table depicting the activity in the Company's reserve for
excess and obsolescence (in thousands):
<TABLE>
<CAPTION>
October 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Beginning balance ........................ $ 7,466 $ 11,154
Provision charged to operations .......... 9,617 6,534
Amounts written off against the reserve .. (5,929) (5,243)
-------- --------
Ending balance ........................... $ 11,154 $ 12,445
======== ========
</TABLE>
(5) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
--------------------------
1998 1999
--------- ---------
<S> <C> <C>
Equipment, furniture and fixtures ........... $ 141,845 $ 182,794
Leasehold improvements ...................... 24,076 30,231
--------- ---------
165,921 213,025
Accumulated depreciation and amortization .. (41,506) (88,716)
Construction-in-progress .................... 1,352 943
--------- ---------
$ 125,767 $ 125,252
========= =========
</TABLE>
46
<PAGE> 47
(6) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
---------------------
1998 1999
------- -------
<S> <C> <C>
Warranty and other contractual obligations .. $17,256 $28,582
Accrued compensation ........................ 9,229 15,471
Other ....................................... 7,952 14,433
------- -------
$34,437 $58,486
======= =======
</TABLE>
(7) EARNINGS (LOSS) PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of
the basic net income (loss) per common share ("basic EPS") and diluted net
income (loss) per common and dilutive potential common share ("diluted EPS").
Basic EPS is computed using the weighted average number of common shares
outstanding. Diluted EPS is computed using the weighted average number of common
shares outstanding, stock options and warrants using the treasury stock method
and shares issued upon conversion of all outstanding shares of Mandatorily
Redeemable Preferred Stock (in thousands except per share amounts).
<TABLE>
<CAPTION>
October 31,
-----------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) .......................... $ 115,568 $ 45,700 $ (3,924)
========= ========= =========
Weighted average shares-basic .............. 75,964 117,990 133,521
--------- --------- ---------
Effect of dilutive securities:
Employee stock options and warrants ... 8,791 9,904 -
Conversion of preferred stock ......... 20,088 - -
--------- --------- ---------
Weighted average shares-diluted ............ 104,843 127,894 133,521
========= ========= =========
Basic EPS .................................. $ 1.52 $ 0.39 $ (0.03)
========= ========= =========
Diluted EPS ................................ $ 1.10 $ 0.36 $ (0.03)
========= ========= =========
</TABLE>
Approximately 182,000, 769,000 and 11,886,000 options and restricted stock
were outstanding during fiscal 1997, 1998 and 1999 respectively, but were not
included in the computation of the Diluted EPS as the effect would be
anti-dilutive.
(8) STOCKHOLDERS' EQUITY
Stockholder Rights Plan
In December 1997, the Company's Board of Directors adopted a Stockholder
Rights Plan. This plan is designed to deter any potential coercive or unfair
takeover tactics in the event of an unsolicited takeover attempt. It is not
intended to prevent a takeover of the Company on terms that are favorable and
fair to all shareholders and will not interfere with a merger approved by the
Board of Directors. Each right entitles shareholders to buy a "unit" equal to
one one-thousandth of a share of Preferred Stock of the Company. The rights will
be exercisable only if a person or a group acquires or announces a tender or
exchange offer to acquire 15% or more of the Company's common stock or if the
Company enters into certain other business combination transactions not approved
by the Board of Directors.
In the event the rights become exercisable, the rights plan allows for
CIENA shareholders to acquire stock of the surviving corporation, whether or not
CIENA is the surviving corporation, having a value twice that of the exercise
price of the Rights. The Rights were distributed to shareholders of record in
January 1998. The Rights will expire December 2007 and are redeemable for $.001
per right at the approval of the Company's Board of Directors.
47
<PAGE> 48
Public Offerings
In February 1997, the Company successfully completed its initial public
offering of Common Stock. The Company sold 5,750,000 shares, inclusive of
750,000 shares from the exercise of the underwriters over-allotment option, at a
price of $23 per share. Net proceeds from the offering were approximately
$121,800,000 with an additional $600,000 received from the exercise of 300,000
shares of outstanding Convertible Preferred Stock warrants.
In July 1997, the Company completed a public offering of 10,477,216 shares
of Common Stock of which 1,252,060 shares were sold by the Company inclusive of
252,060 shares from the exercise of the underwriters over-allotment option, at a
price of $44 per share. Net proceeds to the Company from the public offering
were approximately $52,200,000.
Other Offerings
During 1997, Omnia issued 9,411,617 shares of common stock in exchange for
approximately $5,223,000. In 1998 and 1999 Omnia issued 5,376,665 and 184,495
shares of common stock in exchange for approximately $12,801,000 and $66,000,
respectively.
During 1998, Lightera issued a total of 16,577,505 shares of common stock
in exchange for certain technology rights, notes receivable totaling $211,000
and proceeds of approximately $15,893,000. In 1999, Lightera issued 968,511
shares of common stock in exchange for approximately $104,000.
Stock Incentive Plans
In August of 1999, the Company approved the 1999 Non-Officers Incentive
Stock Plan (the "1999 Plan"). Under the 1999 Plan, 6,000,000 shares of the
Company's authorized but unissued Common Stock are reserved for options issuable
to employees who are not executive officers of the Company. These options vest
to the employee over four years and are exercisable once vested. Options under
the 1999 Plan are categorized as non-qualified, and the exercise price for each
option shall be established by the Board of Directors provided the price is not
less than 85% of fair market value.
The Company has an Amended and Restated 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, 20,050,000 shares of the Company's authorized but
unissued Common Stock are reserved for options issuable to employees. Certain of
these options are immediately exercisable upon grant, and both the options and
the shares issuable upon exercise of the options generally vest to the employee
over a four year period. The Company has the right to repurchase any exercised
and non-vested shares at the original purchase price from the employees upon
termination of employment. In June 1996, the Company approved the 1996 Outside
Directors Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, 750,000
shares of the Company's authorized but unissued Common Stock are reserved for
options issuable to outside members of the Company's Board of Directors. These
options vest to the director over periods from one to three years, depending on
the type of option granted, and are exercisable once vested. Under the 1994 Plan
and the 1996 Plan, options may be incentive stock options or non-qualified
options, and the exercise price for each option shall be established by the
Board of Directors provided, however, that the exercise price per share shall
not be not less than the fair market value for incentive stock options and not
less than 85% of fair market value for non-qualified stock options.
As a result of the Company's merger with Omnia, the Company assumed the
Omnia 1997 Stock Plan Option Plan ("the 1997 Plan"). The 1997 Plan provided for
the granting of stock options to employees and consultants of Omnia. Options
granted under the 1997 Plan were either incentive stock options or nonstatutory
stock options. Incentive stock options, ("ISO"), could be granted only to Omnia
employees (including officers and directors who were also employees).
Nonstatutory stock options ("NSO") could be granted to Omnia employees and
consultants. The Company has reserved 759,889 shares of Common Stock for
outstanding options under the plan. Options exercised are immediately subject to
a repurchase right held by the Company which lapse over a maximum period of four
years at such times and under such conditions as determined by the Board of
Directors. To date, options granted generally vest over four years.
48
<PAGE> 49
As a result of the Company's merger with Lightera, the Company assumed the
Lightera 1998 Stock Option Plan ("the 1998 Plan"). The 1998 Plan provided for
the granting of stock options to employees and consultants of Lightera. Options
granted under the 1998 Plan were either incentive stock options or nonstatutory
stock options. Incentive stock options, ("ISO"), could be granted only to
Lightera employees (including officers and directors who were also employees).
Nonstatutory stock options ("NSO") could be granted to Lightera employees and
consultants. The Company has reserved 2,529,161 shares of Common Stock for
outstanding options under the plan. Options exercised are immediately subject to
a repurchase right held by the Company which lapse over a maximum period of five
years at such times and under such conditions as determined by the Board of
Directors. To date, options granted generally vest over four years.
Following is a summary of the Company's stock option activity (shares in
thousands):
<TABLE>
<CAPTION>
Shares Weighted Average
Exercise Price
---------------------------
<S> <C> <C>
Balance at October 31, 1996 .... 11,083 0.97
Granted ........................ 1,737 32.81
Exercised ...................... (3,612) 0.27
Canceled ....................... (98) 0.52
------
Balance at October 31, 1997 .... 9,110 7.33
Granted ........................ 6,414 18.99
Exercised ...................... (2,648) 2.40
Canceled ....................... (3,340) 40.12
------
Balance at October 31, 1998 .... 9,536 4.82
Granted ........................ 8,131 23.45
Exercised ...................... (1,728) 4.65
Canceled ....................... (878) 13.29
------
Balance at October 31, 1999 .... 15,061 14.43
======
</TABLE>
During September 1998, the Company canceled and re-issued outstanding
employee stock options with exercise prices in excess of the fair market value,
except those options held by outside directors and officers of the Company. A
total of 2,905,116 options with an average exercise price of $42.87 were
cancelled and reissued at $12.38 per share. At October 31, 1999 approximately
2,030,000 shares of Common Stock subject to repurchase by the Company had been
issued upon the exercise of options and restricted stock purchase agreements.
3,961,914 million of the total outstanding options were vested and not subject
to repurchase by the Company upon exercise. As of October 31, 1999,
approximately 6.4 million shares are available for issuance under these plans.
The following table summarizes information with respect to stock options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
Options Not Subject to
Options Outstanding Repurchase Upon Exercise
-------------------------------------------- ------------------------
Weighted
Average
Number Remaining Weighted Weighted
Range of Outstanding Contractual Average Number Average
Exercise at Oct. 31, Life Exercise at Oct. 31, Exercise
Price 1999 (Years) Price 1999 Price
- ------------------- ------------ ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.03 754,475 5.24 $ 0.03 752,775 $ 0.03
$ 0.06 - $ 1.66 2,586,246 8.27 $ 0.37 724,100 $ 0.67
$ 2.25 - $ 4.70 2,523,154 6.66 $ 2.47 1,483,635 $ 2.47
$ 7.17 - $ 15.63 2,472,106 8.91 $ 12.36 958,723 $ 12.37
$ 17.00 - $ 24.25 2,328,629 9.16 $ 18.25 17,681 $ 17.10
$ 25.00 - $ 29.81 2,314,488 9.91 $ 29.51 - -
$ 30.06 - $ 43.25 2,082,210 9.76 $ 33.04 25,000 $ 43.25
---------- ---------
$ 0.01 - $ 43.25 15,061,308 8.55 $ 14.43 3,961,914 $ 4.39
========== =========
</TABLE>
49
<PAGE> 50
Employee Stock Purchase Plan
In March 1998, the shareholders approved the Corporation's 1998 Stock
Purchase Plan ("the Purchase Plan") under which 2.5 million shares of common
stock have been reserved for issuance. Eligible employees may purchase a limited
number of shares of the Company's stock at 85% of the market value at certain
plan-defined dates. As of October 31, 1999, 303,524 shares of common stock had
been issued for $3,347,000 and approximately 2.2 million shares are available
for issuance under this plan.
Pro forma Stock-Based Compensation
Had compensation cost for the Company's stock option plans and the
Purchase Plan been determined based on the fair value at the grant date for
awards in fiscal years 1997, 1998 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net income and net income per share for fiscal 1997
and 1998 would have been decreased and the net loss per share for fiscal 1999
would have been increased to the pro forma amounts indicated below (in
thousands, except per share):
<TABLE>
<CAPTION>
October 31,
--------------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) applicable to common stockholders -
as reported ....................................... $ 115,568 $ 45,700 $ (3,924)
============== ============== ==============
Net income (loss) applicable to common stockholders -
pro forma ......................................... $ 110,005 $ 20,816 $ (40,067)
============== ============== ==============
Basic net income (loss) per share - as reported ........ $ 1.52 $ 0.39 $ (0.03)
============== ============== ==============
Basic net income (loss) per share - pro forma .......... $ 1.45 $ 0.18 $ (0.30)
============== ============== ==============
Diluted net income (loss) per share - as reported ...... $ 1.10 $ 0.36 $ (0.03)
============== ============== ==============
Diluted net income (loss) per share - pro forma ........ $ 1.05 $ 0.16 $ (0.30)
============== ============== ==============
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
The aggregate fair value and weighted average fair value of each option
granted under the various stock option plans, excluding the purchase plan, in
fiscal years 1997, 1998 and 1999 were approximately $33.6 million, $73.2
million, and $129.2 million and $19.33, $15.17, and $18.89 respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted average
assumptions for fiscal years 1997, 1998, and 1999:
<TABLE>
<CAPTION>
October 31,
-----------------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Expected volatility 60% 109% 88%
Risk-free interest rate 5.8% 4.4% 5.5%
Expected life 3.0 yrs. 3.0 yrs. 2.8 yrs
Expected dividend yield 0% 0% 0%
</TABLE>
50
<PAGE> 51
The aggregate fair value and weighted average fair value of each option
granted under the Stock Purchase Plan in fisca1 1999 was approximately $6.5
million and $11.20, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes Option Pricing Model with
the following weighted average assumptions for fiscal year 1999:
<TABLE>
<CAPTION>
October 31,
-----------
1999
-----------
<S> <C>
Expected volatility 88%
Risk-free interest rate 5.5%
Expected life 0.5 yrs.
Expected dividend yield 0%
</TABLE>
(9) INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income taxes
consists of the following (in thousands):
<TABLE>
<CAPTION>
October 31,
----------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes ..... $ 188,056 $ 81,900 $ (5,991)
========= ========= =========
Provision (benefit) for income taxes:
Current:
Federal ............................... 67,529 36,865 5,175
State ................................. 7,373 4,444 235
Foreign ............................... 98 40 75
--------- --------- ---------
Total current .................. 75,000 41,349 5,485
--------- --------- ---------
Deferred:
Federal ............................... (2,015) (4,496) (7,477)
State ................................. (497) (653) (75)
Foreign ............................... - - -
--------- --------- ---------
Total deferred ................. (2,512) (5,149) (7,552)
--------- --------- ---------
Provision (benefit) for income taxes .... $ 72,488 $ 36,200 $ (2,067)
========= ========= =========
</TABLE>
The tax provision reconciles to the amount computed by multiplying income before
income taxes by the U.S. federal statutory rate of 35% as follows:
<TABLE>
<CAPTION>
October 31,
-------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Provision at statutory rate ........................ 35.0% 35.0% 35.0%
Non-deductible purchased research and development .. - 4.3 -
State taxes, net of federal benefit ................ 2.6 4.3 (2.6)
Research and development credit .................... - (4.0) 48.9
Foreign sales corporation benefit .................. - (1.6) 28.7
Non-deductible merger costs and other .............. 0.9 6.2 (75.5)
------ ------ ------
38.5% 44.2% 34.5%
====== ====== ======
</TABLE>
51
<PAGE> 52
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
October 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves and accrued liabilities .............. $ 14,611 $ 14,931
Other ......................................... 690 637
Net operating loss and credit carry forward ... 2,682 11,244
-------- --------
Gross deferred tax assets .................... 17,983 26,812
Valuation allowance .......................... (1,562) (1,427)
-------- --------
Net current deferred tax asset ............ $ 16,421 25,385
======== ========
Deferred tax liabilities:
Equipment leases .............................. $ 7,978 $ 8,738
Services ...................................... 21,594 23,916
Depreciation and other ........................ 4,553 4,299
-------- --------
Deferred long term tax liabilities ........ $ 34,125 $ 36,953
======== ========
</TABLE>
As of October 31, 1998, the Company assumed net operating loss carry
forwards through its acquisitions of Lightera and Omnia. As of October 31, 1999,
the Company has $22.5 million of net operating loss carry forwards which begin
to expire in fiscal 2016.
The income tax provisions do not reflect the tax savings resulting from
deductions associated with the Company's stock option plans or the exercise of
certain stock warrants. Tax benefits of approximately $22.6 million and $3.6
million in fiscal 1998, and $11.0 million and $0.7 million in fiscal 1999 from
exercises of stock options and certain stock warrants were credited directly to
additional paid-in-capital and to long-term deferred income taxes, respectively.
The IRS is currently examining the Company's federal income tax returns
for fiscal 1997 and fiscal 1998. Management does not expect the outcome of these
examinations to have a material adverse affect on the Company's consolidated
financial position, results of operations or cash flows.
(10) EMPLOYEE BENEFIT PLANS
Employee 401(k) Plan
In January 1995, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age, have completed three months of service and are not covered by a
collective bargaining agreement where retirement benefits are subject to good
faith bargaining. Participants may contribute up to 15% of pre-tax compensation,
subject to certain limitations. The Company may make discretionary annual profit
sharing contributions of up to the lesser of $30,000 or 25% of each
participant's compensation. In fiscal 1997 the Company revised the plan to
include an employer matching contribution equal to 100% of the first 3% of
participating employee contributions, with a five year vesting plan applicable
to the Company's contribution. The Company has made no profit sharing
contributions to date. During fiscal 1997, 1998 and 1999 the Company made
matching contributions of approximately $0.3 million, $1.1 million and $1.7
million, respectively.
52
<PAGE> 53
(11) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has certain minimum obligations under non-cancelable operating
leases expiring on various dates through 2006 for equipment and facilities.
Future annual minimum rental commitments under non-cancelable operating leases
at October 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending October 31,
- ------------------------------
<S> <C>
2000................................. $11,187
2001................................. 10,919
2002................................. 9,350
2003................................. 7,666
2004................................. 7,538
Thereafter........................... 29,932
-------
$76,592
=======
</TABLE>
Rental expense for fiscal 1997, 1998 and 1999 was approximately
$2,699,000, $6,104,000, and $9,467,000, respectively.
Litigation
A class action complaint was filed on August 26, 1998 in U.S. District
Court for the District of Maryland entitled Witkin et al. v. CIENA Corporation
et al. (Case No. Y-98-2946). Several other complaints, substantially similar in
content were consolidated by court order on November 30, 1998. An amended,
consolidated complaint was filed on February 16, 1999. On July 19, 1999 the
United States District Court dismissed the suit with leave to amend before any
discovery had been taken. On August 20, 1999, plaintiffs filed a second amended
class action complaint alleging that CIENA and certain officers and directors
violated certain provisions of the federal securities laws, including Section
10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other actions
intending to artificially inflate and maintain the market price of CIENA's
common stock during the Class Period of May 21, 1998 to September 14, 1998,
inclusive. The plaintiffs intend to seek certification of the suit as a class
action on behalf of all persons who purchased shares of CIENA's common stock
during the Class Period and the awarding of compensatory damages in an amount to
have been determined at trial together with attorneys' fees. CIENA has filed,
and the parties have fully briefed, a motion to dismiss the second amended
complaint. CIENA believes the suit is without merit and CIENA intends to
continue to defend the case vigorously.
Pirelli Litigation. On June 1, 1998 the Company resolved the long-standing
litigation with Pirelli S.p.A. The terms of the settlement involve dismissal of
Pirelli's three lawsuits against CIENA previously pending in Delaware, dismissal
of CIENA's legal proceedings against Pirelli in the United States International
Trade Commission, a worldwide, non-exclusive cross-license to each party's
patent portfolios, a five-year moratorium on future litigation between the
parties. As a result of the settlement, CIENA recorded a charge for the fiscal
year ended October 31, 1998 of $30.6 million relating to the Pirelli settlement
and associated legal fees.
(12) FOREIGN SALES
The Company has sales and marketing operations outside the United States
in Canada, the United Kingdom, Belgium, France, Germany, Japan, Mexico and
Brazil. The Company has distributor or marketing representative arrangements
covering Italy, the Republic of Korea, Japan, Venezuela, Columbia and Chile.
Included in revenues are export sales of approximately $11.7 million, $117.1
million, and $213.6 million in fiscal years 1997, 1998 and 1999, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
53
<PAGE> 54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the
Company is set forth in Part I of this report under the caption Item 1.
Business- "Directors, and Executive Officers" and is incorporated by reference
herein.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Michael A. Champa and Charles Chi each filed a late Form 3 reporting their
initial statement of beneficial ownership of the Company's stock. Stephen
Bradley filed a late Form 4 reporting a single transaction, Charles Chi filed
two late Form 4's reporting six transactions, and Harvey Cash filed one late
Form 4 reporting two transactions. Billy Oliver filed three late Form 4's
totaling 5 transactions. Clifford Higgerson filed one late Form 5 reporting two
transactions.
ITEM 11. EXECUTIVE COMPENSATION
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is incorporated herein by reference to the Company's
definitive 2000 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
2. Exhibits: See Index to Exhibits on page 56. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K
No reports filed on Form 8-K were filed during the fourth quarter fiscal
1999.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Linthicum, County of Anne Arundel, State of Maryland, on the 10th day of
December 1999.
CIENA CORPORATION
By: /s/ Patrick H. Nettles
-------------------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Patrick H. Nettles President, Chief Executive Officer December 10, 1999
------------------------------------- and Director
Patrick H. Nettles
(Principal Executive Officer)
/s/ Joseph R. Chinnici Sr. Vice President, Finance and December 10, 1999
------------------------------------- Chief Financial Officer
Joseph R. Chinnici
(Principal Financial Officer)
/s/ Andrew C. Petrik Vice President, Controller December 10, 1999
------------------------------------- and Treasurer
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Harvey B. Cash Director December 10, 1999
-------------------------------------
Harvey B. Cash
/s/ John Dillon Director December 10, 1999
-------------------------------------
John Dillon
/s/ Billy B. Oliver Director December 10, 1999
-------------------------------------
Billy B. Oliver
/s/ Michael J. Zak Director December 10, 1999
-------------------------------------
Michael J. Zak
/s/ Stephen P. Bradley Director December 10, 1999
-------------------------------------
Stephen P. Bradley
</TABLE>
55
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
3.1* Certificate of Amendment to Third Restated Certificate of Incorporation
3.2* Third Restated Certificate of Incorporation
3.3* Amended and Restated Bylaws
4.1* Specimen Stock Certificate
4.2*** Rights Agreement dated December 29, 1997
4.3**** Amendment to Rights Agreement
10.1* Form of Indemnification Agreement for Directors and Officers
10.2* Amended and Restated 1994 Stock Option Plan
10.3* Form of Employee Stock Option Agreements
10.4* 1996 Outside Directors Stock Option Plan
10.5* Forms of 1996 Outside Directors Stock Option Agreement
10.7* Lease Agreement dated October 5, 1995 between the Company and CS
Corridor-32 Limited Partnership
10.6* Series C Preferred Stock Purchase Agreement dated December 20, 1995
10.8+* Purchase Agreement Between Sprint/United Management Company and the
Company dated December 14, 1995
10.9+* Basic Purchase Agreement between WorldCom Network Services, Inc. and
the Company dated September 19, 1996
10.10* Settlement Agreement and Mutual Release, between the Company and
William K. Woodruff & Company, dated August 26, 1996
10.13* Employment Agreement dated April 9, 1994 between the Company and
Patrick Nettles
10.14* Lease Agreement dated November 1, 1996 by and between the Company and
Aetna Life Insurance Company
10.15* Revolving Note and Business Loan Agreement dated November 25, 1996
between the Company and Mercantile-Safe Deposit & Trust Company
10.16+* First Addendum to Procurement Agreement between the Registrant and
Sprint/United Management Company dated December 19, 1996
10.17***** Third Addendum to Procurement Agreement between the Registrant and
Sprint/United Management Company
10.18***** Form of Transfer of Control/Severance Agreement
10.19@ Lightera 1998 Stock Option Plan and Form of Stock Option Agreement
10.20- Omnia Communications, Inc. 1997 stock plan and form of agreements
10.21 Employment Agreement dated August 18, 1999 between the Company and Gary
B. Smith (filed herewith)
10.22 1999 Non-Officer Stock Option Plan and Form of Stock Option Agreement
(filed herewith)
10.23 Lease Agreement dated June 1, 1999 between the Company and Ridgeview
Court Associates, L.L.C. (filed herewith)
21** Subsidiaries of registrant
23.1 Consent of Independent Accountants (filed herewith)
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (333-17729).
