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EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES REFORM ACT OF 1995
CIENA Corporation ("CIENA" or the "Company") desires to take advantage
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995 (the "Act") and is filing this Form 8-K in order to do so.
CIENA wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect,
CIENA's actual results, and could cause CIENA's actual results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of CIENA. The filing of this list should not be construed as
constituting all factors which investors should consider prior to making an
investment decision in CIENA's securities, nor should investors assume that the
information contained herein is complete or accurate in all respects after the
date of this filing. The Company disclaims any duty to update the statements
contained herein.
Concentration of Potential Customers; Dependence on Major Customers.
The Company has only three current customers and few potential customers,
consisting almost exclusively of long distance telecommunications carriers.
There are only a small number of long distance telecommunications carriers, and
the substantial capital requirements involved in the establishment of long
distance fiberoptic networks significantly limit additional entrants into this
market. The Company's business will depend on this small number of existing
and potential customers, and that number may decrease if and as customers merge
with or acquire one another. All of the Company's revenue for the fiscal year
ended October 31, 1996 was derived from the Sprint Corporation ("Sprint"), and
substantially all of the Company's revenue for fiscal 1997 is expected to be
derived from Sprint and LDDS WorldCom ("WorldCom"). WorldCom may terminate all
or part of any outstanding purchase order upon the payment of a termination
fee, and the Company's agreement with WorldCom does not require minimum
purchase commitments. There can be no assurance the Company will be able to
develop additional customers in the long distance telecommunications market.
The loss of any one of the Company's customers, or the reduction, delay or
cancellation of orders or a delay in shipment of the Company's products to such
customers, could have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company's dependence on sizable orders from very few customers
makes the relationship between the Company and each customer critically
important to the Company's business. While each customer relationship is
typically structured around a detailed, heavily negotiated contract, as the
relationship evolves over time, adjustments to such items as product
specifications, laboratory and field testing plans, customer forecasts and
delivery timetables, and installation and field support requirements may be
required in response to customer demands and expectations. The inability of
the Company to manage its customer relationships successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Recent Product Introduction. The Company first began commercial
shipments of its product, the MultiWave 1600 system, in May 1996. The
Company's first operational systems only began carrying live traffic in October
1996 and therefore do not have a history of live traffic operation over an
extended period of time. If reliability, quality or network monitoring
problems should develop, a number of material and 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 level of interest from potential
customers. The Company is aware of instances in which installation and
activation of certain MultiWave 1600 systems have been delayed due to faulty
components found in certain portions of these systems. Although the Company
maintains accruals for product warranties, there can be no assurance that
actual costs will not exceed these amounts. There is limited operating history
of open architecture wavelength division multiplexing technology in fiberoptic
networks, and in particular of
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MultiWave 1600 systems, and the equipment must be handled with care by trained
installers. Accordingly, the Company expects there will be interruptions or
delays from time to time in the activation of the systems, particularly because
the Company does not control all aspects of the customer's installation and
activation activities. If significant interruptions or delays occur, or if
their cause is not promptly identified, diagnosed and resolved, confidence in
the MultiWave 1600 system could be undermined. An undermining of confidence in
the MultiWave 1600 system would have a material adverse effect on the Company's
customer relationships, business, financial condition and results of
operations.
Management of Expansion. The Company is experiencing rapid expansion
in all areas of its operations, particularly in manufacturing, and the Company
anticipates that this expansion will continue in the near future. Total
personnel has grown from 49 on October 31, 1995 to 225 on October 31, 1996,
with 125 of the 176 new employees devoted to manufacturing. This expansion has
placed strains on the material, financial and personnel resources of the
Company and will continue to do so. The rapid pace and volume of new hiring
could adversely affect the efficiency of the Company's manufacturing process.