** Incorporated by reference from the Company's Registration Statement on
Form S-1 (333-28525).
*** Incorporated by reference from the Company's Form 8-K dated December
29, 1997.
**** Incorporated by reference from the Company's Form 8-K dated October 14,
1998.
***** Incorporated by reference from the Company's Form 10-K dated December
10, 1998.
@ Incorporated by reference from the Company's Form 10-Q dated May 21,
1999.
- - Incorporated by reference from the Company's Form 10-Q dated August 19,
1999.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain portions of these exhibits.
56
<PAGE> 1
EXHIBIT 10.21
CIENA CORPORATION
EXECUTIVE INCENTIVE AGREEMENT
This EXECUTIVE INCENTIVE AGREEMENT (the "Agreement"), dated as of
August 18, 1999, by and between CIENA CORPORATION, a Delaware corporation with
its principal address at 1201 Winterson Road, Linthicum, Maryland 21090
(together with its subsidiaries, the "Corporation") and GARY B. SMITH (the
"Executive" and with the Corporation the "Parties").
WITNESSETH
The Executive is serving as the CHIEF OPERATING OFFICER of the Corporation
and possesses an intimate knowledge of the business and affairs of the
Corporation. The Corporation and the Board of Directors for the Corporation
(the "Board") recognize the Executive's contribution to its growth and success
and desires to enter into this Agreement with the Executive in order to assure
to the Corporation the continuing benefits of the Executive's expertise and
knowledge. The Executive, in turn, desires an assurance of an agreed upon bonus
by the Corporation payable at the end of the period set forth herein.
ACCORDINGLY, in consideration of the mutual covenants and representations
contained herein and the mutual benefits derived here from, the Parties hereto
agree as follows:
1. Certain Definitions. In addition to those terms defined herein,
when used herein, the following Capitalized terms shall have the meanings
indicated:
1.1. "Bonus Payment Date" shall mean the earlier of (a) a Triggering Event
or (b) August 18, 2002.
1.2. "Cause" means (a) the Executive's willful or continued failure
substantially to perform the duties of the Executive's position (other than as
a result of Disability or as a result of termination by the Executive for Good
Reason) or to comply with the provisions of this Agreement after written notice
to the Executive by the Board specifying such failure, provided that such
"cause" shall have been found by a majority vote of the Board after at least 10
days' written notice to the Executive specifying the failure on the part of the
Executive and after an opportunity for the Executive to be heard at a meeting
of the Board; (b) any willful act or omission by the Executive constituting
dishonesty, fraud or other malfeasance, or any act or omission by the Executive
constituting immoral conduct, which in any such case is injurious to the
financial condition or business reputation of the Corporation or any of its
affiliates; (c) the Executive's indictment for a felony under the laws of the
United States or any state thereof or any other jurisdiction in which the
Corporation conducts business, (d) the Executive's willful violation of the
terms of any confidentiality or proprietary information agreement or other
obligation between the Executive and the Corporation, or (e) Executive has
accepted employment with an entity other than the Corporation. For purposes of
this definition, no act or failure to act shall be deemed "willful" unless
effected by the Executive not in good faith and without a reasonable belief
that such action or failure to act was in or not opposed to the Corporation's
best interests.
1.3. "Disability" means either (a) "total disability" as defined for
purposes of the Corporation's long-term disability benefit plan; or (b) the
Executive's inability, as a result of physical or mental incapacity, to perform
the Executive's duties for a period of six (6) consecutive months or for an
aggregate of six (6) months in any twelve (12) consecutive month period.
1
<PAGE> 2
1.4. "Effective Date" means the date this Agreement is executed by the
Parties hereto.
1.5. "Good Reason" means (a) material diminution in the Executive's
title, position, duties or responsibilities, or the assignment to the Executive
of duties that are inconsistent, in a material respect, with the scope of
duties and responsibilities associated with the Executive's position
immediately prior to the Effective Date; or (b) reduction in base salary or
incentive compensation opportunity, or a reduction in level of participation in
long term incentive, benefit and other plans for senior executives as in effect
immediately preceding the Effective Date, or their equivalents. For purposes of
this Section, an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Corporation promptly after receipt of
notice thereof given by the Executive shall be excluded.
1.6. "Incentive Bonus" shall mean Three Million U.S. Dollars
($3,000,000).
1.7. "Pro-Rata Bonus" and "Pro-Rata Portion" shall have the meanings
set forth in Section 3(b) below.
1.8. "Triggering Event" shall mean the occurrence of a Transfer of
Control, and subsequent termination of Executive's employment with the
Corporation either without Cause by the Corporation, or for Good Reason by the
Executive. For purposes of this Section, Executive's employment with the
Corporation will be deemed to have terminated on the earlier of the date the
Executive's employment with the Corporation ceases or the date that written
notice of any such termination is received by the Executive or by the
Corporation, as the case may be, even though the parties may agree in
connection therewith that the Executive's employment with the Corporation will
continue for a specified period thereafter. The failure by the Executive or the
Corporation to set forth in any such notice sufficient facts or circumstances
showing Good Reason or Cause, as the case may be, shall not waive any right of
the Executive or the Corporation or preclude either party from asserting such
facts or circumstances in the enforcement of any such right
1.9. "Transfer of Control" shall be deemed to have taken place on the
earliest of the date of (a) the direct or indirect sale or exchange by the
stockholders of the Corporation of all or substantially all of the stock of the
Corporation where the stockholders of the Corporation before such sale or
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the surviving, continuing,
successor, or purchasing corporation or parent corporation thereof, as the case
may be (the "Acquiring Corporation") after such sale or exchange; (b) a merger
or consolidation where the stockholders of the Corporation before such merger
or consolidation do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Acquiring Corporation after
such merger or consolidation; (c) the sale, exchange, or transfer of all or
substantially all of the assets of the Corporation (other than a sale,
exchange, or transfer to one or more subsidiary corporations of the
Corporation); (d) a liquidation or dissolution of the Corporation; or (e) any
other event that the Board, in its sole discretion, shall determine constitutes
a Transfer of Control In each case the determination of whether or not a
"Transfer of Control" is deemed to have taken place shall be made without
regard to whether such events or occurrences constituting the Transfer of
Control were hostile or against the position of the Board, or were approved or
concurred in by the Board.
2. Payment of Incentive Bonus. CIENA promptly shall pay Executive the
Incentive Bonus on the Bonus Payment Date. The Executive shall be entitled to
receive the prime rate of interest published from time to time by The Wall
Street Journal on any payment under this Agreement that is more than thirty
(30) days overdue.
3. Revocation of the Incentive Bonus. The obligation of the
Corporation to pay Executive the Incentive Bonus under this Agreement shall be
considered revoked, and Executive's rights in relation thereto forfeited, to
the extent provided below.
2
<PAGE> 3
(a) Termination of Employment for Cause, or by Executive's Voluntary
Action. If prior to the Bonus Payment Date, Executive is terminated for
Cause, or Executive voluntarily ceases to be an employee of the Corporation
for any reason except death, Disability or Good Reason, the obligation of the
Corporation to pay the Incentive Bonus under this Agreement shall be
considered revoked. For purposes of this Section, Executive's employment with
the Corporation will be deemed to have terminated on the earlier of the date
the Executive's employment with the Corporation ceases or the date that
written notice of any such termination is received by the Executive or by the
Corporation, as the case may be, even though the parties may agree in
connection therewith that the Executive's employment with the Corporation
will continue for a specified period thereafter
(b) Other Termination of Executive's Employment. If prior to the Bonus
Payment Date (a) Executive's employment with the Corporation is terminated by
the Executive for Good Reason or as a result of Executive's death or
Disability, or (b) Executive's employment with the Corporation is terminated by
the Corporation for any reason other than for Cause, Executive (or Executive's
legal representative) shall be entitled to a pro-rata portion of the Incentive
Bonus, such portion to be calculated as set forth below (the "Pro-Rata Bonus"),
and the balance of the Incentive Bonus shall be considered revoked on the date
Executive's employment was terminated.
For purposes of this Section 3(b), the Pro-Rata Bonus shall equal the
product of (x) the Incentive Bonus and (y) the Pro-Rata Portion. The "Pro-Rata
Portion" shall be calculated according to the following schedule:
<TABLE>
<CAPTION>
Pro-Rata Portion
<S> <C>
Prior to August 18, 2000 0
On August 18, 2000, provided Executive is continuously 25%
employed by the Corporation from the Effective Date
Plus
----
For each full month of Executive's continuous 3.125%
employment by the Corporation from and after August
18, 2000
In no event shall the Pro-Rata Bonus exceed 100% of the
Incentive Bonus.
</TABLE>
(c) Leave of Absence. For purposes hereof, Executive's employment with
the Corporation shall not be deemed to terminate if Executive takes any sick
leave, or other bona fide leave of absence approved by the Corporation of
ninety (90) days or less. In the event of a leave in excess of ninety (90)
days, Executive's employment shall be deemed to terminate on the ninety-first
(91st) day of the leave unless Executive's right to reemployment with the
Corporation remains guaranteed by statute or contract. Notwithstanding the
foregoing, unless otherwise designated by the Corporation (or required by law)
a leave of absence shall not be treated as employment for purposes of
determining the Pro-Rata Bonus under Section 3(b).
4. Termination of Agreement. This Agreement shall automatically be
deemed to have terminated on the earlier of: (a) the revocation of the
Corporation's obligations pursuant to Section 3(a) above, (b) the payment of
the Pro-Rata Bonus pursuant to Section 3(b) above, or (c) the payment in full
of the Incentive Bonus to Executive pursuant to Section 2. Upon the termination
of this Agreement, all rights and obligations of the Corporation hereunder
immediately shall terminate.
3
<PAGE> 4
5. Miscellaneous/ General.
5.1. Successors. All rights under this Agreement are personal to the
Executive and, without the prior written consent of the Corporation, shall not
be assignable by the Executive. This Agreement shall inure to the benefit of or
be enforceable in the event of the Executive's death or disability by the
Executive's legal representative as expressly provided in this Agreement. This
Agreement shall inure to the benefit of and be binding upon the Corporation and
its successors and assigns. The Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business of the Corporation to assume expressly and
agree to perform this Agreement in the same manner and to the extent that the
Corporation would be required to perform it if no such event resulting in a
successor had taken place. As used in this Agreement, "Corporation" shall mean
the Corporation and any successor to its business and/or assets as aforesaid
which assumes and agrees, or is otherwise obligated, to perform this Agreement
by operation of law, or otherwise.
5.2 No Effect on Other Agreements; Inconsistent Provisions. This
Agreement shall be in addition to, and have no effect on, the provisions of any
other agreements, including without limitation indemnification agreements and
proprietary inventions/confidentiality agreements that may exist between the
Corporation and the Executive. Notwithstanding the foregoing, to the extent
that the terms and conditions of this Agreement are inconsistent with those
found in any other agreement or plan to which the Corporation and the Executive
are each a party, the terms and conditions of this Agreement shall be
controlling.
5.3. Controlling Law. This Agreement shall in all respects be governed
by, and construed in accordance with, the laws of the State of Delaware
(without regard to the principles of conflicts of laws).
5.4. Arbitration. DISPUTES REGARDING THE EXECUTIVE'S EMPLOYMENT WITH
THE CORPORATION, INCLUDING, WITHOUT LIMITATION, ANY DISPUTE HEREUNDER, WHICH
CANNOT BE RESOLVED BY NEGOTIATIONS BETWEEN THE CORPORATION AND THE EXECUTIVE
SHALL BESUBMITTED TO, AND SOLELY DETERMINED BY, FINAL AND BINDING ARBITRATION
CONDUCTEDBY JAMS/ENDISPUTE, INC. OR ANY SUCCESSOR THERETO, IN ACCORDANCE WITH
JAMS/ENDISPUTE, INC.'S ARBITRATION RULES APPLICABLE TO EMPLOYMENT DISPUTES, AND
THE PARTIES AGREE TO BE BOUND BY THE FINAL AWARD OF THE ARBITRATOR IN ANY SUCH
PROCEEDING. THE ARBITRATOR SHALL APPLY THE LAWS OF THE STATE OF DELAWARE WITH
RESPECT TO THE INTERPRETATION OR ENFORCEMENT OF ANY MATTER RELATING TO THIS
AGREEMENT. ARBITRATION MAY BE HELD IN BALTIMORE, MARYLAND OR SUCH OTHER PLACE
AS THE PARTIES HERETO MAY MUTUALLY AGREE, AND SHALL BE CONDUCTED SOLELY BY A
FORMER JUDGE. JUDGMENT UPON THE AWARD BY THE ARBITRATOR MAY BE ENTERED IN ANY
COURT HAVING JURISDICTION THEREOF. THE PREVAILING PARTY IN THE ARBITRATION, AS
DETERMINED BY THE ARBITRATOR, SHALL BE ENTITLED TO REIMBURSEMENT OF HIS
REASONABLE ATTORNEY'S FEES AND DISBURSEMENTS INCURRED IN SUCH PROCEEDINGS BY
THE NON-PREVAILING PARTY.
5.5. Severability. Any provision in this Agreement which is prohibited
or unenforceable shall be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof.
5.6. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
4
<PAGE> 5
5.7. Integrated Agreement. This Agreement constitutes the entire
understanding and agreement of Executive and the Corporation with respect to
the subject matter contained herein, and there are no agreements,
understandings, restrictions, representations, or warranties among Executive
and the Corporation other than those as set forth or provided for herein.
5.8. Tax Advice. Executive represents and warrants that he has
consulted with a tax advisor of his own choosing in connection with
understanding and planning for any and all federal or state income or capital
gains taxes associated with this Agreement, and that he has not received and is
not expecting or relying on the Corporation for such advice.
IN WITNESS WHEREOF, the Parties have executed and delivered this
Agreement on the date first above written.
CIENA CORPORATION EXECUTIVE
By: ___________________ By: ________________
Name: Patrick H. Nettles Name: Gary B. Smith
Title: Chief Executive Officer
5
<PAGE> 1
EXHIBIT 10.22
CIENA CORPORATION
1999 NON-OFFICER STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURPOSE 3
2. DEFINITIONS 3
3. ADMINISTRATION 5
3.1. Board. 5
3.2. Committee 5
3.3. No Liability 5
4. SHARES 5
5. ELIGIBILITY 6
5.1. Designated Recipients 6
5.2. Successive Grants 6
6. EFFECTIVE DATE AND TERM OF THE PLAN 6
6.1. Effective Date 6
6.2. Term 4
7. GRANT OF OPTIONS 6
8. PARACHUTE LIMITATIONS 6
9. STOCK OPTION AGREEMENTS 7
10. OPTION PRICE 7
11. TERM AND EXERCISE OF OPTIONS 7
11.1. Term 7
11.2. Option Period and Limitations on Exercise 7
11.3. Termination of Employment 7
11.4. Rights in the Event of Death 8
11.5. Rights in the Event of Disability 8
11.6. Limitations on Exercise of Option 8
11.7. Method of Exercise 9
12. TRANSFERABILITY OF SHARES AND OPTIONS 9
13. USE OF PROCEEDS 9
14. REQUIREMENTS OF LAW 9
15. AMENDMENT AND TERMINATION OF THE PLAN 10
16. EXCHANGE ACT: RULE 16B-3 10
16.1. General 10
16.2. Committee 10
16.3. Additional Restriction on Transfer of Shares 10
17. EFFECT OF CHANGES IN CAPITALIZATION 10
17.1. Changes in Shares 10
17.2. Reorganization in Which the Company Is the Surviving Entity 11
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C>
17.3. Reorganization in Which the Company Is Not the Surviving
Entity or Sale of Assets or Shares 11
17.4. Adjustments 12
17.5. No Limitations on Company 12
18. DISCLAIMER OF RIGHTS 12
19. NONEXCLUSIVITY OF THE PLAN 12
20. CAPTIONS 12
21. WITHHOLDING TAXES 12
21.1. Withholding 12
21.2. Limitations for Reporting Person 13
22. OTHER PROVISIONS 13
23. NUMBER AND GENDER 13
24. SEVERABILITY 13
25. GOVERNING LAW 13
</TABLE>
2
<PAGE> 3
CIENA CORPORATION
1999 NON-OFFICER STOCK OPTION PLAN
CIENA Corporation, sets forth herein the terms of this 1999 Non-Officer Stock
Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Company by providing
eligible individuals (as designated pursuant to Section 5 below) with
incentives to improve business results, by providing an opportunity to acquire
or increase a proprietary interest in the Company, which thereby will create a
stronger incentive to expend maximum effort for the growth and success of the
Company, and will encourage such eligible individuals to continue to serve the
Company. To this end, the Plan provides for the grant of stock options as set
out herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Stock
Option Agreements), the following definitions shall apply:
2.1. "Affiliate" means any company or other trade or business that is
controlled by or under common control with the Company (determined in
accordance with the principles of Section 414(b) and 414(c) of the
Code and the regulations thereunder).
2.2. "Agreement" means a written agreement between the Company and the
recipient individual that sets out the terms and conditions of the
grant of an Incentive Award.
2.3. "Board" means the Board of Directors of the Company.
2.4. "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended.
2.5. "Committee" means the committee appointed by the Board pursuant to
Section 3.2of the Plan.
2.6. "Company" means CIENA Corporation.
2.7. "Effective Date" means the date of adoption of the Plan by the Board.
2.8. "Exchange Act" means the Securities Exchange Act of 1934, as now in
effect or as hereafter amended.
2.9. "Exercise Price" means the Option Price multiplied by the number of
Shares purchased pursuant to the exercise of an Option.
2.10. "Expiration Date" means the date fixed for termination of the Option
at the time it is granted, or, if earlier, the termination of the
Option pursuant to Section 17.3.
2.11. "Fair Market Value" means the value of each Share subject to the Plan
determined as follows: if on the Grant Date or other determination
date the Shares are listed on an established national or regional
stock exchange, are admitted to quotation on the National Association
of Securities Dealers Automated Quotation System, or are publicly
traded on an established securities market, the Fair Market Value of
the Shares shall be the closing
3
<PAGE> 4
price of the Shares on such exchange or in such market (the highest
such closing price if there is more than one such exchange or market)
on the trading day immediately preceding the Grant Date or such other
determination date (or if there is no such reported closing price, the
Fair Market Value shall be the mean between the highest bid and lowest
asked prices or between the high and low sale prices on such trading
day) or, if no sale of the Shares is reported for such trading day, on
the next preceding day on which any sale shall have been reported. If
the Shares are not listed on such an exchange, quoted on such System
or traded on such a market, Fair Market Value shall be determined by
the Board in good faith.
2.12. "Grant Date" means the later of (i) the date as of which the Board
approves the grant, (ii) the date as of which the Optionee and the
Company or Subsidiary enter the relationship resulting in the Optionee
being eligible for grants and (iii) such other date as may be
specified by the Board.
2.13. "Incentive Award" means an award of an Option under the Plan.
2.14. "Option" means an option to purchase one or more Shares pursuant to
the Plan.
2.15. "Optionee" means a person who holds an Option under the Plan.
2.16. "Option Period" means the period during which Options may be
exercised as defined in Section 11.
2.17. "Option Price" means the purchase price for each Share subject to an
Option.
2.18. "Plan" means the CIENA Corporation 1999 Nonofficer Stock Option Plan.
2.19. "Reporting Person" means a person who is required to file reports
under Section 16(a) of the Securities Exchange Act of 1934, as
amended.
2.20. "1933 Act" means the Securities Act of 1933, as now in effect or as
hereafter amended.
2.21. "Shares" mean shares of common stock, par value $.01 per Share, of
the Company.
2.22. "Stock Option Agreement" means the written agreement evidencing the
grant of an Option hereunder.
2.23. "Subsidiary" means any "subsidiary corporation" of the Company within
the meaning of Section 425(f) of the Code.
3. ADMINISTRATION
3.1. BOARD.
The Plan shall be administered by the Board, which shall have
the full power and authority to take all actions and to make all determinations
required or provided for under the Plan or any Option granted or Stock Option
Agreement entered into hereunder and all such other
4
<PAGE> 5
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Board to be necessary or appropriate to
the administration of the Plan or any Option granted or Stock Option Agreement
entered into hereunder. The interpretation and construction by the Board of any
provision of the Plan or of any Option granted or Stock Option Agreement
entered into hereunder shall be final and conclusive.
3.2. COMMITTEE
The Board may from time to time appoint the Committee, and
the Board, in its sole discretion, may provide that the role of the Committee
shall be limited to making recommendations to the Board concerning any
determinations to be made and actions to be taken by the Board pursuant to or
with respect to the Plan, or the Board may delegate to the Committee such
powers and authorities related to the administration of the Plan, as set forth
in Section 3.1 hereof, as the Board shall determine, consistent with the
Certificate of Incorporation and Bylaws of the Company and applicable law. In
the event that the Plan or any Option granted or Stock Option Agreement entered
into hereunder provides for any action to be taken by or determination to be
made by the Board, such action may be taken by or such determination may be
made by the Committee if the power and authority to do so has been delegated to
the Committee by the Board as provided for in this Section 3.2. Unless
otherwise expressly determined by the Board, any such action or determination
by the Committee shall be final and conclusive.
3.3. NO LIABILITY
No member of the Board or of the Committee shall be liable
for any action or determination made, or any failure to take or make an action
or determination, in good faith with respect to the Plan or any Option granted
or Stock Option Agreement entered into hereunder.
4. SHARES
The Shares that may be issued pursuant to Incentive Awards may be treasury
Shares or authorized but unissued Shares. The number of Shares that may be
issued pursuant to Incentive Awards under the Plan shall not exceed, in the
aggregate, six million (6,000,000) Shares. If any Incentive Award expires,
terminates, or is terminated or canceled for any reason prior to exercise or
vesting in full, the Shares that were subject to the unexercised, forfeited, or
terminated portion of such Incentive Award shall be available immediately for
future grants of Incentive Awards under the Plan.
5. ELIGIBILITY
5.1. DESIGNATED RECIPIENTS
Incentive Awards may be granted under the Plan to (i) any
full-time employee of the Company or any Subsidiary as the Board shall
determine and designate from time to time or (ii) any other individual whose
participation in the Plan is determined by the Board to be in the best
interests of the Company and is so designated by the Board (such determination
to be deemed to be made with respect to any recipient by virtue of the grant of
an Incentive Award such individual); provided, however, that any individual who
is a Reporting Person, as defined in Section 2 above, shall not participate in
the Plan and shall not be granted Incentive Awards under the Plan.
5.2. SUCCESSIVE GRANTS
An individual may hold more than one Incentive Award, subject
to such restrictions as are provided herein.
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6. EFFECTIVE DATE AND TERM OF THE PLAN
6.1. EFFECTIVE DATE
The Plan shall be effective as of August 18, 1999, the date
of adoption by the Board.
6.2. TERM
The Plan has no termination date.
7. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, grant to such eligible individuals as
the Board may determine, Options to purchase such number of Shares on such
terms and conditions as the Board may determine. Such authority specifically
includes the authority, in order to effectuate the purposes of the Plan but
without amending the Plan, to modify grants to eligible individuals who are
foreign nationals or are individuals who are employed outside the United States
to recognize differences in local law, tax policy, or custom.
8. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement,
contract, or understanding heretofore or hereafter entered into by the Optionee
with the Company, except an agreement, contract, or understanding hereafter
entered into that expressly modifies or excludes application of this paragraph
(an "Other Agreement"), and notwithstanding any formal or informal plan or
other arrangement for the direct or indirect provision of compensation to the
Optionee (including groups or classes of participants or beneficiaries of which
the Optionee is a member), whether or not such compensation is deferred, is in
cash, or is in the form of a benefit to or for the Optionee (a "Benefit
Arrangement"), if the Optionee is a "disqualified individual," as defined in
Section 280G(c) of the Code, any Option or right to receive any payment or
other benefit under this Plan held by the Optionee shall not become exercisable
or vested (i) to the extent that such right to exercise, vesting, payment, or
benefit, taking into account all other rights, payments, or benefits to or for
the Optionee under this Plan, all Other Agreements, and all Benefit
Arrangements, would cause any payment or benefit to the Optionee under this
Plan to be considered a "parachute payment" within the meaning of Section
280G(b)(2) of the Internal Revenue Code as then in effect (a "Parachute
Payment") and (ii) if, as a result of receiving a Parachute Payment, the
aggregate after-tax amounts received by the Optionee from the Company under
this Plan, all Other Agreements, and all Benefit Arrangements would be less
than the maximum after-tax amount that could be received by him or her without
causing any such payment or benefit to be considered a Parachute Payment. In
the event that the receipt of any such right to exercise, vesting, payment, or
benefit under this Plan, in conjunction with all other rights, payments, or
benefits to or for the Optionee under any Other Agreement or any Benefit
Arrangement would cause the Optionee to be considered to have received a
Parachute Payment under this Plan that would have the effect of decreasing the
after-tax amount received by the Optionee as described in clause (ii) of the
preceding sentence, then the Optionee shall have the right, in the Optionee's
sole discretion, to designate those rights, payments, or benefits under this
Plan, any Other Agreements, and any Benefit Arrangements that should be reduced
or eliminated so as to avoid having the payment or benefit to the Optionee
under this Plan be deemed to be a Parachute Payment.
9. STOCK OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by Stock Option
Agreements, to be executed by the Company and by the Optionee, in such form or
forms as the Board shall from time to time determine. Stock Option Agreements
covering Options granted from time to time or at the same time need not contain
similar provisions; provided, however, that all such Option Agreements shall
comply with all terms of the Plan.
10. OPTION PRICE
The Option Price shall be fixed by the Board and stated in each Stock Option
Agreement. The Option Price shall not be less than 85% of the Fair Market Value
of the Shares.
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11. TERM AND EXERCISE OF OPTIONS
11.1. TERM
Each Option granted under the Plan shall terminate and all
rights to purchase shares thereunder shall cease at such time as may be fixed
by the Board and stated in the Stock Option Agreement relating to such Option.
11.2. OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable, in
whole or in part, at any time and from time to time over a period commencing on
or after the Grant Date and ending upon the expiration or termination of the
Option, as the Board shall determine and set forth in the Stock Option
Agreement relating to such Option. Without limiting the foregoing, the Board,
subject to the terms and conditions of the Plan, may in its sole discretion
provide that an Option may not be exercised in whole or in part for a stated
period or periods of time during which such Option is outstanding; provided,
however, that any such limitation on the exercise of an Option contained in any
Stock Option Agreement may be rescinded, modified or waived by the Board, in
its sole discretion, at any time and from time to time after the Grant Date of
such Option, so as to accelerate the time at which the Option may be exercised.
11.3. TERMINATION OF EMPLOYMENT
Upon the termination of the employment of an Optionee with
the Company, a Subsidiary or an Affiliate, other than by reason of the death or
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code), any Option granted to an Optionee pursuant to the Plan shall terminate,
and such Optionee shall have no further right to purchase Shares pursuant to
such Option; provided further, that the Board may provide, by inclusion of
appropriate language in any Stock Option Agreement, that an Optionee may
(subject to the general limitations on exercise set forth in Section 11.2
above), in the event of termination of employment of the Optionee with the
Company, a Subsidiary or an Affiliate, exercise an Option, in whole or in part,
at any time subsequent to such termination of employment and prior to
termination of the Option pursuant to Section 11.1 above, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 11.2 above, as the Board, in its sole and absolute discretion, shall
determine and set forth in the Stock Option Agreement. Whether a leave of
absence or leave on military or government service shall constitute a
termination of employment for purposes of the Plan, shall be determined by the
Board, which determination shall be final and conclusive. For purposes of the
Plan, a termination of employment with the Company, a Subsidiary or an
Affiliate shall not be deemed to occur if the Optionee is immediately
thereafter employed with the Company, any other Subsidiary or any other
Affiliate.
11.4. RIGHTS IN THE EVENT OF DEATH
If an Optionee dies while employed by the Company, a
Subsidiary or an Affiliate, the executors or administrators or legatees or
distributees of such Optionee's estate shall have the right (subject to the
general limitations on exercise set forth in Section 11.2 above), at any time
within one year after the date of such Optionee's death and prior to
termination of the Option pursuant to Section 11.1 above, to exercise any
Option held by such Optionee at the date of such Optionee's death, to the
extent such Option was exercisable immediately prior to such Optionee's death;
provided, however, that the Board may provide by inclusion of appropriate
language in
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<PAGE> 8
any Stock Option Agreement that, in the event of the death of an Optionee, the
executors or administrators or legatees or distributees of such Optionee's
estate may exercise an Option (subject to the general limitations on exercise
set forth in Section 11.2 above), in whole or in part, at any time subsequent
to such Optionee's death and prior to termination of the Option pursuant to
Section 11.1 above, either subject to or without regard to any installment
limitation on exercise imposed pursuant to Section 11.2 above, as the Board, in
its sole and absolute discretion, shall determine and set forth in the Stock
Option Agreement.
11.5. RIGHTS IN THE EVENT OF DISABILITY
If an Optionee terminates employment with the Company, a
Subsidiary or an Affiliate by reason of the "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code) of such Optionee, then
such Optionee shall have the right (subject to the general limitations on
exercise set forth in Section 11.2 above), at any time within one year after
such termination of employment and prior to termination of the Option pursuant
to Section 11.1 above, to exercise, in whole or in part, any Option held by
such Optionee at the date of such termination of employment, to the extent such
Option was exercisable immediately prior to such termination of employment;
provided, however, that the Board may provide, by inclusion of appropriate
language in any Stock Option Agreement, that an Optionee may (subject to the
general limitations on exercise set forth in Section 11.2 above), in the event
of the termination of employment of the Optionee with the Company, a Subsidiary
or an Affiliate by reason of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option,
in whole or in part, at any time subsequent to such termination of employment
and prior to termination of the Option pursuant to Section 11.1 above, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 11.2 above, as the Board, in its sole and absolute
discretion, shall determine and set forth in the Stock Option Agreement.
Whether a termination of employment is to be considered by reason of "permanent
and total disability" for purposes of this Plan shall be determined by the
Board, which determination shall be final and conclusive.
11.6. LIMITATIONS ON EXERCISE OF OPTION
Notwithstanding the foregoing Sections, in no event may the
Option be exercised, in whole or in part, or after the occurrence of an event
referred to in Section 17.3 below which results in termination of the Option.
In no event may the Option be exercised for a fractional Share.
11.7. METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by
the Optionee's delivery to the Company of written notice of the exercise and
the number of Shares for which the Option is being exercised. Such delivery
shall occur on any business day, at the Company's principal office, addressed
to the attention of the Board. Such notice shall specify the number of Shares
with respect to which the Option is being exercised and shall be accompanied by
payment in full of the Option Price of the Shares for which the Option is being
exercised. The minimum number of Shares with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of (i) 100
shares or such lesser number set forth in the applicable Option Agreement and
(ii) the maximum number of Shares available for purchase under the Option at
the time of exercise. Payment of the Option Price for the Shares purchased
pursuant to the
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<PAGE> 9
exercise of an Option shall be made (i) in cash or in cash equivalents; (ii)
through the tender to the Company of Shares, which, if acquired directly or
indirectly from the Company have been held for six months which Shares shall be
valued, for purposes of determining the extent to which the Option Price has
been paid thereby, at their Fair Market Value on the date of exercise; or (iii)
by a combination of the methods described in (i) and (ii). The Board may
provide, by inclusion of appropriate language in an Stock Option Agreement,
that payment in full of the Option Price need not accompany the written notice
of exercise provided the notice of exercise directs that the Share certificate
or certificates for the Shares for which the Option is exercised be delivered
to a licensed broker acceptable to the Company as the agent for the individual
exercising the Option and, at the time such Share certificate or certificates
are delivered, the broker tenders to the Company cash (or cash equivalents
acceptable to the Company) equal to the Option Price for the Shares purchased
pursuant to the exercise of the Option plus the amount (if any) of federal
and/or other taxes which the Company may in its judgment, be required to
withhold with respect to the exercise of the Option. An attempt to exercise any
Option granted hereunder other than as set forth above shall be invalid and of
no force and effect. Promptly after the exercise of an Option and the payment
in full of the Option Price of the Shares covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Share certificate
or Share certificates evidencing his or her ownership of such Shares. Unless
otherwise stated in the applicable Stock Option Agreement, an individual
holding or exercising an Option shall have none of the rights of a stockholder
(for example, the right to receive cash or dividend payments attributable to
the subject Shares or to direct the voting of the subject Shares) until the
Shares covered thereby are fully paid and issued to him or her. Except as
provided in Section 0 below, no adjustment shall be made for dividends or other
rights for which the record date is prior to the date of such issuance.
12. TRANSFERABILITY OF SHARES AND OPTIONS
During the lifetime of an Optionee, only such Optionee or grantee (or, in the
event of legal incapacity or incompetency, the guardian or legal representative
of the Optionee or grantee) may exercise the Option.
13. USE OF PROCEEDS
The proceeds received by the Company from the sale of Shares pursuant to the
exercise of Options granted under the Plan shall constitute general funds of
the Company.
14. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any Shares under any
Incentive Award if the sale or issuance of such Shares would constitute a
violation by the Optionee, the individual exercising the Option, or the Company
of any provisions of any law or regulation of any governmental authority,
including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion,
that the listing, registration or qualification of any Shares subject to the
Option upon any securities exchange or under any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with, the
issuance or purchase of Shares hereunder, the Option may not be exercised in
whole or in part unless such listing registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company, and any delay caused thereby shall in no way affect
the date of termination of the Option. Specifically in connection with the 1933
Act, upon the exercise of any Option, unless a registration statement under
such act is in effect with respect to the Shares covered by Option, the Company
shall not be required to sell or issue such Shares unless the Board has
received evidence satisfactory to it that the holder of such Option, may
acquire such Shares pursuant to an exemption from registration under such act.
Any determination in this connection by the Board shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register
any securities covered hereby pursuant to the 1933 Act. The Company shall not
be obligated to take any affirmative action in order to cause the exercise of
an Option to comply with any law or regulation of any governmental authority.
As to any jurisdiction that expressly imposes the requirement that an Option
shall not be exercisable unless and until the
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Shares covered by such Option are registered or are exempt from registration,
the exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend, or terminate
the Plan as to any Shares as to which Incentive Awards have not been granted.
The Company may retain the right in an Agreement to cause a forfeiture of the
Shares or gain realized by a holder of an Incentive Award on account of the
holder taking actions in "competition with the Company," as defined in the
applicable Agreement. Furthermore, the Company may annul the grant of an Option
if the holder of such grant was an employee of the Company or a Subsidiary and
is terminated "for cause," as defined in the applicable Agreement. Except as
permitted under this Section 15 or Section 17 hereof, no amendment, suspension,
or termination of the Plan shall, without the consent of the holder of the
Incentive Award, alter or impair rights or obligations under any Incentive
Award theretofore granted under the Plan.
16. EXCHANGE ACT: RULE 16b-3
16.1. GENERAL
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3")
under the Exchange Act. Any provision inconsistent with Rule 16b-3 shall, to
the extent permitted by law and determined to be advisable by the Board
(constituted in accordance with Section 16.2 hereof) or the Board (acting
pursuant to Section 16.3 hereof), be inoperative and void.
16.2. COMMITTEE
The Committee appointed pursuant to Section 3.2 hereof shall
consist of not fewer than two members of the Board each of whom shall qualify
(at the time of appointment to the Committee and during all periods of service
on the Committee) in all respects as a "non-employee director" as defined in
Rule 16b-3.
16.3. ADDITIONAL RESTRICTION ON TRANSFER OF SHARES
No director, officer or other "insider" of the Corporation
subject to Section 16 of the Exchange Act shall be permitted to sell Shares
(which such "insider" had received upon exercise of an Option) during the six
months immediately following the grant of such Option.
17. EFFECT OF CHANGES IN CAPITALIZATION
17.1. CHANGES IN SHARES
If the number of outstanding Shares is increased or decreased
or the Shares are changed into or exchanged for a different number or kind of
Shares or other securities of the Company on account of any recapitalization,
reclassification, stock split, reverse split, combination of Shares, exchange
of Shares, Share dividend or other distribution payable in capital stock, or
other increase or decrease in such Shares effected without receipt of
consideration by the Company, occurring after the closing of the initial public
offering of Shares of the Company, the number and kinds of Shares for the
acquisition of which Options may be granted under the Plan shall be adjusted
proportionately and accordingly by the Company. In addition, the number and
kind of Shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the
holder of the Option immediately following such event shall, to the extent
practicable, be the same as immediately before such event. Any such adjustment
in outstanding Options shall not change the aggregate Option Price payable with
respect to Shares that are subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per Share.
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17.2. REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING ENTITY
Subject to Section 17.3 hereof, if the Company shall be the
surviving Entity in any reorganization, merger, or consolidation of the Company
with one or more other entities, any Option theretofore granted pursuant to the
Plan shall pertain to and apply to the securities to which a holder of the
number of Shares subject to such Option would have been entitled immediately
following such reorganization, merger, or consolidation, with a corresponding
proportionate adjustment of the Option Price per Share so that the aggregate
Option Price thereafter shall be the same as the aggregate Option Price of the
Shares remaining subject to the Option immediately prior to such
reorganization, merger, or consolidation.
17.3. REORGANIZATION IN WHICH THE COMPANY IS NOT THE SURVIVING ENTITY OR
SALE OF ASSETS OR SHARES
Upon the dissolution or liquidation of the Company, or upon
a merger, consolidation, or reorganization of the Company with one or more
other entities in which the Company is not the surviving entity, or upon a sale
of substantially all of the assets of the Company to another entity, or upon
any transaction (including, without limitation, a merger or reorganization in
which the Company is the surviving entity) approved by the Board that results
in any person or entity (or person or entities acting as a group or otherwise
in concert) owning 80 percent or more of the combined voting power of all
classes of securities of the Company, the Plan and all Options outstanding
hereunder shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan or the
assumption of such Options theretofore granted, or for the substitution for
such Options of new options covering the stock of a successor Company, or a
parent or subsidiary thereof, with appropriate adjustments as to the number and
kinds of shares and exercise prices, in which event the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided. In the event of any such termination of the Plan, each individual
holding an Option shall have the right (subject to the general limitations on
exercise set forth in Section 11.2 above), immediately before the occurrence of
such termination and during such period occurring before such termination as
the Board in its sole discretion shall determine and designate, to exercise
such Option in whole or in part, whether or not such Option was otherwise
exercisable at the time such termination occurs. The Board shall send written
notice of an event that will result in such a termination to all individuals
who hold Options not later than the time at which the Company gives notice
thereof to its stockholders but in no event less than 30 days before the
occurrence of such termination.
17.4. ADJUSTMENTS
Adjustments under this Section 17 related to Shares or
securities of the Company shall be made by the Board, whose determination in
that respect shall be final, binding, and conclusive. No fractional Shares or
units of other securities shall be issued pursuant to any such adjustment, and
any fractions resulting from any such adjustment shall be eliminated in each
case by rounding downward to the nearest whole share or unit.
17.5. NO LIMITATIONS ON COMPANY
The grant of Shares and Incentive Awards pursuant to the Plan
shall not affect or limit in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations, or changes of its capital or
business structure or to merge, consolidate, dissolve, or liquidate, or to sell
or transfer all or any part of its business or assets.
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18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Incentive Award granted or Agreement entered
into pursuant to the Plan shall be construed to confer upon any individual the
right to remain in the employ or service of the Company, any Subsidiary or any
Affiliate, or to interfere in any way with any contractual or other right or
authority of the Company, any Subsidiary or any Affiliate either to increase or
decrease the compensation or other payments to any individual at any time, or
to terminate any employment or other relationship between any individual and
the Company, a Subsidiary or an Affiliate. In addition, notwithstanding
anything contained in the Plan to the contrary, unless otherwise stated in the
applicable Agreement, no Incentive Award granted under the Plan shall be
affected by any change of duties or position of the Optionee (including a
transfer to or from the Company, a Subsidiary or an Affiliate), so long as such
Optionee continued to be a director, officer, consultant, employee, or
independent contractor (as the case may be) of the Company, a Subsidiary or an
Affiliate. The obligation of the Company to pay any benefits pursuant to this
Plan shall be interpreted as a contractual obligation to pay only those amounts
described herein, in the manner and under the conditions prescribed herein. The
Plan shall in no way be interpreted to require the Company to transfer any
amounts to a third party director or otherwise hold any amounts in trust or
escrow for payment to any participant or beneficiary under the terms of the
Plan.
19. NONEXCLUSIVITY OF THE PLAN
The adoption of the Plan shall not be construed as creating any limitations
upon the right and authority of the Board to adopt such other incentive
compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or particular individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
20. CAPTIONS
The use of captions in this Plan or any Agreement is for the convenience of
reference only and shall not affect the meaning of any provision of the Plan or
such Agreement.
21. WITHHOLDING TAXES
21.1. WITHHOLDING
The Company shall have the right to deduct from payments of
any kind otherwise due to an Optionee any Federal, state, or local taxes of any
kind required by law to be withheld with respect to any Shares issued upon the
exercise of an Option under the Plan. At the time of exercise the Optionee
shall pay to the Company any amount that the Company may reasonably determine
to be necessary to satisfy such withholding obligation. Subject to the prior
approval of the Company, which may be withheld by the Company in its sole
discretion, the Optionee may elect to satisfy such obligations, in whole or in
part, (i) by causing the Company to withhold Shares otherwise issuable pursuant
to the exercise of an Option or (ii) by delivering to the Company Shares
already owned by the Optionee. The Shares so delivered or withheld shall have a
fair market value equal to such withholding obligations. The fair market value
of the Shares used to satisfy such withholding obligation shall be determined
by the Company as of the date that the amount of tax to be withheld is to be
determined. An Optionee who has made an election pursuant to this Section 21.1
may only satisfy his or her withholding obligation with Shares that are not
subject to any repurchase, forfeiture, unfulfilled vesting, or other similar
requirements.
21.2. LIMITATIONS FOR REPORTING PERSON
Notwithstanding the foregoing, in the case of a Reporting
Person, no election to use Shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements under Rule
16b-3(e) or any successor rule under the Exchange Act.
22. OTHER PROVISIONS
Each Incentive Award granted under the Plan may contain such other terms and
conditions not inconsistent with the
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Plan as may be determined by the Board, in its sole discretion.
23. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall include the
plural form, the masculine gender shall include the feminine gender, etc., as
the context requires.
24. SEVERABILITY
If any provision of the Plan or any Agreement shall be determined to be illegal
or unenforceable by any court of law in any jurisdiction, the remaining
provisions hereof and thereof shall be severable and enforceable in accordance
with their terms, and all provisions shall remain enforceable in any other
jurisdiction.
25. GOVERNING LAW
The validity and construction of this Plan and the instruments evidencing the
Incentive Awards granted hereunder shall be governed by the laws of the State
of Maryland without regard to the choice of law provisions thereof. The Plan
was duly adopted and approved by the Board of Directors of the Company on the
18th day of August, 1999.
---------------------------
Michael O. McCarthy
Secretary of the Company
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CIENA CORPORATION
1999 NON-OFFICER STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTIONS
GRANT DATE: ____________ NUMBER OF SHARES OF COMMON STOCK COVERED BY
OPTION: ____________
EXERCISE PRICE: $____________ LAST DATE TO EXERCISE: ____________ (1)
We are pleased to inform you that the Corporation has granted you an option to
purchase shares of CIENA Corporation common stock (the "Option"). Your grant has
been made under the CIENA 1999 Non-Officer Stock Option Plan (the "Plan"),
which, together with the terms contained in this Agreement, sets forth the terms
and conditions of your grant and is incorporated herein by reference. A copy of
the Plan is attached. Please review it carefully. If any provisions of the
Agreement should appear to be inconsistent with the Plan, the Plan will control.
This Option Agreement has been duly executed and delivered by all parties
hereto, as of the above written Grant Date.
ACCEPTED AND AGREED TO: CIENA CORPORATION:
By:
- -------------------------- -----------------------------
Name of Grantee: Name:
---------- ---------------------------
Title:
--------------------------
THIS IS NOT A STOCK CERTIFICATE OR A NEGOTIABLE INSTRUMENT. NON-TRANSFERABLE.
PAGE 1 OF 2
- --------
(1) Certain events can cause an earlier termination of the Option. See
"Exercise" on reverse side.
<PAGE> 15
VESTING:
Subject to the terms of the Plan, the Option becomes vested as to 25% of the
shares purchasable pursuant to the Option on the last day of the calendar month
in which occurs the date one (1) year after the Grant Date (the "Initial Vesting
Date"), if you have been providing services to the Corporation or an Affiliate
continuously from the Grant Date to the Initial Vesting Date. Thereafter, the
Option shall become vested as to an additional 2.084% of shares purchasable
pursuant to the Option for each full month you have been providing continuous
services to the Corporation or an Affiliate.
EXERCISE:
You may exercise this Option, in whole or in part, to purchase a whole number of
vested shares at any time of not less than 100 shares, unless the number of
shares purchased is the total number available for purchase under the Option, by
following the exercise procedures as set forth in the Plan. All exercises must
take place before the last Date to Exercise, or such earlier date following your
death, disability or your ceasing to provide services as described below under
"Service Requirements." The number of shares you may purchase as of any date
cannot exceed the total number of shares vested by that date, less any shares
you have previously acquired by exercising this Option. Certain corporate
transactions involving the Corporation may cause your Option to terminate prior
to the last Date to Exercise. The Plan provides important information regarding
these corporate transactions.