Any delays or difficulties in the Company's manufacturing process caused by
these factors or others could make it difficult for the Company to meet its
delivery commitments to customers. The Company is in the process of
substantially increasing its flow of materials, optical assembly, final
assembly and final component module and system test functions to respond to
customer demand. The Company is expanding its manufacturing capacity at its
existing facility in Savage and intends to lease a third facility. The pace of
the Company's expansion, in combination with the complexity of the technology
involved in the manufacture of the Company's systems, demands an unusually high
level of managerial effectiveness in anticipating, planning, coordinating and
meeting the operational needs of the Company and the needs of the Company's
customers for quality, reliability, timely delivery and post-installation field
support. Given the small number of potential customers for the Company's
systems, the adverse effect on the Company resulting from a lack of effective
management in any of these areas will be magnified. The Company's key
management employees have not had previous experience in managing companies
undergoing such rapid expansion. Inability to manage the expansion of the
Company's business would have a material adverse effect on its business,
financial condition and results of operations. In addition, the Company's
manufacturing expansion and related capital expenditures are being made in
anticipation of a level of customer orders that has not been historically
experienced by the Company and that may not be achieved. The Company is also
seeking to achieve ISO 9001 certification for its manufacturing facility. The
Company's failure to achieve such certification would have a material adverse
effect on its competitive position.
Dependence on a Single Product--the MultiWave 1600 System. The
MultiWave 1600 system is the Company's only product and is focused exclusively
on providing additional bandwidth to long distance telecommunications carriers.
Accordingly, a softening or slowdown in demand for the Company's product or for
additional bandwidth by long distance telecommunications carriers would have a
material adverse effect on the Company's business, financial condition and
results of operations. Patent litigation recently brought against the Company
by a competitor could also adversely affect demand for the MultiWave 1600
system. There can be no assurance that the Company will be successful in
developing any other products or taking other steps to reduce the risk
associated with any softening or slowdown in the demand for additional
bandwidth, nor is there any assurance the Company will be able to leverage
successfully its DWDM technology into other network applications. Conversely,
if the demand for additional bandwidth accelerates, there is no assurance that
the Company's MultiWave 1600 system will deliver sufficient capacity as rapidly
as needed, or that competing DWDM products from other vendors offering higher
capacity would not displace or render obsolete the MultiWave 1600 system.
Fluctuation in Quarterly and Annual Results. The Company's revenue
and operating results may vary significantly from quarter to quarter and from
year to year as a result of a number of factors, including the size and timing
of orders, product mix and shipments of systems. The timing of order
placement, size of orders, satisfaction of contractual customer acceptance
criteria, as well as order delays or deferrals and shipment delays and
deferrals, may cause material fluctuations in revenue. Delivery of new
equipment for installation is also likely to be deferred during the high
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telecommunications traffic periods in November and December so as not to risk
network reliability problems. The Company's expense levels in the future will
be partially based on its expectations of long term future revenue and as a
result net income any quarterly period in which material orders are shipped or
delayed could vary significantly. Due to this likelihood of significant
quarterly fluctuation in operating results, the Company believes
quarter-to-quarter comparisons of its results of operations particular during
the next two to three years of operations, may not necessarily be meaningful
indicators of year-to-year performance.
Long and Unpredictable Sales Cycles. The Company expects that the
period of time between initial customer contact and an actual purchase order
may span a year or more. In addition, even when committed to proceed with
deployment of equipment, long distance telecommunications carriers typically
undertake extensive and lengthy product evaluation and factory acceptance and
field testing of new equipment before purchasing and installing any of it in
their networks. Additionally, the purchase of network equipment such as DWDM
equipment is typically carried out by network operators pursuant to multiyear
purchasing programs which may increase or decrease annually as the operators
adjust their capital equipment budgets and purchasing priorities. The
Company's customers do not typically share information on the duration or
magnitude of planned purchasing programs, nor do they consistently provide to
the Company advance notice of contemplated changes in their capital equipment
budgets and purchasing priorities. These uncertainties substantially
complicate the Company's manufacturing planning. Curtailment or termination of
customer purchasing programs, decreases in customer capital budgets or
reduction in the purchasing priority assigned to equipment such as DWDM
equipment, particularly if significant and unanticipated by the Company, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Long distance carriers may also encounter delays in
their buildout of new routes or in their installation of new equipment in
existing routes, with the result that orders for the MultiWave 1600 systems may
be delayed or deferred. Any delay or deferral of orders for the MultiWave 1600
systems would have material adverse effect on the Company's business, financial
condition and results of operations.