TRANSFER OF CONTROL:
A "Transfer of Control" shall be deemed to have occurred in the event any of the
following occurs with respect to the Corporation: (a) the direct or indirect
sale or exchange by the stockholders of the Corporation of all or substantially
all of the stock of the Corporation where the stockholders of the Corporation
before such sale or exchange do not retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be, (the "Acquiring Corporation") after such sale or exchange;
(b) a merger or consolidation where the stockholders of the Corporation before
such merger or consolidation do not retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the Acquiring
Corporation after such merger or consolidation; (c) the sale, exchange, or
transfer of all or substantially all of the assets of the Corporation (other
than a sale, exchange, or transfer to one (1) or more subsidiary corporations
(as defined in clause (a) above) of the Corporation); or (d) a liquidation or
dissolution of the Corporation. Each Option holder shall be credited, as of the
proposed effective date of a Transfer of Control, and if still employed by the
Corporation on the date such Transfer of Control is consummated, with twelve
(12) full months of additional vesting of the shares subject to his/her Option,
or full vesting to the extent permitted under Section 17.3 of the Plan.
SERVICE REQUIREMENTS:
If you cease to provide services to the Corporation or an Affiliate, all further
vesting of shares under this grant stops, and all unvested shares are canceled.
You will have ninety (90) days after your provision of services ceases to
exercise your vested Options (unless your services are terminated for "Cause"),
and in the event of your death or permanent and total disability you or your
estate will have a period of one year to exercise any Options, to the extent
such Option was otherwise exercisable, at the time of your death or permanent
and total disability.
FORFEITURE:
The Corporation shall have the right to cause a forfeiture of your rights under
this Agreement, including, but not limited to, the right to cause you to forfeit
any outstanding Option in the event that the Company finds that you have: (i)
violated the terms of any confidentiality agreement or obligation between you
and the Corporation or an Affiliate; (ii) accepted employment with an entity
which the Corporation determines is in a business that could result in
comprising any confidentiality agreement or obligation between you and the
Corporation; (iii) willfully failed or refused to perform material assigned
duties; or (iv) engaged in willful, deliberate or gross misconduct toward the
Corporation or an Affiliate.
TAXES AND WITHHOLDING:
This Option shall not constitute an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended. In the event that
the Corporation determines that any federal, state, local or foreign tax or
withholding payment is required relating to the exercise or sale of shares
arising from this grant, the Corporation shall have the right to require such
payments from you, or withhold such amounts from other payments due to you from
the Corporation or an Affiliate.
* * * *
PAGE 2 OF 2
<PAGE> 1
EXHIBIT 10.23
10500-A RIDGE VIEW COURT, CUPERTINO, CALIFORNIA
LEASE
BETWEEN
RIDGEVIEW COURT ASSOCIATES, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
AND
CIENA CORPORATION,
A DELAWARE CORPORATION
<PAGE> 2
LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. PREMISES.........................................................................................1
1.1 Description...........................................................................1
1.2 Condition of Premises.................................................................1
II. DEFINITIONS......................................................................................2
2.1 Buildings/Building....................................................................2
2.2 CC&Rs.................................................................................2
2.3 Effective Date........................................................................2
2.4 Interest Rate.........................................................................2
2.5 Land..................................................................................2
2.6 Lease Year............................................................................2
2.7 Permitted Transferee..................................................................2
2.8 Project...............................................................................2
2.9 Project Common Areas..................................................................3
2.10 Property....................................................................................3
2.11 Tenant's Project Percentage Share...........................................................3
III. TERM.............................................................................................3
3.1 Lease Term and Commencement...........................................................3
3.2 Option to Extend Term.................................................................4
3.3 Conditions to Exercise................................................................4
3.4 Terms of Extension Option.............................................................4
3.5 Fair Market Rent......................................................................4
3.6 Appraisal Process.....................................................................5
3.7 Cancellation of Exercise..............................................................6
IV. RENT.............................................................................................6
4.1 Rent..................................................................................6
4.2 Base Rent.............................................................................6
4.3 Additional Rent--Annual Rent Adjustments/Operating Expenses...........................7
4.4 Additional Rent--Annual Rent Adjustments/Taxes.......................................10
4.5 Revisions in Building or Project.....................................................12
4.6 Proration of Rent....................................................................12
V. USE.............................................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
5.1 Use Permitted........................................................................13
5.2 Definition of Hazardous Substance....................................................13
5.3 Compliance with Applicable Laws......................................................14
5.4 No Hazardous Waste Facilities........................................................14
5.5 Underground Storage Tanks............................................................14
5.6 Information to be Provided by Tenant.................................................14
5.7 Radioactive Materials/Radiation......................................................15
5.8 Environmental Condition..............................................................15
5.9 Tenant's Indemnity...................................................................16
5.10 Cooperation of Tenant......................................................................16
5.11 Landlord's Approval........................................................................16
5.12 No Obligation of Landlord..................................................................17
5.13 Acknowledgment by Tenant...................................................................17
5.14 Survival...................................................................................17
5.15 Landlord's Indemnity.................................................................17
VI. ALTERATIONS.....................................................................................17
6.1 Alterations..........................................................................17
6.2 Contractors..........................................................................18
6.3 Bonds................................................................................18
6.4 Insurance Requirements...............................................................19
6.5 Professional Services................................................................19
6.6 Liens................................................................................20
6.7 Ownership of Alterations.............................................................20
6.8 Ownership of Equipment, Trade Fixtures and Non-Structural Alterations................20
VII. REPAIRS..........................................................................................20
7.1 Tenant's Repair Obligations..........................................................20
7.2 Landlord's Repair Obligation.........................................................21
VIII. DAMAGE OR DESTRUCTION...........................................................................21
8.1 Landlord's Obligation to Rebuild.....................................................21
8.2 Right to Terminate...................................................................21
8.3 Abatement of Rent....................................................................22
8.4 Damage Near End of Term and Extensive Damage.........................................22
8.5 Landlord's Insurance.................................................................23
8.6 Insurance Proceeds...................................................................23
IX. EMINENT DOMAIN..................................................................................23
9.1 Eminent Domain.......................................................................23
X. INDEMNITY AND INSURANCE.........................................................................23
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
10.1 Indemnity..................................................................................23
10.2 Waiver.....................................................................................24
10.3 Tenant's Insurance.........................................................................24
10.4 Increases in Insurance.....................................................................24
10.5 Landlord's Insurance.......................................................................25
XI. ASSIGNMENT AND SUBLETTING.......................................................................25
11.1 Landlord's Consent.........................................................................25
11.2 Permitted Transferee.......................................................................25
11.3 Effect of Sublet...........................................................................25
11.4 Information to be Furnished................................................................25
11.5 Landlord's Election........................................................................25
11.6 Payment upon Sublet........................................................................26
11.7 Fees for Review............................................................................26
11.8 Executed Counterparts......................................................................26
11.9 Transfers Comprising Sublets...............................................................26
XII. DEFAULT..........................................................................................27
12.1 Tenant's Default...........................................................................27
12.2 Remedies upon Tenant's Default.............................................................27
12.3 Landlord's Right to Perform Tenant's Covenants.............................................28
XIII. SECURITY DEPOSIT................................................................................29
13.1 Security Deposit...........................................................................29
XIV. SURRENDER OF PREMISES............................................................................29
14.1 Surrender..................................................................................29
XV. HOLDING OVER......................................................................................29
15.1 Holding Over...............................................................................29
XVI. ACCESS TO PREMISES...............................................................................30
16.1 Access to Premises.........................................................................30
XVII. SIGNS...........................................................................................30
17.1 Restrictions and Costs.....................................................................30
XVIII. WAIVER OF SUBROGATION..........................................................................31
18.1 Waiver of Subrogation......................................................................31
XIX. SUBORDINATION....................................................................................31
19.1 Subordinate Nature.........................................................................31
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
19.2 Possible Priority of Lease.................................................................32
19.3 Recognition and Attornment Agreement.......................................................32
XX. TRANSFER OF LANDLORD'S INTEREST...................................................................32
20.1 Transfer of the Project....................................................................32
XXI. ESTOPPEL CERTIFICATES............................................................................32
21.1 Estoppel Certificates......................................................................32
XXII. MODIFICATION FOR LENDERS........................................................................32
22.1 Modification for Lenders...................................................................32
XXIII. ATTORNEY'S FEES................................................................................33
23.1 Attorneys' Fees............................................................................33
XXIV. BROKERS.........................................................................................33
24.1 Tenant's Warranty..........................................................................33
24.2 Indemnity..................................................................................33
XXV. PARKING..........................................................................................33
25.1 Parking....................................................................................33
XXVI. UTILITIES AND SERVICES..........................................................................34
26.1 Tenant's Responsibility....................................................................34
26.2 Telecommunications, Risers and Cabling.....................................................34
XXVII. NAMES OF PROJECT AND BUILDING..................................................................34
27.1 Revision of Names..........................................................................34
27.2 Use of Names...............................................................................34
XXVIII. MEMORANDUM OF LEASE...........................................................................34
28.1 Recording..................................................................................34
28.2 Quitclaim..................................................................................35
XXIX. NOTICES.........................................................................................35
29.1 Notices....................................................................................35
XXX. LIABILITY OF LANDLORD............................................................................35
30.1 Landlord's Exculpation.....................................................................35
XXXI. LIGHT, AIR AND VIEW.............................................................................35
31.1 Additional Structures......................................................................35
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
XXXII. RULES AND REGULATIONS..........................................................................35
32.1 Rules and Regulations......................................................................35
XXXIII. RIGHT OF FIRST OFFER..........................................................................36
33.1 Right of First Offer.......................................................................36
XXXIV. GENERAL........................................................................................36
34.1 Captions...................................................................................36
34.2 Time.......................................................................................36
34.3 Severability...............................................................................36
34.4 Choice of Law; Construction................................................................36
34.5 Gender; Singular, Plural...................................................................36
34.6 Binding Effect.............................................................................37
34.7 Waiver.....................................................................................37
34.8 Entire Agreement...........................................................................37
34.9 Waiver of Jury Trial.................................................................37
34.10 Counterparts.........................................................................37
34.11 Exhibits.............................................................................37
34.12 Third Party Beneficiaries............................................................37
</TABLE>
Exhibits
Exhibit A - Diagram of Premises
Exhibit B - Diagram of Basement Space
Exhibit C - Diagram of Project
Exhibit D - Initial Improvement of the Premises
Exhibit E - Term Commencement Memorandum
Exhibit F - Subordination, Non-Disburbance and Attornment Agreement
Exhibit G - H-P Exclusive Parking Area
<PAGE> 7
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
DATE: June 1, 1999
LANDLORD: RIDGEVIEW COURT ASSOCIATES, L.L.C.,
a Delaware limited liability company
TENANT: CIENA CORPORATION,
a Delaware corporation
PREMISES: See Exhibit A, Exhibit B, and
Section 1
APPROXIMATE RENTABLE AREA: One Hundred Eight Thousand Seven
Hundred Fifty-One (108,751)
rentable square feet of space in
Building 3 (53,510 on 1st floor
and 55,241 on 2nd floor), and
seven thousand (7,000) rentable
square feet of basement storage
space in Building 2
BUILDINGS IN WHICH PREMISES LOCATED: Building 3 and basement storage
space in Building 2; See Section
1
PROJECT: 10500-A Ridge View Court (See
Exhibit D)
USE: General office use; research and
development; and light
manufacturing of products
TERM: Ten (10) years
ANTICIPATED COMMENCEMENT DATE: October 25, 1999 (See Section
3.1)
OPTION TO EXTEND: One (1) extension option of five
(5) years
</TABLE>
<PAGE> 8
BASE RENT: Lease Year Monthly Rate
---------- ------------
1 $299,065
2 308,037
3 317,278
4 326,797
5 336,600
6 346,699
7 357,099
8 367,812
9 378,847
10 390,212
<TABLE>
<S> <C>
SECURITY DEPOSIT: Two Hundred Ninety Thousand
Dollars ($290,000.00)
ADDRESS FOR NOTICES:
LANDLORD: Ridgeview Court Associates, L.L.C.
c/o Vintage Properties
314 Lytton Avenue, Suite 200
Palo Alto, CA 94301
Attn: Joseph R. Seiger
TENANT: Ciena Corporation
1201 Winterson Road
Linthicum, MD 21090
Attn: Joseph Chinnici, Chief
Financial Officer
Exhibit A - Diagram of Premises
EXHIBITS: Exhibit B - Diagram of Basement Space
Exhibit C - Diagram of Project
Exhibit D - Initial Improvements
to Premises
Exhibit E - Term Commencement Memorandum
Exhibit F - Subordination,
Non-Disturbance and
Attornment Agreement
Exhibit G - H-P Exclusive Parking Area
</TABLE>
<PAGE> 9
LEASE
THIS LEASE is made and entered into as of June 1, 1999, by and between
RIDGEVIEW COURT ASSOCIATES, L.L.C., a Delaware limited liability company
("Landlord"), and CIENA CORPORATION, a Delaware corporation ("Tenant").
IN CONSIDERATION of the foregoing and of the mutual covenants set
forth herein, the parties agree as follows:
I. PREMISES
I.1 DESCRIPTION. Landlord leases to Tenant, and Tenant leases from
Landlord, the Premises described in the Basic Lease Information, together with
the right in common with the other occupants of the Project to use the Project
Common Areas (as hereinafter defined). The Premises are shown on Exhibit A,
attached hereto. The rentable area of the Premises shall be deemed to be that
stated in the Basic Lease Information. The Premises include approximately seven
thousand (7,000) square feet of storage space in the basement of Building 2
("Basement Space"). The Basement Space is shown on Exhibit B, attached hereto.
The Basement Space is not included in the definition of the "Premises" for the
purposes of calculating Tenant's Project Percentage Share. Tenant shall have
access to the Basement Space pursuant to the common access areas shown on
Exhibit B, attached hereto, which common access areas shall be included within
the Project Common Areas. For all purposes of this Lease, the Approximate
Rentable Square Footage for each portion of the Premises (e.g., Building 3 and
the Basement Space in Building 2) stated in the Basic Lease Information shall
be deemed to be the actual rentable square footage of the applicable portion.
I.2 Condition of Premises. Subject to Landlord's obligations with
respect to the initial improvement of the Premises and the structural condition
of Building 3 as set forth in Exhibit D, Tenant acknowledges that by taking
possession of the Premises, the Premises shall be deemed to have been delivered
to Tenant with the Premises and all building systems, including, but not
limited to, HVAC, plumbing and electrical, roofs, and all parking areas in good
working order and repair, and in compliance with all applicable laws, codes and
ordinances, including the requirements of the Americans with Disabilities Act,
42 U.S.C. Section 12101 et seq. ("ADA"), in effect on the Commencement Date.
TENANT ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY AGENT OF LANDLORD HAS MADE
ANY REPRESENTATION OR WARRANTY (EXPRESS OR IMPLIED) WITH RESPECT TO THE
PREMISES, THE BUILDINGS, THE PROJECT, OR ANY PORTION THEREOF OR WITH RESPECT TO
THE SUITABILITY OF ANY OF THEM FOR THE CONDUCT OF TENANT'S BUSINESS, AND TENANT
SHALL RELY SOLELY ON TENANT'S OWN INSPECTION AND EXAMINATION OF THE PREMISES,
THE BUILDINGS AND THE PROJECT. Subject to the performance by Landlord of its
obligations under Exhibit D relating to the initial improvement of the
Premises, Tenant shall accept the Premises in its "as-is" condition as of the
Commencement Date.
II. DEFINITIONS
The following definitions, which are in addition to the
definitions which appear in other locations within this Lease, shall be
applicable to this Lease.
II.1 BUILDINGS/BUILDING. The term "Buildings" shall mean the buildings
within the Project, consisting of three (3) inter-connected, two-story
buildings (including a two-story link between two (2) of the buildings). The
Buildings, which are shown on Exhibit C to this Lease, are referred to as: (i)
Building 1; (ii) Building 2; and (iii) Building 3. The term "Building" shall
mean any one (1) of the Buildings.
<PAGE> 10
II.2 CC&R'S. The term "CC&Rs" shall mean the Declaration of Covenants,
Conditions and Restrictions for Ridgeview Court Business Park dated August 12,
1981, recorded in Book 6271 OR, Page 662 of Official Records of the County of
Santa Clara, as amended from time to time.
II.3 EFFECTIVE DATE. The term "Effective Date" shall mean the date of
this Lease.
II.4 INTEREST RATE. The term "Interest Rate" shall mean the rate which
is the lesser of (a) the prime or reference rate reported from time to time by
The Wall Street Journal or its successor as a national business daily
newspaper, as the prevailing rate for short term commercial loans, plus four
percent (4%) per annum, or (b) the maximum rate permitted by law.
II.5 LAND. The term "Land" shall mean the real property more
particularly described in the exhibit to the form of Subordination,
Non-Disturbance and Attornment Agreement attached hereto as Exhibit F, which
consists of approximately twelve and 54/100 (12.54) acres and upon which the
Project and the Buildings are located.
II.6 LEASE YEAR. The term "Lease Year" shall mean the twelve (12)
month period commencing on the Commencement Date, if such day is the first day
of the month, otherwise commencing on the first day of the calendar month
following the Commencement Date, and ending on the last day of the calendar
month twelve (12) months thereafter.
II.7 PERMITTED TRANSFEREE. The term "Permitted Transferee" shall mean
(i) a subsidiary, affiliate, division or corporation controlling, controlled by
or under common control with Tenant, (ii) a successor corporation related to
Tenant by merger, consolidation, nonbankruptcy reorganization or government
action, which has a net worth at least equal to the net worth of Tenant prior
to the merger, consolidation, nonbankruptcy reorganization or government
action, or (iii) a purchaser of all or substantially all of Tenant's assets as
a going concern.
II.8 PROJECT. The term "Project" shall mean the project, presently
known as "10500 Ridgeview Court", consisting of the Land, Buildings and the
Project Common Areas. Tenant acknowledges that Landlord shall have the right,
in its sole discretion, from time to time during the Term (including any
extensions) to reconfigure the Project in any way including expanding or
reducing the area of any Building and transferring one or more of the Buildings
such that the transferred Building or Buildings is or are no longer part of the
Project. Notwithstanding the foregoing, Landlord shall not make any change in
the configuration of the improvements consisting of the project which
permanently obstruct Tenant's access to the Premises or the visibility of
Tenant's signage at the Project entrance or from the I-280 freeway.
II.9 PROJECT COMMON AREAS. The term "Project Common Areas" shall mean
the areas and facilities within the Project provided and designated by Landlord
from time to time for the general use, convenience or benefit of Tenant and
other tenants and occupants of the Project, subject to the exclusive parking
rights over those portions of the Project identified with shading on Exhibit G
to Hewlett-Packard Company under its lease dated April 30, 1996 for Buildings 1
and 2. The Project Common Areas shall include the common access areas within a
Building, landscape areas, and similar areas and facilities designated as
Project Common Areas by Landlord.
II.10 PROPERTY. The term "Property" shall mean the legal parcel or
parcels upon which the Buildings are located. As of the date of this Lease, the
Property consists of the Land. Landlord shall have the right, at any time and
in its sole discretion, to subdivide the Land into two (2) or more new and
separate parcels. After the subdivision, the "Property" shall be the parcel(s)
upon which the Buildings which are then subject to this Lease are located.
II.11 TENANT'S PROJECT PERCENTAGE SHARE. The term "Tenant's Project
Percentage Share" initially shall be determined by dividing the rentable square
footage of the Premises by the rentable square footage of the Project.
<PAGE> 11
The rentable square footage of the Project is two hundred forty-six thousand
seven hundred fifty-one (246,751) rentable square feet (i.e., the sum of the
rentable square footage of all three (3) of the Buildings). The rentable square
footages of the Buildings as of the date of this Lease are (i) Building 1:
seventy-four thousand one hundred thirty-five (74,135) rentable square feet;
(ii) Building 2: sixty-three thousand eight hundred sixty-five (63,865)
rentable square feet; and (iii) Building 3: one hundred eight thousand seven
hundred fifty-one (108,751) rentable square feet. Tenant's Project Percentage
Share as of the date of this Lease is forty-four percent (44%). Tenant's
Project Percentage Share shall be revised if Tenant leases additional space
within the Project or if the rentable square footage of any Building changes.
III. TERM
III.1 LEASE TERM AND COMMENCEMENT. The Term of this Lease shall
commence on the "Commencement Date" which shall be one hundred twelve (112)
days following the date that Landlord delivers possession of the Premises to
Tenant with a sufficient portion of Landlord's Work under Exhibit D completed
so that Tenant may commence and thereafter continue construction of the Tenant
Improvements without material delay or impediment due to the incompletion of
Landlord's Work or the activities of Landlord's contractor, or (ii) the date
Tenant commences business operations within the Premises and, unless terminated
on an earlier date in accordance with the terms of this Lease, shall extend for
ten (10) years (the "Term"). The date upon which this Lease is to expire is
hereinafter referred to as the "Expiration Date." Within ten (10) days
following the Commencement Date Tenant shall execute and deliver to Landlord a
Term Commencement Memorandum in the form of Exhibit E.
III.2 OPTION TO EXTEND TERM. Subject to the terms of this Article
III, Tenant shall have an option (the "Extension Option") to extend the Term of
this Lease for an extension term (the "Extension Term") of five (5) years.
III.3 CONDITIONS TO EXERCISE. Tenant's option to exercise the
Extension Option shall be conditioned upon (i) there not being an uncured Event
of Default as of the date Tenant (or the Permitted Transferee exercising the
Extension Option) desires to exercise the Extension Option and on the date the
Extension Term is to commence; (ii) Tenant not having subleased for
substantially all of the remainder of the Term more than fifty percent (50%) of
the Premises at any time during the initial Term; and (iii) Tenant not having
caused or permitted by those under its control the release or discharge of any
Hazardous Materials in violation of applicable laws and regulations, which
violation continues to exist as of the date of exercise.
III.4 TERM OF EXTENSION OPTION. Subject to the provisions of
Section 3.3, Tenant shall have the right to extend the term of this Lease as to
all (but not less than all) of the Premises subject to this Lease as of the
expiration of the initial term for one (1) period of five (5) years, commencing
on the Expiration Date. If Tenant elects to extend this Lease for the Extension
Term, Tenant shall give unequivocal written notice ("Extension Term Exercise
Notice") of its exercise to Landlord not less than twelve (12) months prior to
the Expiration Date. Tenant's failure to give the Extension Term Exercise
Notice in a timely manner shall be deemed a waiver of all of Tenant's rights to
extend. The terms, covenants and conditions applicable to the Extension Term
shall be all of the terms, covenants and conditions of this Lease, except that
(i) Tenant shall not be entitled to any further option to extend; (ii) the Base
Rent for the Premises shall be the greater of (A) the Base Rent in effect as of
the First Extension Option Expiration Date, or (B) ninety-five percent (95%) of
the fair market rent as of the commencement of the Extension Term.