Competition. The competition to achieve higher and more
cost-effective bandwidth in the global telecommunications industry is intense
and is dominated by a small number of very large companies with greater
financial, technical and marketing resources, greater manufacturing capacity
and more established customer relationships with network operators than the
Company. Each of Lucent Technologies Inc., formerly part of AT&T Corporation
("Lucent"), Alcatel Alsthom Group ("Alcatel"), Northern Telecom Inc.
("Nortel"), NEC Corporation ("NEC"), Pirelli SpA ("Pirelli"), Siemens AG
("Siemens") and ECI Telecom Ltd. ("ECI") offer various forms of alternative
transmission enhancing equipment and in some cases are offering or have
announced an intention to offer DWDM equipment. Such competitors use their
advantages in resources and alternative equipment in different ways. For
example, Lucent, Alcatel, Nortel, NEC and Siemens are already providers of a
full complement of switches, fiberoptic transmission terminals and fiberoptic
signal regenerators and thereby can position themselves as vertically
integrated, "one-stop shopping" solution providers to potential customers.
Further, in certain cases, competitors have offered the Company's target
customers, on an immediate delivery basis, off-the-shelf time division
multiplexing ("TDM") transmission equipment at comparatively lower prices, with
a promise to upgrade to DWDM or other improved equipment in the future. The
substantial system integration resources and manufacturing capability of the
TDM suppliers, in combination with any difference in timeliness of delivery,
can be important to long distance network operators. Finally, as and when
these competitors are able to offer DWDM systems in combination with their own
fiberoptic transmission terminals, they can be expected to press further on the
attractiveness of a "one-stop shopping" solution. The Company expects
competition in general to intensify substantially, especially over the next few
quarters, and further expects competition to be broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate network needs and
foreseeable scaleability requirements.
A U.S. affiliate of Pirelli instituted litigation against the Company
on December 20, 1996, alleging infringement of five U.S. patents held by
Pirelli (the "Pirelli Litigation"). Pirelli and other
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competitors could use the existence of the Pirelli Litigation to raise
questions in customers' and potential customers' minds as to the Company's
ability to manufacture and deliver the MultiWave 1600 system. There can be no
assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not result in lower prices for the Company's products and otherwise have a
material adverse effect on its business, financial condition and results of
operations.
Technological Change and New Products. The Company expects that new
technologies will emerge as competition in the telecommunications industry
increases and the need for higher and more cost efficient bandwidth expands.
The Company's ability to anticipate changes in technology, industry standards,
customer requirements and product offerings and to develop and introduce new
and enhanced products will be significant factors in the Company's ability to
remain the leader in the deployment of open architecture DWDM systems. The
market for telecommunications equipment is characterized by substantial capital
investment and diverse and competing technologies such as fiberoptic, cable,
wireless and satellite technologies. The accelerating pace of deregulation in
the telecommunications industry will likely intensify the competition for
improved technology. Many of the Company's competitors have substantially
greater financial, technical and marketing resources and manufacturing capacity
with which to compete for new technologies and for market acceptance of their
products. The introduction of new products embodying new technologies or the
emergence of new industry standards could render the Company's existing product
uncompetitive from a pricing standpoint, obsolete or unmarketable. Any of
these outcomes would have a material adverse effect on the Company's business,
financial condition and results of operations.
Proprietary Rights. The Company relies on patents, contractual
rights, trade secrets, trademarks and copyrights to establish and protect its
proprietary rights in its product. While the Company does not expect that its
proprietary rights in its technology will prevent competitors from developing
technologies and products functionally similar to the Company's, the Company
believes many aspects of its DWDM technologies and know-how are proprietary,
and intends to monitor closely the DWDM products introduced by competitors for
any infringement of the Company's proprietary rights. Additionally, the
Company expects that DWDM technologies and know-how in general will become
increasingly valuable intellectual properties as the competition to achieve
higher and more cost effective bandwidth intensifies. The Company believes
this increasing value in an industry marked by a few very large competing
suppliers represents a competitive environment where intellectual property
disputes are likely. On December 20, 1996, a U.S. affiliate of Pirelli filed a
lawsuit against the Company alleging infringement of five U.S. patents held by
Pirelli. Intellectual property disputes may be initiated by competitors
against the Company for tactical purposes to gain competitive advantage or
overcome competitive disadvantage, even if the merits of specific disputes are
doubtful. In the future, the Company may be required to bring or defend
against other litigation to enforce any patents issued or assigned to the
Company, to protect trademarks, trade secrets and other intellectual property
rights owned by the Company, to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of others. Any litigation, including the Pirelli Litigation,
could be costly and a diversion of management's attention, which could have a
material adverse effect on the company's business, financial condition and
results of operations. Adverse determinations in litigation, including in the
Pirelli Litigation, could result in the loss of the Company's proprietary
rights, subject the Company to significant liabilities, require the Company to
seek licenses from third parties or prevent the Company from manufacturing or
selling its products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has received, and may receive in the future, notices from
holders of patents in the optical technology field that raise issues as to
possible infringement by the Company's products. Pirelli sent a notice in
December 1995 identifying 11 patents it possesses in the field of optical
communications. The Company believes the MultiWave 1600 system does not
infringe any valid patents cited in the notices received. However, questions
of infringement in the field of DWDM technologies involve highly technical and
subjective analyses. There can be no assurance that any such patent holders or
others will not in the future initiate legal proceedings against the Company or
that, if any such proceedings were initiated, the Company would be successful
in defending against
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these actions. On December 20, 1996, a U.S. affiliate of Pirelli filed a
lawsuit against the Company alleging infringement of five U.S. patents. Even if
the Company is successful in defending against the Pirelli Litigation or any
other such actions, these actions could have an adverse effect on existing and
potential customer relationships and therefore could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's existing customer agreements provide for
indemnification of Sprint, WorldCom and Teleway for liability that may be
incurred in connection with the infringement of a third party's intellectual
property rights, and the Company expects that it will be requested to agree to
indemnify other potential customers in the future. There can be no assurance
that such indemnification against alleged liability will not be required from
the Company in the future.
Patent applications in the United States are not publicly disclosed
until the patent issues. The Company anticipates, based on the size and
sophistication of its competitors and the history of rapid technological
advances in its industry, that several competitors may have patent applications
in progress in the United States that, if issued, could relate to the Company's
products. If such patents were to issue, there can be no assurance that the
patent holders or licensees will not assert infringement claims against the
Company or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such
claims, regardless of the merits of such claims. Parties making such claims
may be able to obtain injunctive or other equitable relief which could
effectively block the Company's ability to sell its products, and each claim
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company and its customers may be required to obtain
one or more licenses from third parties. There can be no assurance that the
Company or its customers could obtain necessary licenses from third parties at
a reasonable or acceptable cost or at all.
Substantial inventories of intellectual property are held by a few
industry participants, such as Bell Laboratories (now owned by Lucent) and
major universities and research laboratories. This concentration of
intellectual property in the hands of few major entities also poses certain
risks to the Company in seeking to hire qualified personnel. The Company has
on a few occasions recruited such personnel from competitors. The Company in
the past received letters from counsel to Lucent asserting that the hiring of
their personnel compromises Lucent's intellectual property. There can be no
assurance that other companies will not claim the misappropriation or
infringement of their intellectual property, particularly when and if employees
of these companies leave to work for the Company. To date, the Company has not
experienced litigation concerning the assertions by Lucent, and believes there
is no basis for claims against the Company. Nevertheless, there can be no
assurance that the Company will be able to avoid litigation in the future,
particularly if new employees join the Company after having worked for a
competing company. Such litigation could be very expensive to defend,
regardless of the merits of the claims.