III.5 FAIR MARKET RENT. Regardless of how long before the scheduled
expiration of the Term Tenant gives an Extension Term Exercise Notice to
Landlord, Landlord shall not be obligated to commence the process of
determining fair market rental value until eighteen (18) months prior to the
Expiration Date. Landlord and Tenant shall have thirty (30) days after Landlord
receives an Exercise Notice in which to agree on the fair market rental value
of the Premises during the Extension Term. In determining the fair market
rental value of the Premises during
<PAGE> 12
an Extension Term, consideration shall be given to (A) the uses of the Premises
permitted under this Lease; (B) the quality, size, design and location of the
Premises (including the Basement Space and the Tenant Equipment Pad Area); (C)
the rental value of comparable, improved space located in the geographical area
of the Project used for general office use, research and development and
manufacturing of products; (D) any scheduled or indexed increases in base rent
and any free rent and other concessions then being given which are then
prevalent in the market. If Landlord and Tenant agree on the fair market rental
value of the Premises for the Extension Term during the thirty (30) day period,
they shall immediately execute an amendment to this Lease stating the Base
Rent. If Landlord and Tenant are not able to agree on the fair market rental
value for the Premises during the Extension Term during the thirty (30) day
period, the matter shall be determined by the appraisal procedure set forth in
Section 3.6.
III.6 APPRAISAL PROCESS
(a) Selection of Appraisers. If Landlord and Tenant are unable to
agree on the fair market rental value of the Premises for the Extension Term
within the thirty (30) day period specified in Section 3.5; then, within ten
(10) days after the expiration of the thirty (30) day period, Landlord and
Tenant each, at its cost and by giving notice to the other party, shall appoint
a competent and disinterested real estate appraiser with at least ten (10)
years full-time commercial appraisal experience in the geographical area of the
Project (i.e., within a twenty-five (25) mile radius of the Project) to
appraise and set the fair market rental value of the Premises during the
Extension Term. If either Landlord or Tenant does not appoint an appraiser
within ten (10) days after the other party has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser and shall
set the fair market rental value of the Premises during the Extension Term. If
two (2) appraisers are appointed by Landlord and Tenant as stated in this
Section, they shall meet promptly and attempt to set the fair market rental
value of the Premises for the Extension Term. If the two (2) appraisers are
unable to agree within thirty (30) days after the second appraiser has been
appointed, they shall attempt to select a third appraiser meeting the
qualifications stated in this Section within ten (10) days after the last day
the two (2) appraisers are given to set the fair market rental value of the
Premises. If they are unable to agree on the third appraiser, either Landlord
or Tenant, by giving ten (10) days' notice to the other party, can apply to the
then President of the Real Estate Board of Santa Clara County or to the
Presiding Judge of Santa Clara Superior Court, for the selection of a third
appraiser (the "Independent Appraiser") who meets the qualifications stated in
this Section. Landlord and Tenant each shall bear one-half ( 1/2) of the cost
of appointing the third appraiser and of paying the Independent Appraiser's
fee. The Independent Appraiser, however selected, shall be a person who has not
previously acted in any capacity for either Landlord or Tenant.
(b) Value Determined by Independent Appraiser. Within thirty (30)
days after the selection of the Independent Appraiser, each of Tenant's
appraiser and Landlord's appraiser shall deliver to the Independent Appraiser
its determination of fair market rental value. Within ten (10) days after its
receipt of the determinations of Landlord's appraiser and Tenant's appraiser,
the Independent Appraiser shall determine which of either the determination of
Landlord's appraiser of Tenant's appraiser most closely approximates the
Independent Appraiser's determination of the fair market rental value. If
within the time required, either Landlord's appraiser or Tenant's appraiser
does not deliver its determination to the Independent Appraiser, the fair
market rental value shall be deemed to be that set forth in the determination
which is timely delivered.
(c) Notice to Landlord and Tenant. After the fair market rental
value of the Premises for the Extension Term has been set, the appraisers
immediately shall notify Landlord and Tenant. Landlord and Tenant then
immediately shall execute an amendment to this Lease stating the Base Rent
during the Extension Term.
III.7 CANCELLATION OF EXERCISE. At any time following its exercise
of an Extension Option but no later than nine (9) months prior to the
then-scheduled expiration of the term, and provided that Tenant has received
from
<PAGE> 13
Landlord an estimate of the fair market rental value prior to such date, Tenant
may cancel its exercise of an Extension Option by notice to Landlord.
Thereafter and within thirty (30) days of Landlord's request, Tenant shall
reimburse Landlord for all of its out-of-pocket expenses incurred in connection
with the appraisal process.
IV. RENT
IV.1 RENT. As used in this Lease, the term "Rent" shall include:
(i) the Base Rent (as stated in the Basic Lease Information); (ii) Tenant's
Project Percentage Share of Project Operating Expenses paid or incurred by
Landlord during the Term (including all extensions) of this Lease; (iii)
Tenant's Project Percentage Share of Taxes paid or incurred during the Term
(including all extensions) of this Lease; and (iv) all other amounts which
Tenant is obligated to pay under the terms of this Lease. All amounts of money
payable by Tenant to Landlord shall be paid without prior notice or demand,
deduction or offset. Any amount which is not paid when due shall bear interest
from the date due until the date paid at the Interest Rate. If any installment
of Rent is not received by Landlord when due, and then is not received within
five (5) days following the giving of notice by Landlord to Tenant, Tenant
shall pay to Landlord a late charge as liquidated damages equal to five percent
(5%) of the overdue amount; provided that such late charge shall be payable,
without any notice to Tenant, upon Tenant's failure to pay Rent when due, when
notice previously has been given, more than one time in any twelve (12) month
period.
IV.2 BASE RENT. Tenant shall pay Base Rent to Landlord (or other
entity designated by Landlord), in advance, on the first day of each calendar
month of the Term, at Landlord's address for notices (as set forth in the Basic
Lease Information) or at such other address as Landlord may designate. The Base
Rent shall be the amount set forth in the Basic Lease Information.
Notwithstanding the foregoing, from the period from the Commencement Date and
continuing until January 1, 2000, Tenant shall be obligated only to pay Base
Rent and its Project Percentage Share of Project Operating Expenses and Taxes
which are attributable to the rentable area of the first floor of the Premises,
i.e., Base Rent of $147,152.50 per month and a Project Percentage Share of
21.69%. In addition, if and to the extent that Landlord's delivery of the
Premises as required under Section 3.1 is delayed beyond July 5, 1999 and such
delay causes a delay in the completion of Tenant's Work as described in Exhibit
D and as documented by Tenant, there shall be an abatement of Tenant's
obligation to commence payment of Base Rent and Tenant's Project Percentage
Share of Project Operating Expenses and Taxes during the period of such delay
and a delay in Tenant's obligation of two (2) additional days for each one (1)
day of such delay.
IV.3 ADDITIONAL RENT--ANNUAL RENT ADJUSTMENTS/OPERATING EXPENSES
(a) Project Operating Expenses. The term "Project Operating
Expenses" shall mean the costs and expenses of the Project which Landlord
determines should be charged to the Project (in general). The Project Operating
Expenses shall include (i) Landlord's direct costs and expenses of operation,
management, repair and maintenance of the Project and supporting facilities,
consisting of those portions of the Project and supporting facilities which are
not Tenant's responsibility under this Lease, as determined by Landlord in
accordance with generally accepted accounting principles or other recognized
accounting principles, consistently applied; (ii) management fees or a
management cost recovery in an amount not to exceed two percent (2%) of gross
revenues from the Project; (iii) costs properly allocable to the Project of any
capital improvements made to the Project by Landlord (whether structural or
non-structural) for upgrading services, for replacing worn-out equipment,
paving and other portions of the Project which are not required to be
maintained by tenants, or that are required under any governmental law or
regulation (including Americans with Disabilities Act), the costs, or allocable
portion thereof, to be amortized over such reasonable period as Landlord shall
reasonably determine based upon the useful life of such improvements, together
with interest upon the unamortized balance at the rate as may be paid by
Landlord on funds borrowed for the purpose of constructing such capital
improvements or, if not borrowed, at ten percent (10%) per annum (provided,
however, that Tenant shall be responsible for and shall pay in the year
incurred by Landlord, one hundred percent (100%) of the costs, without
amortization of any capital improvements made to the Project by Landlord, that
are required under any governmental law or regulation to the extent that the
capital improvements are required as a result of use of the Premises by Tenant
for any purpose other than general office use
<PAGE> 14
or as a result of any alterations of or improvements to the Premises or any
other portion of the Project made by Tenant); and (iv) the cost of insurance
carried by Landlord with respect to the Project, including any rental
interruption insurance carried by Landlord. At Landlord's election, the
insurance for the Project may include earthquake and environmental impairment
coverage (with the premium for the earthquake and environmental impairment
coverage to be included in the Project Operating Expenses). If Landlord
includes the Project under blanket insurance polices covering multiple
properties, the term "Project Operating Expenses" shall include the portion of
costs of such blanket insurance allocable by Landlord to the Project. If less
than ninety-five percent (95%) of the rentable area of the Project is occupied,
Project Operating Expenses shall be adjusted to equal Landlord's reasonable
estimate of Project Operating Expenses if ninety-five percent (95%) of the
total rentable area of the Project were occupied.
(b) Exclusion from Operating Expenses. "Project Operating
Expenses" shall not include, and Tenant shall in no event have any obligation
to perform or to pay directly to, or reimburse Landlord for, the following: (i)
costs for items which Landlord reasonably determines should be capitalized
under standard accounting practices, except as provided in clauses 4.3(a)(ii)
and (iv), to the extent amortized over the cost recovery period of the capital
item in question; (ii) costs of any renovations, improvement, painting or
redecorating of any portion of the interiors of the Buildings not made
available for Tenant's use; (iii) costs incurred in connection with negotiation
of disputes with any other occupant of the Project and costs arising from the
violation by Landlord or any other occupant of the Project of the terms and
conditions of any lease or other agreement; (iv) any repair or other work
necessitated by condemnation, fire or other casualty; (v) any costs, fines and
the like due to Landlord's violation of any governmental rule or authority
(except to the extent caused by Tenant's violations); (vi) costs regarding the
presence of Hazardous Substances or Hazardous Wastes within the Project, except
that Tenant shall be responsible, in accordance with the terms of Section 10,
for one hundred percent (100%) of such costs to the extent resulting from
releases, spills or discharges of Tenant or its employees, agents, contractors
or invitees; and (vii) services, benefits or both provided to some tenants of
the Project but not to Tenant; (viii) the costs of capital improvements made to
the Project by Landlord that are required as the result of the use of any other
portion of the Project by another tenant for any purpose other than general
office use or as a result of any alterations of or improvements to any other
portion of the Project made by or for another tenant; (ix) interest or rent
paid to any lender or a ground lessor; (x) brokerage commissions, advertising
costs or other related expenses received by Landlord in connection with the
leasing of space to individual tenants of the Building; (xi) alterations,
additions, improvements or replacements required to correct any physical
defects in the Building or the Project Common Areas; (xii) damage and repairs
necessitated by the gross negligence or willful misconduct of Landlord, its
employees, contractors or agents; (xiii) executive salaries or salaries of
service personnel of Landlord or its property manager to the extent that such
personnel perform services not in connection with the management, operation,
repair or maintenance of the Building; (xiv) Landlord's general overhead
expenses not related to the Building; (xv) legal fees, accountants' fees and
other expenses incurred in the defense of Landlord's title to or interest in
the Building or any part thereof; (xvi) costs incurred due to a violation by
Landlord or any other tenant of the Building of the terms and conditions of a
lease; (xvii) costs of any service provided to Tenant or other occupants of the
Building for which Landlord is reimbursed; (xviii) premiums for earthquake
insurance to the extent such premiums for the Project exceed One Hundred
Fifty-Six Thousand Dollars ($156,000) per year (as increased as of each
anniversary of the Commencement Date in proportion with increases in the San
Francisco Bay Area, all consumers, all items, Consumer Price Index as published
by the U.S. Department of Labor) unless Landlord is required to maintain such
insurance under the terms of any documents securing a loan which is secured by
the Project; and (xix) costs and fees for professional services incurred in
reviewing alterations proposed by other tenants of the Project.
(c) Annual Operating Expenses Estimate. During December of each
calendar year during the Term (and any extensions), or as soon thereafter as
practicable, Landlord shall give Tenant written notice of Landlord's reasonable
estimate ("Annual Operating Expenses Estimate") of the amount of Project
Operating Expenses which will be payable by Tenant for the ensuing calendar
year. On or before the first day of each month during the ensuing calendar
year, Tenant shall pay to Landlord one-twelfth (1/12th) of the Annual Operating
Expenses
<PAGE> 15
Estimate; provided, however, that if notice is not given in December, Tenant
shall continue to pay on the basis of the then applicable Annual Operating
Expenses Estimate until the month after the notice is given. If at any time it
reasonably appears to Landlord that the amount payable for the current calendar
year will vary from Landlord's Annual Operating Expenses Estimate by more than
five percent (5%), Landlord may give notice to Tenant of Landlord's revised
Annual Operating Expenses Estimate for the year, and subsequent payments by
Tenant for the year shall be based on the revised Annual Operating Expenses
Estimate.
(d) Annual Operating Expenses Reconciliation. Within sixty (60)
days after the close of each calendar year of the Term (and any extensions), or
as soon after the sixty (60) day period as practicable, Landlord shall deliver
to Tenant a statement ("Annual Operating Expenses Statement") of the
reconciliation of the Project Operating Expenses for the prior calendar year.
If, on the basis of the Annual Operating Expenses Statement, Tenant owes an
amount that is less than the Annual Operating Expenses Estimate payments for
the calendar year previously made by Tenant, Landlord shall apply the excess to
the next payment(s) of Annual Operating Expenses Estimate due or, if the Lease
has expired, promptly refund such overpayment to Tenant. If, on the basis of
the Annual Operating Expenses Statement, Tenant owes an amount that is more
than the Annual Operating Expenses Estimate payments for the calendar year
previously made by the Tenant, Tenant shall pay the deficiency to Landlord
within thirty (30) days after delivery of the Annual Operating Expenses
Statement. An Annual Operating Expenses Statement shall be presumed correct and
shall be deemed final and binding upon Tenant unless Tenant in good faith
objects in writing thereto within two (2) years and three (3) months after
delivery of the Annual Operating Expenses Statement to Tenant (which writing
shall state, in reasonable detail, all of the reasons for the objection).
(e) Audit of Project Operating Expenses and Taxes.
(i) Tenant and its authorized representatives may, upon
at least fifteen (15) days prior notice to Landlord, examine, inspect, audit
and copy the records of Landlord regarding each such statement of Annual
Operating Expenses and Annual Taxes Statement at Landlord's or its agent's or
accountant's office during normal business hours within two (2) years after the
furnishing of a particular statement. Unless Tenant takes written exception to
any item on such statement within sixty (60) days after the commencement of any
such audit, the statement shall be considered as final and accepted by Tenant
except that Landlord may, at any time during that 60-day period, submit a
corrected statement to Tenant if Annual Operating Expenses or Taxes on the
original statement were overstated or understated.
(ii) The payment by Tenant of the amounts shown on any
statement of Total Operating Expenses or Taxes shall not preclude Tenant from
questioning the correctness of any item of the statement subject to the rights
in this Article. There shall be no more than one (1) audit of Total Operating
Expenses or Taxes for any twelve (12) month period. Landlord may defer the
audit for up to thirty (30) days while Landlord is closing its books, is
preparing financial statements or tax returns, or for other reasons is
anticipating unusual demands on its accounting office and personnel. Upon
completion of the audit, Tenant shall forward to Landlord a copy of the audit
report and all accompanying data and work papers available to Tenant relating
thereto.
(iii) To facilitate an audit by Tenant, Landlord shall
keep its books and records applicable to Total Operating Expenses and Taxes for
any particular fiscal year for two (2) years after the statement for such
fiscal year is delivered to Tenant. Notwithstanding the foregoing, if a dispute
arises as to any item of Operating Expenses or Taxes after an audit conducted
by Tenant in accordance with the terms and conditions of this Section 4.3(f),
then Landlord shall keep its books and records applicable to such item or items
in dispute until one (1) year after the resolution of any such dispute.
(iv) Tenant shall diligently complete (or to abandon) any
audit begun by Tenant. Tenant shall pay all costs of the audit, unless the
audit reveals that Project Operating Expenses taken as a whole for any fiscal
year were overstated by three percent (3%) or more. In that event, Landlord
shall pay for the reasonable costs of
<PAGE> 16
that audit. Pending resolution of any disputes regarding Project Operating
Expenses or Taxes, Tenant shall pay to Landlord any Project Operating Expenses
and Taxes alleged to be due from Tenant as reflected on Landlord's statement or
any invoice issued on the basis of Landlord's statement. Landlord shall
promptly refund to Tenant any amounts overpaid by Tenant as determined by an
audit.
(v) Tenant's right of audit is subject to the following
conditions: (1) the audit shall be done by an independent certified accountant
experienced in auditing such records, and in no event shall the auditor or any
other person directly or indirectly involved in the audit (collectively with
the auditor, an "Auditor-Related Person") be compensated pursuant to a
commission or other arrangement pursuant to which the nature or extent of fees
or other compensation is dependent upon the results of the audit; (2) in no
event shall any Auditor-Related Person solicit or otherwise communicate to any
other tenant or occupant of Landlord in any manner which discloses that Tenant
has a right to audit the records of Landlord, or that Tenant or the
Auditor-Related Person is planning to or has audited Landlord's records; (3)
Tenant and each Auditor-Related Person shall keep confidential and shall not
disclose that any audit hereunder is to be or has been conducted or the results
thereof, except to the extent that disclosure in confidence to its accountants
is necessary in connection with the performance of an audit, and except as may
be required by law; (4) at Landlord's request, prior to commencement of the
audit, Tenant and each Auditor-Related Person shall sign and deliver to
Landlord written assurances of compliance with the matters set forth in clauses
(1) through (3) above; and (5) Tenant's right to audit as provided above shall
be available to Tenant only on condition that an Event of Default shall not
then exist.
(vi) Tenant's audit rights under this paragraph 4.3(e)
may not be exercised by any subtenant.
IV.4 ADDITIONAL RENT--ANNUAL RENT ADJUSTMENTS/TAXES.
(a) Taxes. Tenant shall pay as Rent, Tenant's Project Percentage
Share of Taxes paid or incurred by Landlord during the Term.
(b) Real Property Taxes. The term "Real Property Taxes" shall
mean any ordinary or extraordinary form of tax, special tax, assessment or
special assessment, license fee, rent tax, business license tax, gross receipts
tax, levy, penalty (if a result of Tenant's delinquency) imposed by any
authority having the direct or indirect power to tax, or by any city, county,
state or federal government for any maintenance or improvement or other
district or division thereof against or related to the Premises, Buildings,
Property and/or Project. Notwithstanding anything to the contrary, "Real
Property Taxes" shall not include net income, premium, estate, succession,
inheritance, transfer or franchise taxes. The term shall include all transit
charges, housing fund assessments, real estate taxes and all other taxes
relating to the Premises, Buildings, Property and/or Project, all other taxes
which may be levied in lieu of real estate taxes, all assessments, assessment
bonds, levies, fees, and other governmental charges (including charges for
traffic facilities, improvements, child care, water services studies and
improvements, and fire services studies and improvements) or amounts necessary
to be expended because of governmental orders, whether general or special,
ordinary or extraordinary, unforeseen as well as foreseen, of any kind and
nature for public improvements, services, benefits or any other purposes which
are assessed, levied, confirmed, imposed or become a lien upon the Premises,
Building, Property or Project or become payable during the Term (including any
extensions) in connection with the ownership, operation, use or rental of the
Project, including the revenues received by Landlord therefrom. "Taxes" shall
also include any fees and other out-of-pocket expenses reasonably incurred by
Landlord in appealing and contesting the assessed value upon which Real
Property Taxes are calculated. The term "Taxes" shall not include any tax or
assessment expense or any increase therein (i) in excess of the amount which
would be payable if such tax or assessment were paid in installments over the
longest possible term or (ii) imposed on land and improvements other than the
Project.
(c) Annual Taxes Estimate. During December of each calendar year
during the Term (and any extensions), or as soon thereafter as practicable,
Landlord shall give Tenant written notice of Landlord's reasonable
<PAGE> 17
estimate ("Annual Taxes Estimate") of the amount of Real Property Taxes which
will be payable by Tenant for the ensuing calendar year. On or before the first
day of each month during the ensuing calendar year, Tenant shall pay to
Landlord one-twelfth (1/12th) of the Annual Taxes Estimate; provided, however,
that if notice is not given in December, Tenant shall continue to pay on the
basis of the then applicable Annual Real Property Taxes Estimate until the
month after the notice is given. If at any time it reasonably appears to
Landlord that the increased amount payable for the current calendar year will
vary from Landlord's Annual Taxes Estimate by more than five percent (5%),
Landlord may give notice to Tenant of Landlord's revised Annual Taxes Estimate
for the year, and subsequent payments by Tenant for the year shall be based on
the revised Annual Taxes Estimate.
(d) Annual Taxes Reconciliation. Within sixty (60) days after the
close of each calendar year of the Term (and any extensions), or as soon after
the sixty (60) day period as practicable, Landlord shall deliver to Tenant a
statement ("Annual Taxes Statement") of the Taxes for the prior calendar year.
The Annual Taxes Statement shall be final and binding upon Landlord and Tenant.
If, on the basis of the Annual Taxes Statement, Tenant owes an amount that is
less than the Annual Taxes Estimate payments for the calendar year previously
made by Tenant, Landlord shall apply the excess to the next Annual Taxes
Estimate payment(s) due or pay such excess to Tenant, if the Lease has expired.
If, on the basis of the Annual Taxes Statement, Tenant owes an amount that is
more than the Annual Taxes Estimate payments for the calendar year previously
made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30)
days after delivery of the Annual Taxes Statement.
(e) Taxes on Tenant Improvements and Personal Property.
Notwithstanding any other provision hereof, Tenant shall pay the full amount of
any increase in Taxes during the Term resulting from any and all alterations
and improvements, furnishings, equipment and fixtures of any kind whatsoever
placed in, on or about the Premises for the benefit of, at the request of, or
by Tenant. Tenant shall not be liable for any increase in Taxes which results
from alterations, improvements, furnishings, fixtures and equipment placed or
installed by other tenants of the Project. Tenant shall pay, prior to
delinquency, all taxes assessed or levied against Tenant's personal property
in, on or about the Premises. When possible, Tenant shall cause its personal
property to be assessed and billed separately from the real or personal
property of Landlord.
(f) Tenant's Right to Contest. Upon Tenant's request, Landlord
shall pay Taxes under protest and, at its expense, Tenant may cause the
assessed values upon which Taxes are calculated to be contested, subject to the
following terms and conditions: (i) no Event of Default shall then exist with
respect to Tenant's obligation to pay its Project Percentage Share of Taxes;
(ii) Landlord shall cooperate with Tenant in executing such documents and
taking such other actions as reasonably may be required to prosecute such
contest provided that Tenant shall advance any reasonable out-of-pocket costs
required and Landlord shall not incur any liability as a result; (iii) any
information which Landlord shall disclose to Tenant or its consultants
regarding the Project, including the terms of other leases, shall be held in
strict confidence and only disclosed as previously approved by Landlord; and
(iv) Landlord shall reimburse Tenant for its costs incurred in such contest but
only if and when Landlord realizes savings in Taxes otherwise payable by
Landlord in comparison with the amount of Taxes which otherwise would have been
payable by Landlord.
IV.5 REVISIONS IN BUILDING OR PROJECT. To the extent there are
revisions in the Building (e.g., the rentable square footage of the Building)
or the Project (e.g., the rentable square footage of the Project), Landlord
shall make reasonable revisions in (i) the Project Operating Expenses paid or
incurred by Landlord during the calendar year; (ii) Tenant's Project Percentage
Share; (iii) the Taxes paid or incurred by Landlord in the calendar year; and
(iv) all other amounts which Tenant is obligated to pay under the terms of this
Lease.
IV.6 PRORATION OF RENT. If the Commencement Date is not the first
day of the month, or if the end of the Term is not the last day of the month,
Rent shall be prorated on a monthly basis (based upon a thirty (30) day month)
for the fractional month during which this Lease commences or terminates. The
termination of this Lease
<PAGE> 18
shall not affect the obligations of Landlord and Tenant pursuant to paragraphs
4.3(d) and 4.4(d) which are to be performed after the termination.
V. USE
V.1 USE PERMITTED. Tenant shall use the Premises (exclusive of the
Basement Space) solely for general office use, research and development and
light manufacturing of products, and the Basement Space shall be used solely
for storage purposes, and Tenant shall not use the Premises for any other
purpose without obtaining the prior written consent of Landlord, which consent
Landlord may withhold in its sole and absolute discretion. Tenant shall use the
Basement Space only for the storage of office supplies, equipment, furniture,
files and other materials used in connection with the permitted use of the
Premises, but not for storage of Hazardous Materials. Tenant, at its own
expense, shall comply with all laws, rules, regulations, orders, permits,
licenses and ordinances issued by any governmental authority which relate to
Tenant's use of the Premises during the Term of this Lease and any extensions,
provided that Tenant's compliance obligations regarding Hazardous Substances
and Hazardous Wastes shall be determined pursuant to Section 5.2 through
Section 5.14, and provided that Tenant shall not bring on, store or produce on
the Premises, Hazardous Materials in any quantity which would require Tenant to
prepare a business plan relating to the storage of hazardous or toxic materials
under Health & Safety Code Section 25501, as amended, or any similar law.
Tenant shall not use the Premises in any manner that will constitute waste or
nuisance, or which will interfere with or unreasonably annoy other tenants in
the Buildings or the Project (including using loudspeakers or sound or light
apparatus that can be heard or seen outside the Premises). Additionally, Tenant
shall comply with any Rules and Regulations adopted by Landlord pursuant to
Section 32.1 of this Lease, the requirements of the Board of Fire Underwriters
or any insurance carrier providing insurance with respect to the Premises or
the Project Common Areas, and the CC&R's.
V.2 DEFINITION OF HAZARDOUS SUBSTANCE. The term "Hazardous Substance"
shall mean any toxic or hazardous substance or material or any pollutant or
contaminant including, but not limited to, petroleum and petroleum products,
any and all of those substances included within the definitions of "pollutant,"
"contaminant," "hazardous substances," "hazardous materials," "hazardous
chemical substance or mixture," "imminently hazardous chemical substance or
mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant,"
"chemicals known to cause cancer or reproductive toxicity," or any and all
other similar terms defined in other federal, state and local laws, statutes,
regulations, orders or rules, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq., and the California Carpenter-Presley-Tanner
Hazardous Substance Account Act, California Health & Safety Code Section 25300
et seq., and regulations promulgated thereunder, as amended, and materials
which are, or in the future become, regulated under applicable local, state or
federal law for the protection of health (including industrial hygiene), safety
or the environment, or which are classified as hazardous or toxic substances or
materials, pollutants or contaminants, as defined, listed or regulated by any
federal, state or local law, regulation or order or by common law decision. The
term "Hazardous Waste" shall mean (i) any waste listed as or meeting the
identified characteristics of a "Hazardous Waste" under the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., and
regulations promulgated pursuant thereto, (ii) any waste meeting the identified
characteristics of "Hazardous Waste" under California Hazardous Waste Control
Law, California Health and Safety Code Section 25100 et seq., and regulations
promulgated pursuant thereto (collectively, "CHWCL"), and (iii) any wastes
which are, or in the future become, regulated under applicable local, state or
federal law for the protection of health (including industrial hygiene), safety
or the environment, or which are classified as hazardous, toxic or infectious
wastes, as defined, listed or regulated by any federal, state or local law,
regulation or order or by common law decision. The term "Hazardous Waste
Facility" shall mean a hazardous waste facility as defined under CHWCL.
V.3 COMPLIANCE WITH APPLICABLE LAWS. Tenant, at its sole cost and
expense, shall comply with all applicable laws, rules, regulations, orders,
permits, licenses and operating plans of any governmental authority with
<PAGE> 19
respect to the use, handling, generation, transportation, storage, treatment
and/or disposal of Hazardous Substances or Hazardous Wastes by Tenant as
occupant of the Premises, or its employees, agents, contractors or invitees.
Tenant shall provide Landlord with copies of all permits, registrations or
other similar documents that authorize Tenant to conduct any such activities in
connection with its authorized use of the Premises.
V.4 NO HAZARDOUS WASTE FACILITIES. Tenant shall not operate on the
Premises any facility required to be permitted or licensed as a Hazardous Waste
Facility or for which interim status as such is required. Tenant shall not
perform treatment of Hazardous Substances or Hazardous Wastes on the Premises
which treatment is subject to a conditional exemption, conditional
authorization or permit-by-rule under the CHWCL.
V.5 UNDERGROUND STORAGE TANKS. Tenant shall not construct or install
any underground storage tank within the Project.
V.6 INFORMATION TO BE PROVIDED BY TENANT. Within thirty (30) days
after each anniversary of the Commencement Date, Tenant shall deliver to
Landlord a written report, in a form acceptable to Landlord and prepared at
Tenant's sole cost and expense by an environmental consultant acceptable to
Landlord, certifying that Tenant is in compliance with (i) all applicable laws,
rules, regulations, orders, permits, licenses and operating plans of any
governmental authority with respect to the use, handling, generation,
transportation, storage, treatment and/or disposal of Hazardous Wastes and (ii)
Sections 5.2 through 5.8 of this Lease. In addition, to the extent applicable,
Tenant shall provide to Landlord in writing the following information and/or
documentation prior to or on the Commencement Date and within sixty (60) days
after any change in the required information and/or documentation:
(a) List of Hazardous Substances. A list of all Hazardous
Substances and/or Hazardous Wastes that Tenant uses, handles, generates,
transports, stores, treats or disposes in connection with its operations on the
Premises.
(b) Material Safety Data Sheets. Copies of all Material Safety
Data Sheets ("MSDSs") required to be maintained with respect to operations of
Tenant at the Premises in accordance with Title 8, California Code of
Regulations Section 5194 or 42 U.S.C. Section 11021, or any amendments thereto.
In lieu of this requirement, Tenant may provide a Hazardous Materials Inventory
Sheet that details the MSDSs.
(c) Hazardous Materials Manifest. Copies of all Hazardous Waste
Manifests, as defined in Title 22, California Code of Regulations Section
66481, that Tenant is required to complete in connection with its operations at
the Premises.
(d) Hazardous Materials Management Plans. A copy of any Hazardous
Materials Management Plans required with respect to Tenant's operations.
(e) Contingency Plans and Emergency Procedures. Copies of any
Contingency Plans and Emergency Procedures required of Tenant due to its
operations in accordance with Title 22, Chapter 30, Article 20, of the
California Code of Regulations, and any amendments thereto.
(f) Reports to DTSC. Copies of any biennial reports to be
furnished to California Department of Toxic Substances Control or a local
agency relating to Hazardous Substances or Hazardous Wastes.
(g) Wastewater Permits. Copies of all industrial wastewater
discharge permits.
(h) Notices. Copies of (A) any reports, notices or other
communications made to or received from any governmental agency arising out of
or in connection with any Hazardous Substances or Hazardous Wastes in, on,
under or about the Premises or (B) any claim made or threatened by any person
against Tenant, Landlord or the
<PAGE> 20
Premises relating to damage, contribution, cleanup, removal, cost recovery,
compensation, loss or injury resulting from or claimed to result from any
Hazardous Substance or Hazardous Wastes.
V.7 RADIOACTIVE MATERIALS/RADIATION. Tenant shall not receive, store,
possess, use, transfer or dispose of "Radioactive Materials" or "Radiation," as
such materials are defined in Title 17, California Code of Regulations Sections
30100(w), or materials possessing the characteristics of the materials so
defined.
V.8 ENVIRONMENTAL CONDITION. The generation, presence, use, handling,
storage, treatment, disposal or release of any Hazardous Substance, Hazardous
Waste, Radiation or Radioactive Materials by Tenant or its employees, agents,
contractors or invitees in violation of this Lease or any applicable federal,
state or local law or regulation shall constitute an "Environmental Condition."
In the event an Environmental Condition exists on or about the Premises, Tenant
shall promptly undertake and diligently complete, at its sole cost, and in
strict compliance with all applicable laws, rules, regulations and orders, all
investigative, corrective and remedial measures required to respond to the
Environmental Condition. Such measures shall include, but shall not be limited
to, removal and proper disposal of the Hazardous Substance, Hazardous Waste,
Radiation or Radioactive Material, and restoration of the Premises, land,
improvements and other affected areas so that upon completion of the
investigative, corrective, or remedial measures, the Premises and any other
affected areas shall be in the same or better character and condition as before
the Environmental Condition occurred. Tenant shall notify Landlord in writing
of any Environmental Condition within twenty-four (24) hours after Tenant
becomes aware of such Environmental Condition.
V.9 TENANT'S INDEMNITY. Tenant shall indemnify, defend, and hold
harmless Landlord from any and all claims, losses (including loss of rental
income and loss due to business interruption), damages (including diminution in
value or loss of value of the Premises, liabilities, costs, legal fees, fines,
and expenses of any sort arising out of or relating to any release into the
environment of Hazardous Substances, Hazardous Wastes, Radiation or Radioactive
Materials by Tenant or any of Tenant's employees, agents, contractors or
invitees, or Tenant's failure to comply with Sections 5.1 through 5.8.
V.10 COOPERATION OF TENANT. Tenant shall cooperate with Landlord
in furnishing Landlord with complete information regarding Tenant's receipt,
handling, use, storage, transportation, generation, treatment and/or disposal
of Hazardous Substances, Hazardous Wastes, Radiation or Radioactive Materials.
Upon request, Tenant agrees to grant Landlord access at all times to the
Premises to inspect Tenant's receipt, handling, use, storage, transportation,
generation, treatment and/or disposal of Hazardous Substances, Hazardous
Wastes, Radiation or Radioactive Materials, or to conduct environmental tests
including, without limitation, tests of the soil, surface water and the
groundwater in, on or about the Premises. In exercising its rights under this
Section, Landlord shall make reasonable efforts to minimize interference with
Tenant's business.
V.11 LANDLORD'S APPROVAL. Unless an emergency situation exists
that requires immediate action, Tenant shall obtain Landlord's prior written
approval of all contemplated investigative, corrective or remedial measures
relating to Hazardous Substances at or under the Premises which Tenant may
cause to be undertaken. Such approval shall not be unreasonably withheld.
Examples of measures subject to Landlord's prior approval include the selection
of any environmental consultant or contractor, determination of the scope of
work and sampling activities to be performed by the consultant or any
contractor and the form and substance of all draft reports prepared by any
consultant (before such reports are finalized). Tenant shall provide Landlord
with at least three (3) business days' advance notice of any proposed sampling
and, if Landlord requests, Tenant shall split samples with Landlord. Tenant
shall also promptly provide Landlord with the results of any test,
investigation or inquiry conducted by or on behalf of Tenant in connection with
the presence or suspected presence of Hazardous Substances on or about the
Premises. Tenant shall provide Landlord with reasonable advance notice, and
Landlord shall have the right, but not the obligation, to participate in all
oral or written communications with government entities concerning
Environmental Conditions on or about the Premises. In this connection, Landlord
shall have the
<PAGE> 21
right to retain an environmental engineer or consultant, and Tenant shall
cooperate and provide access to Tenant's operations in the Premises for such
purpose, to monitor any and all of the foregoing activities, including
activities conducted by Tenant on lands which Tenant owns, occupies, uses or
controls other than the Premises, which Environmental Condition subjects or may
subject the Premises to environmental contamination. In addition, if Tenant has
brought on to the Premises, stored thereon or released therefrom Hazardous
Substances in quantities requiring preparation of a business plan or similar
reporting as described in Section 5.1, or if any other investigation of
Tenant's activities by Landlord reveals a violation by Tenant or those under
its control of laws or regulations pertaining to Hazardous Substances, which
violation remains uncorrected, the reasonable cost of any periodic audit of
Tenant's activities shall be reimbursed by Tenant to Landlord within thirty
(30) days of Landlord's request. Landlord's rights under this paragraph shall
be solely for the purpose of protecting Landlord's interest in the Project.
V.12 NO OBLIGATION OF LANDLORD. Notwithstanding Landlord's rights
of inspection and review under this Section, Landlord shall have no obligation
or duty to so inspect or review, and no third party shall be entitled to rely
on Landlord to conduct any sort of inspection or review by reason of the
provisions of this Section.
V.13 ACKNOWLEDGEMENT BY TENANT. Landlord has delivered to Tenant
copies of the following reports prepared for Landlord regarding the presence of
Hazardous Substances in, on or under the Project, but Landlord makes no
representation regarding the accuracy of such reports: (a) Facility Closure
Plan dated April 13, 1999 regarding the Premises as previously occupied by
MicroModule Systems,Inc., and (b) Preliminary Environmental Assessment for the
Project dated April 9, 1998, both prepared by Erler & Kalinowski, Inc. To the
best of knowledge of Landlord, which shall be deemed to be the knowledge of
Joseph R. Seiger, the managing member of the general partner of the managing
member of Landlord, and of Steven R. Meckfessel, president of Landlord's
development consultant, there is no additional information indicating the
presence of hazardous Substances on or under the Premises or the Project which
is not contained in the documents described above. Landlord shall deliver to
Tenant copies of reports obtained by Landlord describing the removal of
facilities previously located in the Premises which contained Hazardous
Substances.
V.14 SURVIVAL. This Article V shall survive expiration or
termination of this Lease.
V.15 LANDLORD'S INDEMNITY. Landlord shall indemnify and hold
harmless Tenant from and against all suits, orders, fines, liabilities, loss,
damages, costs and expenses (including reasonable attorneys' fees) arising out
of or resulting from the presence on or under the Premises or the Project of
Hazardous Substances as of the Effective Date.
VI0 ALTERATIONS.
VI.1. ALTERATIONS. Tenant shall give Landlord not less than thirty
(30) days' notice of any alteration Tenant desires to make to the Premises
which requires Landlord's consent hereunder and at least ten (10) days' prior
notice of any alteration which does not require Landlord's consent. Tenant
shall not make any alteration in, on or about a Building or the Premises
without the prior written consent of Landlord unless (i) the alteration does
not affect the Building structure, the exterior appearance of the Building or
the Project, the roof or the Building systems (e.g., electrical systems, HVAC,
fire and life safety); (ii) the cost of the alteration is not in excess of
Twenty-Five Thousand Dollars ($25,000.00); (iii) Tenant delivers to Landlord
notice and a copy of any final specifications and drawings for any such
alteration at least ten (10) days prior to the date set forth above prior to
commencement of the work thereof; and (iv) the other conditions of this Section
are satisfied (including conforming to Landlord's rules, regulations and
insurance requirements described below). Provided Landlord gives notice to
Tenant at the time it consents to any alteration, prior to the expiration or
earlier termination of this Lease, Tenant shall remove such proposed
alterations and restore the Premises to its condition as of the Commencement
Date, ordinary wear and tear and the effects of casualty or condemnation
excepted. Landlord's approval of specifications and/or drawings for alterations
shall not create any responsibility or liability on the part of Landlord for
their completeness, design
<PAGE> 22
sufficiency or compliance with applicable laws. Landlord will not unreasonably
withhold its consent to a proposed alteration provided that Tenant complies
with all terms of this Article VI. Tenant shall comply with all rules, laws,
ordinances and requirements at the time Tenant makes any alteration, including,
without limitation, Americans with Disabilities Act, shall complete all
alterations in accordance with drawings and specifications previously approved
by Landlord, and shall reimburse Landlord within thirty (30) days of its demand
for all alterations and improvements to the Building and to the remainder of
the Project which may be required as a result of Tenant's alterations (for
example, under the Americans with Disabilities Act), whether or not such
alterations and improvements correct conditions which existed prior to the
Effective Date. Tenant shall deliver to Landlord a complete set of "as built"
drawings and specifications for each alteration. In addition, Tenant shall
obtain, or cause to be obtained, and shall maintain in effect, as necessary,
all building permits, licenses, temporary and permanent certificates of
occupancy and other governmental approvals which may be necessary or required
in connection with the making of the alterations. Tenant shall be solely
responsible for maintenance and repair of all alterations made by Tenant. As
used in this Section, the term "alteration" shall include any alteration,
addition or improvement, as well as carpeting, painting and other "aesthetic"
modifications.
VI.2 CONTRACTORS. All alterations shall be made or installed only
by licensed contractors and subcontractors which have been approved by
Landlord, which approval Landlord shall not unreasonably withhold or delay.
Landlord shall be deemed reasonable in withholding its approval if Landlord
determines that a proposed contractor or subcontractor (i) is not reputable and
bondable by reputable bonding companies; (ii) does not carry the kinds of
insurance, and in the amounts, set forth herein; (iii) is not licensed by the
State of California; or (iv) does not work in harmony with Landlord's
contractors and laborers in the Buildings and the Project.
VI.3 BONDS. At Landlord's request, prior to the commencement of
any alteration which requires Landlord's consent, a payment and performance
bond shall be obtained by Tenant's contractor. Any such bonds shall be issued
by an insurance company qualified to do business in the State of California, be
in a sum equal to the cost of the alterations (as determined by the
construction contract between Tenant and its contractor), and name Landlord as
a dual obligee, guaranteeing the completion of the alterations free and clear
of all liens and other charges, and in accordance with the drawings and
specifications.
VI.4 INSURANCE REQUIREMENTS. Tenant shall have its general
contractor procure and maintain in effect during the course of construction of
any alterations the following insurance coverages with an insurance company or
companies authorized to do business in the State of California and with a
Best's rating of at least A-XIII. Such insurance, other than the Worker's
Compensation and Employer's Liability, shall be endorsed to name Landlord, its
members and property manager as additional insureds and to provide at least
thirty (30) days' prior written notice to Landlord of cancellation, material
reduction in coverage or expiration.
(a) Builder's All-Risk. Builder's All-Risk Insurance in an
amount equal to the full replacement cost of the Building including all
fixtures and equipment;
(b) Worker's Compensation. Worker's Compensation and Occupational
Disease Insurance in accordance with the laws of the State of California, along
with "All States," "Voluntary Compensation" and "Foreign Compensation" coverage
endorsements;
(c) Employer's Liability. Employer's Liability Insurance in the
amount of One Million Dollars ($1,000,000);
(d) Commercial General Liability. Commercial General Liability
Insurance, including Personal Injury and Property Damage coverage in the amount
of a combined single limit of Five Million Dollars ($5,000,000) for each
occurrence. Such coverage shall include the following: (A) premises -
operations; (B) elevators and hoists;
<PAGE> 23
(C) independent contractor; (D) completed operations - products; (E) explosion,
underground and collapse (XCU) coverage; and (F) blanket contractual
obligations; and
(e) Comprehensive Auto Liability. Comprehensive Auto Liability
Insurance including Personal Injury and Property Damage coverage in the amount
of a combined single limit of Three Million Dollars ($3,000,000) for each
occurrence. Such coverage shall include the following: (A) owned vehicles; (B)
leased vehicles; (C) hired vehicle; and (D) non-owned vehicles.
(f) Property Insurance. Property Insurance on a Special Form
Policy ("all-risk") basis in the amount of the full replacement cost of
Tenant's tangible and intangible property within and about the Premises.
VI.5 PROFESSIONAL SERVICES. Tenant shall pay Landlord, as
additional rent, the reasonable cost of any professional services and costs for
general conditions of Landlord and any reasonable fees of third party
consultants used by Landlord for review of any specifications and drawings for
any alterations or for review of the construction of the alterations. Payment
shall be made within ten (10) business days after Tenant's receipt of invoices
either from Landlord or the consultants.
VI.6 LIENS. If, because of any act or omission of Tenant or anyone
claiming by, through, or under Tenant, any mechanics' lien or other lien is
filed against the Premises, a Building, or any other portion of the Project or
against other property of Landlord or any member of Landlord or subsidiary or
related companies of members of Landlord (whether or not the lien is valid or
enforceable), Tenant shall, at its own expense, cause it to be discharged of
record within a reasonable time, not to exceed thirty (30) days, after the date
of the filing. If Tenant fails to do so, then in addition to its other
remedies, Landlord may cause a bond to be posted as security for such lien and
Tenant shall reimburse Landlord for the cost of such bond and provide
substitute security within ten (10) days of Landlord's demand. In addition,
Tenant shall defend and indemnify Landlord and hold it harmless from any and
all claims, losses, damages, judgments, settlements, costs and expenses,
including attorneys' fees, resulting from the lien.
VI.7 OWNERSHIP OF ALTERATIONS. Except as provided in Section 6.8,
any alteration made by Tenant shall immediately become Landlord's property.
Landlord may require Tenant, at Tenant's sole expense and by the end of the
Term (or any extensions), to remove any alterations made by Tenant and to
restore the Premises to its condition prior to the alteration.
VI.8 OWNERSHIP OF EQUIPMENT, TRADE FIXTURES AND NON-STRUCTURAL
ALTERATIONS. Tenant shall retain ownership of, and shall have the right to
remove at any time, its equipment, trade fixtures, provided that Tenant repairs
any damage caused in removing such items.
VII0 REPAIRS
VII.1 TENANTS REPAIR OBLIGATIONS. (a) Tenant, at all times during the
Term (and any extensions) and at Tenant's sole cost and expense (except as
herein expressly provided to the contrary), shall repair, replace and maintain
in first class condition the Premises, except for ordinary wear and tear and
the effects of casualty or condemnation, including, but not limited to, all
non-structural interior walls, the roof membrane and flashing (but not the roof
structure), Building-mounted exterior lighting, plate glass, loading dock, and
the mechanical, electrical, elevator and plumbing systems (including HVAC,
chillers and neutralization system) serving the Premises; provided, however,
that Tenant shall not be required to perform any maintenance, repair, or
replacement of such items to the extent the maintenance, repair or replacement
(i) is required because of fire or other casualty which is (or would be)
covered by insurance Landlord maintains or is required to maintain under this
Lease, (ii) results from the acts or omission of any other occupant of the
Project or their agents, employees or contractors and/or (iii) results from the
active negligence or willful misconduct of Landlord or its agents, employees or
contractors.
<PAGE> 24
(b) Except as expressly provided in this Lease, Tenant hereby
waives all rights to make repairs at the expense of Landlord or in lieu thereof
to vacate the Premises as provided in California Civil Code Section 1942 or any
other law, statute or ordinance now or hereafter in effect.
VII.2 LANDLORD'S REPAIR OBLIGATION. Subject to damage by fire or
other casualty or damage caused by Tenant or those under its control, Landlord,
without expense to Tenant, shall maintain those portions of the Building and of
the Premises which Tenant is not required to maintain in the condition and
repair which would result from customary maintenance and repair for comparable
buildings in Santa Clara County. As a Project Operating Expense, Landlord shall
perform or construct any repair, maintenance or improvement required by any
governmental law or regulation (including ADA) but only to the extent such
improvements are not required because of Tenant's use of the Premises or
because of alterations or other works of improvement undertaken by Tenant. As a
Project Operating Expense, Landlord shall also maintain building systems not
exclusively serving the Premises and the exterior portion of the Premises,
including landscaping, exterior lighting, the exterior portions of the
Building, parking lots (to the extent not the responsibility of a tenant under
its lease), drives, curbs, exterior walkways and utilities in the Project
Common Areas including telecommunications conduit but not cabling, but not any
utilities or equipment installed by Tenant or by a public utility.
Notwithstanding the foregoing sentence, (A) Tenant shall pay one hundred
percent (100%) of the costs, to the extent not covered by insurance, of
repairs, maintenance or improvements to the structural portions of the Project
occasioned by fire or other casualty caused by Tenant or its employees, agents,
contractors or invitees that are not (or would not be) covered by insurance
Landlord is required to maintain under this Lease, and (B) Tenant shall pay its
Project Percentage Share of the deductibles under Landlord's insurance policies
and the costs described above to the extent such costs are properly included in
the Project Operating Expenses.
VIII0 DAMAGE OR DESTRUCTION
VIII.1 LANDLORD'S OBLIGATION TO REBUILD. If a Building in which a
portion of the Premises is located is damaged or destroyed, Landlord shall
promptly and diligently repair the Premises (which shall include all of the
office area improvements, as such may have been altered in compliance with this
Lease, which are part of the Premises) unless (i) there are insufficient
insurance proceeds (together with such funds as Landlord, in its sole
discretion, elects to provide) and deductibles payable by Tenant or which
Tenant elects in its sole discretion, to provide) to pay for the total costs of
the repair; or (ii) either Landlord or Tenant exercises its option to terminate
this Lease, as provided herein.
VIII.2 RIGHT TO TERMINATE. If a Building in which a portion of the
Premises is located is destroyed or damaged by fire or other casualty,
regardless of whether the casualty is insured against under this Lease,
Landlord or Tenant shall have the option to terminate this Lease if Landlord
reasonably determines that the repair of the Building cannot be completed
within three hundred sixty (360) days after the casualty. If Landlord denies to
exercise the right to terminate this Lease as a result of a casualty, it shall
do so by notice to Tenant as soon as it determines that the estimated period to
complete the repair exceeds three hundred sixty (360) days. If Tenant desires
to exercise the right to terminate this Lease as a result of a casualty, Tenant
shall exercise the right by giving Landlord notice of its election to terminate
within thirty (30) days after Landlord's notice to Tenant of the estimated time
to repair, in which event this Lease shall terminate fifteen (15) days after
the date of the notice. If Landlord or Tenant does not exercise the right to
terminate this Lease as to the destroyed or damaged Building, Landlord shall
promptly commence the process of obtaining necessary permits and approvals, and
shall commence repair of the destroyed and damaged Building as soon as
practicable and thereafter prosecute the repair diligently to completion, in
which event this Lease shall continue in full force and effect.
VIII.3 ABATEMENT OF RENT. In the event of any damage or destruction
to a Building in which any portion of the Premises is located, the Base Rent
and any Additional Rent shall be abated proportionately to the degree the
Premises are untenantable as a result of the damage or destruction, commencing
from the date of the damage or destruction and continuing until the earlier of
(a) the termination of the Lease, or (b) completion of Landlord's repair
<PAGE> 25
and restoration of the Premises. In this regard, the parties expressly
acknowledge that Landlord has the obligation to carry, and Tenant has the
obligation to reimburse Landlord for, insurance covering loss of rents for only
a twelve-month period following damage and destruction of the Premises.
Accordingly, notwithstanding the foregoing, Landlord and Tenant expressly agree
that Tenant shall have no right to abatement of rent after the lapse of the
twelve (12) month period to be covered by insurance, except to the extent that
Landlord fails diligently to undertake and complete the restoration of the
Premises as required of Landlord under this Lease.
VIII.4 DAMAGE NEAR END OF TERM AND EXTENSIVE DAMAGE
(a) In addition to the rights to termination under Section 8.2,
Landlord or Tenant shall have the right to terminate this Lease as of the date
of the occurrence of destruction or damage if (i) either (A) Building 3 is
substantially destroyed or damaged (i.e., there is damage or destruction which
Landlord reasonably determines would require more than six (6) months to
repair) and made substantially untenantable during the last twelve (12) months
of the Term (or any extension) or (B) Building 3 is materially destroyed or
damaged (i.e., there is damage or destruction which Landlord reasonably
determines would require more than two hundred seventy (270) days to repair)
and made untenantable during the last two (2) years of the Term (or any
extension). Any notice of its election to terminate this Lease under this
Section shall be given, if at all, by Landlord or Tenant to the other party
within fifteen (15) days after Landlord's determination of the period that the
damage or destruction would require to repair is given to Tenant.
(b) Notwithstanding Landlord's election to terminate this Lease,
if at the time of Landlord's election Tenant has not yet exercised its
Extension Option, Tenant may cause the parties' obligations to be governed by
Sections 8.1, 8.2 and 8.3 if within thirty (30) days following Landlord's
notice to Tenant, Tenant validly exercises its Extension Option. In such event,
Base Rent as of the commencement of the Option Period shall not be determined
until six (6) months prior to the Commencement of the Extension Term. If
Landlord or Tenant does not elect to terminate this Lease, the repair of the
damage shall be governed by Section 8.1 or 8.2, as the case may be.
VIII.5 LANDLORD'S INSURANCE. Landlord shall maintain at all times
during the term of this Lease, a standard form of "all risk extended coverage"
property insurance in the amount of full replacement value of the Project and
insurance for loss of rentals as a result of casualty (including, at Landlord's
option, earthquake) for a period of up to one year. If available and if Tenant
pays the premiums for such coverage, Landlord shall also carry earthquake
insurance in such additional amounts as may be requested by Tenant.
VIII.6 INSURANCE PROCEEDS. If this Lease is terminated, (i) Landlord
may keep all the insurance proceeds resulting from the damage, except for those
proceeds from insurance policies obtained by Tenant which specifically insure
Tenant's personal property and trade fixtures, and (ii) Tenant shall deliver to
Landlord any insurance proceeds from its policies insuring its alterations or
improvements.
IX0 EMINENT DOMAIN
IX.1 EMINENT DOMAIN. If all or any part of the Premises is taken
for public or quasi-public use by a governmental authority under the power of
eminent domain or is conveyed to a governmental authority in lieu of such
taking, and if the taking or conveyance causes the remaining part of the
Premises to be untenantable or inadequate for use by Tenant for the purpose for
which it was leased, then Tenant, at its option and by giving notice within
fifteen (15) days after the taking, may terminate this Lease as of the date
Tenant is required to surrender possession of the Premises. If a part of the
Premises is taken or conveyed and the remaining part is tenantable and adequate
for Tenant's use, then this Lease shall be terminated as to the part taken or
conveyed as of the date Tenant surrenders possession; Landlord shall make such
repairs, alterations and improvements to the Building as may be necessary to
render the part of the Premises not taken or conveyed tenantable or usable; and
the Rent shall be reduced in proportion to the part of the Premises taken or
conveyed. All compensation awarded for the taking or conveyance shall be the
property of Landlord without any deduction therefrom for any estate of Tenant,
and Tenant hereby
<PAGE> 26
assigns to Landlord all its right, title and interest in and to the award.
Tenant shall have the right, however, to recover from the governmental
authority, but not from Landlord, such compensation as may be awarded to Tenant
on account of the interruption of Tenant's business, moving and relocation
expenses and removal of Tenant's trade fixtures and personal property.
X0 INDEMNITY AND INSURANCE
X.1 INDEMNITY. Tenant shall be responsible for, shall insure against,
and shall indemnify Landlord and its members, subsidiary and related companies,
and their respective managers, members, officers, directors, shareholders,
agents and employees (collectively, "Landlord's Parties"), and hold them
harmless from, any and all liability for any loss, damage or injury to person
or property occurring in, on or about the Premises, but not to the extent
arising out of the negligence or willful misconduct of Landlord or Landlord's
agents, employees, or contractors, and Tenant hereby releases Landlord's
Parties from any and all liability for the same. Tenant's obligation to
indemnify Landlord's Parties hereunder shall include the duty to defend against
any claims asserted by reason of any loss, damage or injury, and to pay any
judgments, settlements, costs, fees and expenses, including attorneys' fees,
incurred in connection therewith. Notwithstanding the terms of this Section,
Tenant's indemnity regarding Hazardous Substances and Hazardous Waste shall be
as provided in Section 5.9 of this Lease. Tenant's indemnity shall survive the
expiration or termination of this Lease.
X.2 WAIVER. As insurance is available to Tenant to protect it against
such risks, Landlord shall not be liable to Tenant for, and Tenant hereby
waives all claims against Landlord for, any injury or damage to any person or
property in, on or about the Premises by or from any cause whatsoever, and,
without limiting the generality of the foregoing, whether caused by water
leakage of any character from the roof, walls, basement or other portion of the
Premises, or caused by gas, fire, oil, electricity, vibration or any cause
whatsoever in, on or about the Premises.
X.3 TENANT'S INSURANCE. At all times during the Term (and any
extensions), Tenant shall carry, at its own expense, for the protection of
Tenant, Landlord, Landlord's members and their subsidiary and related companies
and Landlord's management agents (the "Additional Insureds"), as their
interests may appear, one or more policies of commercial general liability
insurance, including a contractual liability endorsement, and property damage
insurance, issued by one or more insurance companies acceptable to Landlord,
with minimum combined single limit coverage of Five Million Dollars
($5,000,000.00) per occurrence for injury or property damage and insuring
against any and all liability for which Tenant is responsible under this Lease.
The insurance policy or policies shall (a) name the Additional Insureds and
such other entities as Landlord may designate from time to time as additional
insureds, (b) shall provide that the policy or policies may not be canceled on
less than thirty (30) days prior written notice to such parties, (c) shall
provide that it is primary and that any insurance maintained by Landlord shall
be non-contributory with that maintained by Tenant. If Tenant's insurance is
provided under a blanket policy, it shall be endorsed to provide that the full
policy limit shall be available for claims arising from a single location. At
least annually and otherwise within fifteen (15) days following Landlord's
request, Tenant shall furnish Landlord with certificates evidencing the
insurance. If Tenant fails to carry the insurance or to furnish Landlord with
copies of all the policies after a request to do so, Landlord shall have the
right to obtain the insurance and collect the cost thereof from Tenant as
additional Rent.
X.4 INCREASES IN INSURANCE. During the Term (and any extensions), but
not more frequently than once every three (3) years, Landlord shall have the
right to reasonably require that the amount of the insurance coverage
maintained by Tenant be increased and that insurance for additional risks be
obtained to the extent coverage for such risk in the increased amount is
available in the insurance market at commercially acceptable rates.
X.5 LANDLORD'S INSURANCE. During the Term Landlord shall maintain one
or more policies of commercial general liability insurance with minimum
combined single limit coverage of Five Million Dollars ($5,000,000) per
occurrence for bodily injury or property damage.
<PAGE> 27
XI0 ASSIGNMENT AND SUBLETTING
XI.1 LANDLORD'S CONSENT. Except as provided in Section 11.2,
Tenant shall not assign, sublet or otherwise transfer all or any portion of
Tenant's interest in this Lease (collectively, "sublet") without Landlord's
prior written consent, which consent shall not be unreasonably withheld.
Landlord's withholding its consent to a proposed sublet shall be deemed
reasonable if (i) the proposed sublet could result in all or any portion of the
Premises being occupied by one or more governmental agencies (foreign or
domestic); (ii) the sublet would result in significant and inappropriate
increase in the use of any Project Common Areas by the sublessee's employees or
visitors; (iii) the proposed sublessee is, in Landlord's reasonable opinion,
not of similar quality as Tenant (i.e., previously has had numerous, material
disputes with its prior landlords); or (iv) the proposed sublessee's or
assignee's financial condition is insufficient to perform its obligations under
the terms of the sublet, as determined in Landlord's reasonable discretion.
Consent by Landlord to one sublet shall not be deemed to be a consent to any
subsequent sublet.
XI.2 PERMITTED TRANSFEREE. Consent of Landlord shall not be
required for a sublet of all of the Premises to a Permitted Transferee.
XI.3 EFFECT OF SUBLET. Each sublet to which Landlord has consented
shall be by an instrument in writing, in a form satisfactory to Landlord as
evidenced by Landlord's written approval. Each sublessee or assignee shall
agree in writing, for the benefit of Landlord, to assume, to be bound by and to
perform for the benefit of Landlord the terms, conditions and covenants of this
Lease to be performed by Tenant, to the extent applicable to the sublease.
Tenant shall not be released from personal liability for the performance of
each term, condition and covenant of this Lease, and Landlord shall have the
right to proceed against Tenant without proceeding against the subtenant.
XI.4 INFORMATION TO BE FURNISHED. If Tenant desires at any time to
sublet the Premises, Tenant shall first notify Landlord of its desire to do so
and shall submit in writing to Landlord: (i) the name of the proposed subtenant
or assignee; (ii) the nature of the proposed subtenant's or assignee's business
to be carried on in the Premises; (iii) the terms and provisions of the
proposed sublease or assignment and a copy of the proposed sublease or
assignment form; and (iv) such financial information, including financial
statements, as Landlord may reasonably request concerning the proposed
subtenant.
XI.5 LANDLORD'S ELECTION. At any time within fifteen (15) days
after Landlord's receipt of the information specified in Section 11.4, Landlord
may, by written notice to Tenant, elect to (i) consent to the sublet by Tenant;
or (ii) refuse its consent to the sublet. If Landlord fails to elect one of the
alternatives within the fifteen (15) day period, it shall be deemed that
Landlord has refused its consent to the sublet. If Landlord refuses its
consent, Landlord shall deliver to Tenant a statement of the basis for its
refusal. Any attempted sublet without Landlord's consent shall be void.
XI.6 PAYMENT UPON SUBLET. If Landlord consents to the sublet,
Tenant may thereafter enter into a valid sublet of the Premises or portion
thereof, upon the terms and conditions set forth in the information furnished
by Tenant to Landlord pursuant to Section 11.4, subject to the condition that
Tenant shall pay to Landlord fifty percent (50%) of any excess of (a) the
consideration received by Tenant under the sublet for the sublet transaction
and/or the right to occupy the Premises ("subrent") over (b) the Rent required
to be paid by Tenant hereunder plus Tenant's reasonable out-of-pocket costs to
effectuate the sublet, including, without limitation, attorneys' fees, real
estate brokers' commissions and the cost of tenant improvements or allowances
incurred by Tenant in connection with such sublease. Any subrent to be paid to
Landlord pursuant hereto shall be payable to Landlord as and with the Base Rent
payable to Landlord hereunder pursuant to the terms of Article IV. The term
"subrent" as used herein shall include any consideration of any kind received
by Tenant from the subtenant in consideration of Tenant's interest in this
Lease or in the Premises.
<PAGE> 28
XI.7 FEES FOR REVIEW. Tenant also shall pay to Landlord, as
additional rent, the reasonable, documented legal fees (including the allocated
costs for services of in-house counsel) for reviewing the documents in
connection with any proposed sublet, but not in excess of Twenty Five Hundred
Dollars ($2,500) for each request. The payment shall be made within ten (10)
business days after Tenant's receipt of invoices either from Landlord or
Landlord's attorneys.
XI.8 EXECUTED COUNTERPARTS. No sublet shall be valid nor shall any
subtenant or assignee take possession of the Premises until an executed
counterpart of the sublease or assignment has been delivered to Landlord in the
form previously approved by Landlord.
XI.9 TRANSFERS COMPRISING SUBLETS. A sale or other transfer of
all or a substantial portion of Tenant's assets or, if Tenant is a corporation,
partnership or other entity, any transfer, assignment, encumbrance or
hypothecation of fifty percent (50%) or more (in one or more related
transactions) of the stock or other ownership interest in such entity, or any
transfer, assignment, hypothecation or encumbrance of any controlling ownership
or voting interest in such entity, shall be deemed a sublet and shall be
subject to all the restrictions and provisions contained in this Article;
provided, however, that the provisions regarding transfer of stock shall not be
applicable (A) to Tenant if Tenant is a publicly-held corporation and its stock
is transferred publicly over a recognized securities exchange or
over-the-counter market, or (B) to the initial public offering of stock of
Tenant pursuant to trading over a recognized securities exchange or
over-the-counter market.
XII0 DEFAULT
XII.1 TENANT'S DEFAULT. At the option of Landlord, a material
breach of this Lease by Tenant shall exist if any of the following events
(severally, "Event of Default"; collectively, "Events of Default") shall occur:
(i) if Tenant shall have failed to pay when due Rent, including Tenant's
Project Percentage Share of Project Operating Expenses, Tenant's Project
Percentage Share of Real Property Taxes, or any other sum required to be paid
under this Lease; provided that one (1) time in any twelve (12)-month period
there shall not be an Event of Default if any such failure to pay Base Rent
when due does not continue for more than ten (10) days following notice from
Landlord; (ii) if Tenant shall have failed to perform any term, covenant or
condition of this Lease except those requiring the payment of money, and Tenant
shall have failed to cure the breach within fifteen (15) days after written
notice from Landlord if the breach could reasonably be cured within the fifteen
(15) day period; provided, however, if the failure could not reasonably be
cured within the fifteen (15) day period, then Tenant shall not be in default
unless it has failed to promptly commence and thereafter continue to make
diligent and reasonable efforts to cure the failure as soon as practicable as
reasonably determined by Landlord; (iii) if Tenant shall have assigned its
assets for the benefit of its creditors; (iv) if the sequestration of,
attachment of, or execution on, any material part of the property of Tenant or
on any property essential to the conduct of Tenant's business shall have
occurred, and Tenant shall have failed to obtain a return or release of the
property within sixty(60) days thereafter, or prior to sale pursuant to any
sequestration, attachment or levy, whichever is earlier; (v) if Tenant shall
have failed to continuously and uninterruptedly conduct its business in the
Premises, or shall have abandoned or vacated the Premises, while in default of
payment of Rent; (vi) if a court shall have made or entered any decree or order
adjudging Tenant to be insolvent, or approving as properly filed a petition
seeking reorganization of Tenant, or directing the winding up or liquidation of
Tenant, and the decree or order shall have continued for a period of sixty (60)
days; (vii) if Tenant shall have made or suffered any transfer which
constitutes a fraudulent or otherwise avoidable transfer under any provision of
the federal Bankruptcy Laws or any applicable state law; or (viii) if Tenant
shall have failed to comply with the provisions of Articles XIX, XXI or XXII.
An Event of Default shall constitute a default under this Lease.
XII.2 REMEDIES UPON TENANT'S DEFAULT. Upon an Event of Default,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by law, equity, statute or otherwise provided in this Lease,
to which Landlord may resort cumulatively or in the alternative:
<PAGE> 29
(a) Continue Lease. Landlord shall have the remedy described in
California Civil Code Section 1951.4 and may continue this Lease in full force
and effect, and this Lease shall continue in full force and effect as long as
Landlord does not terminate Tenant's right to possession, and Landlord shall
have the right to collect Rent when due.
(b) Terminate Possession. Landlord may terminate Tenant's right
to possession of the Premises at any time by giving written notice to that
effect. No act by Landlord other than giving written notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord shall have the right to remove all
personal property of Tenant and store it at Tenant's cost and to recover from
Tenant as damages: (i) the worth at the time of award of unpaid Rent and other
sums due and payable which had been earned at the time of termination; plus
(ii) the worth at the time of award of the amount by which the unpaid Rent and
other sums due and payable which would have been payable after termination
until the time of award exceeds the amount of the Rent loss that Tenant proves
could have been reasonably avoided; plus (iii) the worth at the time of award
of the amount by which the unpaid Rent and other sums due and payable for the
balance of the Term after the time of award exceeds the amount of the Rent loss
that Tenant proves could be reasonably avoided; plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform Tenant's obligations under this Lease, or which, in
the ordinary course of things, would be likely to result therefrom, including,
without limitation, any costs or expenses incurred by Landlord: (1) in retaking
possession of the Premises, including attorneys' fees and costs therefor; (2)
maintaining or preserving the Premises for reletting to a new tenant, including
repairs or alterations to the Premises for the reletting; (3) leasing
commissions; (4) any other costs necessary or appropriate to relet the
Premises; and (5) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by the laws of
the State of California.
The "worth at the time of award" of the amounts referred to in
clauses (i) and (ii) and is computed by allowing interest at the lesser of the
Interest Rate on the unpaid Rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in clause (iii) is computed by discounting the amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award, plus one percent (1%). Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, if Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder.
XII.3 LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS. If Tenant
shall at any time fail to make any payment or perform any other act on its part
to be made or performed under this Lease within the cure periods set forth in
Section 12.1, Landlord may, but shall not be obligated to, make the payment or
perform the act to the extent Landlord may deem desirable and, in connection
therewith, pay expenses and employ counsel. Any payment or performance by
Landlord shall not waive or release Tenant from any obligations of Tenant under
this Lease. All sums so paid by Landlord, and all penalties, interest and costs
in connection therewith, shall be due and payable by Tenant on the next day
after any payment by Landlord, together with interest thereon at the Interest
Rate, from that date to the date of payment thereof by Tenant to Landlord, plus
collection costs and attorneys' fees. Landlord shall have the same rights and
remedies for the nonpayment thereof as in the case of default in the payment of
Rent.
XIII. SECURITY DEPOSIT
XIII.1 SECURITY DEPOSIT. Upon its execution of this Lease, Tenant
shall have deposited with Landlord the Security Deposit, in the amount of Two
Hundred Ninety Thousand Dollars ($290,000.00), as security for the full and
faithful performance of every provision of this Lease to be performed by
Tenant. If Tenant defaults with respect to any provision of this Lease,
Landlord may use, apply or retain all or any part of the Security Deposit for
the payment of any Rent or other sum in default, for the payment of any amount
which Landlord may expend or become obligated
<PAGE> 30
to expend by reason of Tenant's default, or to compensate Landlord for any loss
or damage which Landlord may suffer by reason of Tenant's default. If any
portion of the Security Deposit is used or applied, Tenant shall deposit with
Landlord, within ten (10) days after demand therefor, cash in an amount
sufficient to restore the Security Deposit to its original amount. Landlord
shall not be required to keep the Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on the Security Deposit.
Upon the expiration or earlier termination of this Lease, Landlord shall
promptly refund to Tenant any portion of the Security Deposit not previously
applied by Landlord.
XIV. SURRENDER OF PREMISES
XIV.1. SURRENDER. Subject to the terms of Articles VIII and IX, on the
expiration or early termination of this Lease (including any extensions),
Tenant shall surrender the Premises to Landlord in a cosmetically and
environmentally clean condition equivalent to that existing on the Effective
Date (i.e., with no additional Hazardous Substances or levels of Hazardous
Substances in excess of those in, on or under the Premises as of the
Commencement Date not stored or released by Tenant or those under its control),
with all of Tenant's personal property, data and communications cabling,
process piping, process and production-related ducts and machinery removed, and
with only such alterations as may have been consented to remain by Landlord or
which shall not have required Landlord's consent. Within thirty (30) days prior
to the date Tenant delivers possession of the Premises to Landlord, Tenant
shall deliver to Landlord a report prepared within thirty (30) days prior to
such delivery which includes the documents and information described in Section
5.6 and which also includes the results of tests of samples of any potential
locations of Hazardous Materials stored, used or released by Tenant or those
under its control on or about the Premises including, if indicated by the
nature of activities within or adjacent to the Premises, groundwater and soil
gas samples as well as samples of materials in representative samples of any
process piping, waste traps and air handling equipment used by Tenant. The
scope of the investigation performed for such report shall be subject to
Landlord's prior approval, which approval shall not unreasonably be withheld
but may be subject to reasonable conditions.
XV. HOLDING OVER
XV.1 HOLDING OVER. If Tenant remains in possession of all or any
part of the Premises after the expiration or termination of this Lease, the
tenancy shall be month-to-month only and shall not constitute a renewal or
extension for any further term. In such event, Base Rent shall be increased to
an amount equal to one hundred twenty-five percent (125%) of the Base Rent
during the last month of the Term (including any extensions), and any other
sums due under this Lease shall be payable in the amount, and at the times,
specified in this Lease. The month-to-month tenancy shall be subject to every
other term, condition, covenant and agreement contained in this Lease and
Tenant shall vacate the Premises (and, if appropriate, the remainder of the
Project) immediately upon Landlord's request. If this Lease terminates prior to
the Expiration Date (including termination during an Extension Term) and the
termination is not a result of one or more Events of Default by Tenant, Tenant
shall have a reasonable period of time to hold over (without the increase in
the Base Rent provided above) in order to complete its restoration obligations
in accordance with the terms of this Lease.
XVI. ACCESS TO PREMISES
XVI.1 ACCESS TO PREMISES. Tenant shall permit Landlord and its
agents to enter the Premises at all reasonable times upon at least twenty-four
(24) hours' notice, except in the case of an emergency (in which event no
notice shall be necessary), and to make use of any Project Common Areas to (i)
inspect the Premises; (ii) post Notices of Nonresponsibility and similar
notices and to show the Premises to interested parties such as prospective
mortgagors, purchasers and tenants; (iii) make necessary alterations,
additions, improvements or repairs to the Premises, the Buildings or the
Project; (iv) discharge Tenant's obligations hereunder when Tenant has failed
to do so within a reasonable time after written notice from Landlord; (v)
install, use, maintain, repair, replace and relocate
<PAGE> 31
pipes, ducts, conduits, wires and meters and equipment above the ceiling
surfaces, below the floor surfaces, within the walls and in the central core
areas of the Buildings; and (vi) make changes to the design and layout of the
Project, including changes to the Buildings, driveways, entrances, loading and
unloading areas, direction of traffic, landscape areas, walkways and parking
areas. Landlord also shall have the right to use or close temporarily any
Project Common Areas and any other portion of the Project while engaging in
making improvements, repairs or alterations to the Building, the Project, or
any portion thereof. Landlord's right of access to the Premises shall be
subject to reasonable security regulations of Tenant, and to the requirement
that Landlord shall at all times act in a manner to minimize interference with
Tenant's operations. Landlord shall not be liable to Tenant for any damages or
losses resulting from Landlord's entry except and to the extent caused by
Landlord's violation of its obligations under the Section 16. Access to the
Premises by third parties except in emergencies shall be subject to such
parties executing non-disclosure agreements acceptable to Tenant and a
representative of Tenant shall have the right to accompany such parties.
XVII. SIGNS
XVII.1 RESTRICTIONS AND COSTS. Tenant may only install signs
identifying Tenant on the Building in compliance with applicable law. At its
expense, Tenant may also install a monument sign identifying tenant at the
entry to the Project in the location designated by Landlord. The costs of any
permitted sign, and the costs of its installation, maintenance and removal,
shall be at Tenant's sole expense and shall be paid within ten (10) days of
Tenant's receipt of a bill from Landlord for the costs. The payment shall be
made within ten (10) business days after Tenant's receipt of invoices either
from Landlord or Landlord's attorneys.
XVIII. WAIVER OF SUBROGATION
XVIII.1 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant each hereby waives and releases the other
of and from any and all rights of recovery, claim, action or cause of action
against the other, its subsidiary and related companies, directors, agents,
officers and employees, for any loss or damage that may occur in the Premises,
the Buildings, or the Project; to improvements to the Buildings and Project or
personal property (building contents) within the Buildings or Project; or to
any furniture, equipment, machinery, goods and supplies not covered by this
Lease which Tenant may bring to the Premises or any additional improvements
which Tenant may construct on the Premises by reason of fire, the elements or
any other cause which is required to be insured against
<PAGE> 32
under this Lease, regardless of the cause or origin, including negligence of
Landlord or Tenant and their agents, subsidiaries, directors, officers and
employees, to the extent insured against under the terms of any insurance
policies carried by Landlord or Tenant or required to be insured against by
Landlord or Tenant under this Lease. Notwithstanding anything to the contrary
contained herein, the waiver of subrogation and release under this Section
shall extend to damage that would be covered by insurance required to be
carried under this Lease, even if the insurance proceeds are not paid to the
insured.
XIX. SUBORDINATION
XIX.1 SUBORDINATE NATURE. Except as provided in Section 19.2 and
subject to Section 19.3, this Lease is subject and subordinate to the CC&Rs and
all ground or underlying leases, mortgages and deeds of trust which now or may
hereafter affect the Project, the Property, the Buildings or the Premises, and
to all renewals, modifications, consolidations, replacements and extensions
thereof. Within ten (10) days after Landlord's request therefor, Tenant shall
execute any and all documents reasonably required by Landlord, the lessor under
any ground or underlying lease ("Lessor"), or the holder or holders of any
mortgage or deed of trust ("Holder") to make this Lease subordinate to the lien
of any lease, mortgage or deed of trust, as the case may be. Tenant hereby
waives its rights under any law (including judicial decisions) which gives or
purports to give Tenant any right to terminate or otherwise adversely affect
this Lease and the obligations of Tenant hereunder in the event of any
foreclosure proceeding or sale. Notwithstanding anything to the contrary
herein, prior to the Commencement Date, and from time to time thereafter
<PAGE> 33
upon any refinancing or additional financing of the Property, Landlord shall
obtain from any lenders holding security interests in, present or future ground
lessors of the Project, and such lenders and ground leases and Tenant shall
execute, acknowledge and deliver a Subordination, Non-Disturbance and
Attornment Agreement in the form of Exhibit F. If any such Agreement so
provides, then no termination of this Lease by Landlord shall be effective
unless consented to by any such lenders and ground lessors.
XIX.2 POSSIBLE PRIORITY OF LEASE. If a Lessor or a Holder advises
Landlord that it desires or requires this Lease to be prior and superior to a
lease, mortgage or deed of trust, Landlord may notify Tenant. Within seven (7)
days of Landlord's notice, Tenant shall execute, have acknowledged and deliver
to Landlord any and all documents or instruments, in the form presented to
Tenant, which Landlord, Lessor or Holder deems necessary or desirable to make
this Lease prior and superior to the lease, mortgage or deed of trust.
XIX.3 RECOGNITION AND ATTORNMENT AGREEMENT. Upon the foreclosure of
any mortgage or deed of trust encumbering Landlord's interest in the Project,
Property, Buildings or the Premises, or a sale or transfer in connection
therewith, Tenant shall attorn to the Holder and its successors, and shall,
upon its request, execute and deliver a new lease with the Holder as landlord,
in the form of this Lease. The obligations of Tenant under this Section shall
survive termination of this Lease.
XX. TRANSFER OF LANDLORD'S INTEREST
XX.1 TRANSFER OF THE PROJECT. Upon transfer of Landlord's interest
in the Project and assignment of this Lease, Landlord shall be entirely freed
and relieved of all liability under any and all of its covenants and
obligations contained in or derived from this Lease occurring after the
consummation of the transfer and assignment. Tenant shall attorn to any entity
purchasing or otherwise acquiring Landlord's interest in the Premises at any
sale or other proceeding.
XXI. ESTOPPEL CERTIFICATES
XXI.1 ESTOPPEL CERTIFICATES. Within ten (10) days following request
by either Tenant or Landlord, the other party shall execute and deliver an
estoppel certificate which shall: (i) certify that this Lease is unmodified and
in full force and effect or, if modified, state the nature of the modification
and certify that this Lease, as so modified, is in full force and effect, and
the date to which the Rent and other charges are paid in advance, if any; (ii)
acknowledge that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder, or if there are uncured defaults on the part of
Landlord, state the nature of the uncured defaults; (iii) evidence the status
of the Lease as may be required either by a lender making a loan to Landlord to
be secured by a deed of trust or mortgage covering the Premises or a purchaser
of all or any portion of Landlord's interest in the Project; and (iv)
acknowledge any other matters concerning this Lease, as reasonably requested by
Landlord.
XXII. MODIFICATION FOR LENDERS
XXII.1 MODIFICATION FOR LENDERS. If, in connection with Landlord
obtaining any financing for all or any portion of Landlord's interest in the
Project, a lender requests modifications to this Lease, Tenant shall execute an
amendment to this Lease incorporating the modifications within ten (10) days
after Landlord's request. The modifications shall not increase Tenant's
obligations under this Lease.
XXIII. ATTORNEY'S FEES
XXIII.1 ATTORNEYS' FEES. If either party shall bring any action or
legal proceeding for damages for an alleged breach of any provision of this
Lease, to recover Rent or other sums due, to terminate the tenancy of the
Premises or to enforce, protect or establish any term, condition or covenant of
this Lease or right of either party, the prevailing party shall be entitled to
recover, as a part of the action or proceedings, or in a separate action
brought for
<PAGE> 34
that purpose, reasonable attorneys' fees and court costs as may be fixed by the
court or jury. The prevailing party shall be the party which secures a final
judgment in its favor. Any such attorneys' fees and other expenses incurred by
any party in enforcing a judgment in its favor under this Lease shall be
recoverable separately from and in addition to any other amount included in
such judgment, and such attorneys' fees obligation is intended to be severable
from the other provisions of this Lease and to survive and not be merged into
any such judgment.
XXIV. BROKERS
XXIV.1 TENANT'S WARRANTY. Tenant and Landlord each warrant and
represent that it has had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease except for BT Commercial and
Cornish & Carey, and that it knows of no other real estate broker or agent who
is or might be entitled to a commission in connection with this Lease. Landlord
acknowledges that it shall be solely responsible for any commission or fee
which may be payable to BT Commercial and Cornish & Carey in connection with
this Lease.
XXIV.2 INDEMNITY. Tenant and Landlord shall indemnify and hold
harmless the other from and against any and all liabilities and expenses
arising out of claims made by any broker or individual other than BT Commercial
or Cornish & Carey for commissions or fees resulting from this Lease claiming a
right through the indemnifying party. The indemnity in this Section shall
survive expiration or termination of this Lease.
XXV. PARKING
XXV.1 PARKING. Tenant shall have the exclusive right to park in the
Project's parking facilities shown on Exhibit G hereto as un-shaded areas and
agrees to cooperate with Landlord and other tenants of the Project in the use
of the parking facilities. At Tenant's request and at its expense, Landlord
shall designate, including providing appropriate signs, parking spaces adjacent
to the main entry to the Premises for Tenant's exclusive use in the area
generally shown on Exhibit C, but Landlord shall not be obligated to enforce
such restrictions. Landlord shall have the right to charge Tenant the portion
which Landlord deems allocable to Tenant of any charges (e.g., fees or taxes)
imposed by the Regional Air Quality Control Board or other governmental or
quasi-governmental agency in connection with operation or use of the parking
facilities by Tenant). Landlord shall not be liable to Tenant, nor shall this
Lease be affected, if any parking is impaired by moratorium, initiative,
referendum, law, ordinance, regulation or order passed, issued or made by any
governmental or quasi-governmental body.
XXVI. UTILITIES AND SERVICES
XXVI.1 TENANT'S RESPONSIBILITY. Tenant shall be responsible for
arranging for and obtaining the utilities and services necessary to service the
Buildings in which any portion of the Premises is located. Tenant shall pay
directly, before the same become delinquent, all charges, duties, rates and
other charges of every description to which the Premises or any part thereof or
any improvements thereon, or Landlord or Tenant in respect thereof, may during
the Term (and any extensions) be assessed or become liable for consumption by
Tenant of electricity, gas, refuse collection, telephone, sewage disposal,
water, cable television or any other utilities or services or any connections
or meters therefor, whether assessed to or payable by Landlord or Tenant. If
Tenant fails to pay any such utility or service charges, the Landlord may at
any time after the same become due pay the same together with any interest,
penalties, fines and costs accrued or imposed and Tenant shall reimburse
Landlord, upon demand, the full amount paid by Landlord, together with interest
at the Interest Rate. Landlord shall not be liable for, Tenant shall not be
entitled to any abatement or reduction of Rent by reason of, no eviction of
Tenant shall result from, and Tenant shall not be relieved from the performance
of any covenant or agreement in this Lease because of, any interruption of such
utilities and services.
XXXVI.2 TELECOMMUNICATIONS, RISERS AND CABLING. Tenant may install
satellite dishes and telecommunications equipment on the roof of the Building
in a manner which is subject to Landlord's prior approval, which shall not
unreasonably be withheld. Landlord shall have no responsibility for the
installation, operation and
<PAGE> 35
maintenance of the telecommunications conduit, risers and cabling in the
Buildings. In addition, Landlord shall have no liability to Tenant if, for
whatever reason, telecommunication service to the Building fails. Upon the
expiration or earlier termination of the Term, Tenant shall remove all
antennae, conduit, switches and cable installed by Tenant and repair and patch
all damage and penetrations.
XXVII. NAMES OF PROJECT AND BUILDING
XXVII.1 REVISION OF NAMES. Landlord shall have the right, in its sole
discretion and without Tenant's consent or any liability to Tenant, at any time
during the Term (including all extensions) to revise (i) the name of the
Project; or (ii) the name of any of the Buildings.
XXVII.2 USE OF NAMES. Tenant shall not employ the name of any
Building or the Project in the name or title of its business or occupation
without Landlord's prior written consent, which consent Landlord may withhold
in its sole discretion.
XXVIII. MEMORANDUM OF LEASE
XXVIII.1 RECORDING. At Tenant's request, the parties shall execute,
acknowledge and cause to be recorded a short form memorandum of this Lease.
XXVIII.2 QUITCLAIM. Upon any termination of this Lease pursuant to its
terms, Tenant, at Landlord's request, shall execute, have acknowledged and
deliver to Landlord a quitclaim deed of all Tenant's interest in the Premises,
Buildings, Property and Project created by this Lease.
XXIX. NOTICES
XXIX.1 NOTICES. Any notice or demand required or desired to be given
under this Lease shall be in writing and shall be given by hand delivery,
electronic mail (e.g., facsimile), courier service or the United States mail.
Notices which are sent by electronic mail or courier service shall be deemed to
have been given upon receipt. Notices which are mailed shall be deemed to have
been given when seventy-two (72) hours have elapsed after the notice is
deposited in the United States mail, certified, the postage prepaid, addressed
to the party to be served. As of the date of execution of this Lease, the
addresses of Landlord and Tenant are as specified in the Basic Lease
Information. Either party may change its address by giving notice of the change
in accordance with this Section.
XXX. LIABILITY OF LANDLORD
XXX.1 LANDLORD'S EXCULPATION. In the event of breach by Landlord
(which term includes Landlord's partners, co-venturers and co-tenants,
subsidiary and related companies and members, managers, officers, directors,
employees, agents and representatives of Landlord and Landlord's partners,
co-venturers, co-tenants, and subsidiary and related companies) of any of
Landlord's obligations under this Lease, Landlord's liability to Tenant shall
be limited to its then ownership interest in the Buildings and Property or the
proceeds of a public sale of the then ownership interest pursuant to the
foreclosure of a judgment against Landlord plus the proceeds of commercial
general liability insurance as maintained by Landlord. Landlord shall not be
personally liable, or liable in any event, for any deficiency beyond its then
ownership interest in the Buildings and Property.
XXXI. LIGHT, AIR AND VIEW
XXXI.1 ADDITIONAL STRUCTURES. Subject to the restrictions in Section
2.8 regarding the visibility of Tenant's signs, any diminution or interference
with light, air or view by any structure which may be erected on land
<PAGE> 36
adjacent to the Buildings (whether or not within the Project) shall in no way
alter this Lease or impose any liability on Landlord.
XXXII. RULES AND REGULATIONS
XXXII.1 RULES AND REGULATIONS. Landlord reserves the right from time
to time to adopt and promulgate, amend and supplement reasonable rules and
regulations applicable to the Buildings and the Project. Notice of such rules
and regulations, and reasonable amendments thereto, shall be given to Tenant;
and Tenant hereby agrees thereupon to comply with and observe all such rules
and regulations, amendments and supplements.
XXXIII. RIGHT OF FIRST OFFER
XXXIII.1 RIGHT OF FIRST OFFER. Tenant shall have a right of first
offer to lease any of all of the space in Building 1 or Building 2 (the "Offer
Space") which is presently leased to Hewlett-Packard Corporation ("H-P") if and
when the Offer Space becomes available for lease to prospective tenants which
are not H-P, its successors, assigns or sublessees (collectively, the "Existing
Occupants"). If and when Landlord desires to make the Offer Space available for
lease to prospective tenants other than the Existing Occupants, Landlord shall
first give notice of such intent to Tenant. Tenant may, by notice given to
Landlord within thirty (30) days following Landlord's notice, enter into
negotiations with Landlord to lease the Offer Space on such terms as the
parties may agree and for thirty (30) days following Tenant's notice, the
parties shall negotiate in good faith towards reaching an agreement for Tenant
to lease the Offer Space. Notwithstanding the foregoing, Landlord shall not be
obligated to enter into such negotiations unless Tenant's notice of exercise is
accompanied by evidence reasonably acceptable to Landlord, that the tangible
net worth of Tenant determined in accordance with generally acceptable
accounting practices as of the date of such exercise, is not less than that of
Tenant as of the Effective Date. Unless Tenant and Landlord shall have
otherwise agreed, Landlord shall not be obligated to negotiate with Tenant with
respect to the Offer Space for more than thirty (30) days and Tenant's right
under this Section 33 shall apply to the Offer Space only the first time it
becomes available for lease to prospective tenants other than Existing
Occupants.
XXXIV. GENERAL
XXXIV.1 CAPTIONS. The captions and headings used in this Lease are
for the purpose of convenience only and shall not be construed to limit or
extend the meaning of any part of this Lease.
XXXIV.2 TIME. Time is of the essence for the performance of each
term, condition and covenant of this Lease.
XXXIV.3 SEVERABILITY. If any provision of this Lease is held to be
invalid, illegal or unenforceable, the invalidity, illegality, or
unenforceability shall not affect any other provision of this Lease, but this
Lease shall be construed as if the invalid, illegal or unenforceable provision
had not been contained herein.
XXXIV.4 CHOICE OF LAW; CONSTRUCTION. This Lease shall be construed
and enforced in accordance with the laws of the State of California. The
language in all parts of this Lease shall in all cases be construed as a whole
according to its fair meaning and not strictly for or against either Landlord
or Tenant.
XXXIV.5 GENDER; SINGULAR, PLURAL. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine, a partnership
or corporation or joint venture, and the singular includes the plural.
XXXIV.6 BINDING EFFECT. The covenants and agreements contained in
this Lease shall be binding on the parties hereto and on their respective
successors and assigns (to the extent this Lease is assignable).
<PAGE> 37
XXXIV.7 WAIVER. The waiver of Landlord of any breach of any term,
condition or covenant of this Lease shall not be deemed to be a waiver of the
provision or any subsequent breach of the same or any other term, condition or
covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord
shall not be deemed to be a waiver of any preceding breach at the time of
acceptance of the payment. No covenant, term or condition of this Lease shall
be deemed to have been waived by Landlord unless the waiver is in writing
signed by Landlord.
XXXIV.8 ENTIRE AGREEMENT. This Lease is the entire agreement between
the parties with respect to the subject matter of this Lease, and there are no
agreements or representations between the parties except as expressed herein.
Except as otherwise provided herein, no subsequent change or addition to this
Lease shall be binding unless in writing and signed by the parties hereto.
XXXIV.9 WAIVER OF JURY TRIAL. To the extent permitted by law, Tenant
hereby waives any right it may have to a jury trial in the event of litigation
between Tenant and Landlord pertaining to this Lease.
XXXIV.10 COUNTERPARTS. This Lease may be executed in counterparts,
each of which shall be an original, but all counterparts shall constitute one
(1) instrument.
XXXIV.11 EXHIBITS. The Basic Lease Information and all exhibits
attached hereto are hereby incorporated herein and made an integral part
hereof.
XXXIV.12 THIRD PARTY BENEFICIARIES. The terms and conditions of this
Lease shall be for the benefit of Landlord and Tenant only and their respective
successors and assigns, to the extent permitted under this Lease. Landlord and
Tenant intend that no person or entity shall be deemed to be a third party
beneficiary of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease, on the
date(s) stated below, effective as of the date first above written.
<TABLE>
<CAPTION>
"Tenant" "Landlord"
<S> <C>
CIENA CORPORATION, RIDGEVIEW COURT ASSOCIATES, L.L.C.,
a Delaware corporation a Delaware limited liability company
By: By: RIDGEVIEW COURT MANAGEMENT, L.P.,
------------------------------------- a California limited partnership,
Its: Its Managing Member
---------------------------
Date:
-----------------------------------
By: Old Trace Properties, LLC, a California
limited liability company, General Partner
By:
-------------------------------------
Its: By:
--------------------------- ----------------------------------------
Date: Its Managing Member
-----------------------------------
</TABLE>
<PAGE> 38
EXHIBIT A
DIAGRAM OF PREMISES
2
<PAGE> 39
EXHIBIT B
DIAGRAM OF BASEMENT SPACE
<PAGE> 40
EXHIBIT C
DIAGRAM OF PROJECT
<PAGE> 41
EXHIBIT D
INITIAL IMPROVEMENT OF THE PREMISES
<PAGE> 42
EXHIBIT E
TERM COMMENCEMENT MEMORANDUM
<PAGE> 43
EXHIBIT F
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-76915, No. 333-83581) of CIENA Corporation of
our report dated November 24, 1999 appearing on page 34 of this Annual Report
on Form 10-K.
PRICEWATERHOUSECOOPERS LLP //S
McLean, VA
December 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATION AND CONSOLIDATED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE PERIOD
ENDING OCTOBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 143,440
<SECURITIES> 118,956
<RECEIVABLES> 146,051
<ALLOWANCES> 1,703
<INVENTORY> 79,608
<CURRENT-ASSETS> 532,999
<PP&E> 213,968
<DEPRECIATION> 88,716
<TOTAL-ASSETS> 677,835
<CURRENT-LIABILITIES> 105,528
<BONDS> 0
0
0
<COMMON> 1,382
<OTHER-SE> 529,091
<TOTAL-LIABILITY-AND-EQUITY> 677,835
<SALES> 482,085
<TOTAL-REVENUES> 482,085
<CGS> 299,769
<TOTAL-COSTS> 299,769
<OTHER-EXPENSES> 202,251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504
<INCOME-PRETAX> (5,991)
<INCOME-TAX> (2,067)
<INCOME-CONTINUING> (3,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,924)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