Litigation. On December 20, 1996, a U.S. affiliate of Pirelli filed
suit in U.S. District Court in Delaware, alleging willful infringement by the
Company of five U.S. patents held by Pirelli. The lawsuit seeks treble
damages, attorneys' fees and costs, as well as preliminary and permanent
injunctive relief against the alleged infringement.
There can be no assurance that the Company will be successful in the
defense of the Pirelli Litigation, and an adverse determination in the
litigation could result from a finding of infringement of only one claim of a
single patent. The Company may consider settlement due to the costs and
uncertainties associated with litigation in general and patent infringement
litigation in particular and due to the fact that an adverse determination in
the litigation could preclude the Company from producing the MultiWave 1600
system until it were able to implement a non-infringing alternative design to
any portion of the system to which such a determination applied. There can be
no assurance that any settlement will be reached by the parties. An adverse
determination in, or settlement of, the Pirelli Litigation could involve the
payment of significant amounts, or could include terms in addition to such
payments, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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The Company expects that defense of the lawsuit will be costly and
will involve a diversion of the time and attention of some members of
management. Further, Pirelli and other competitors may use the existence of
the Pirelli Litigation to raise questions in customers' and potential
customers' minds as to the Company's ability to manufacture and deliver the
MultiWave 1600 system. There can be no assurance that such efforts by Pirelli
and other will not disrupt the Company's existing and prospective customer
relationships.
The Company and certain directors are defendants in another lawsuit
recently brought by entities controlled by Kevin Kimberlin, a stockholder of
the Company concerning alleged entitlement to additional shares of the
Company's Convertible Preferred Stock. No assurance can be given that this
lawsuit will not result in an adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Suppliers. Suppliers in the specialized, high technology
sector of the optical communications industry are generally not as plentiful
or, in some case, as reliable, as suppliers in more mature industries. The
Company is dependent on a limited number of suppliers for components of the
MultiWave 1600 system as well as equipment used to manufacture the MultiWave
1600 system. The MultiWave 1600 system has over 600 components, and certain key
optical and electronic components are currently available only from a sole
source, where the Company has identified other suppliers for the component.
While alternative suppliers have been identified for certain other key optical
electronic components, those alternative sources have not been qualified by the
Company. The Company has to date conducted its business with suppliers through
the issuance of conventional purchase orders against the Company's forecasted
requirements. The Company is seeking to negotiate long term supply agreements
with key suppliers, but currently has no such agreements. The Company has from
time to time experienced minor delays in the receipt of key components, and 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 the company's business, financial condition and
results of operations. In addition, the Company's strategy to have portions of
its final product assembled and, in certain cases, tested by third parties
involves certain risks, including the potential absence of adequate capacity,
the unavailability of or interruptions in access to certain process
technologies, and reduced control over delivery schedules, manufacturing
yields, quality and costs. In the event that any significant supplier or
subcontractor were to become unable or unwilling to continue to manufacture
and/or test the Company's systems in required volumes, the Company would have
to identify and qualify acceptable replacements. This process could also be
lengthy and no assurance can be given that any additional sources would become
available to the Company on a timely basis. A key item of equipment, the
E-2000 Diamond connector, which is used to manufacture a portion of the
MultiWave 1600 system, is available only from a sole source--the Diamond
Company. A delay or reduction in component or equipment shipments, an increase
in component or equipment costs or a delay or increase in costs in the assembly
and testing of products by third party subcontractors could materially and
adversely affect the Company's business, financial condition and results of
operations.
Competitors as Suppliers. Certain of the Company's component
suppliers are both primary sources for such components and major competitors in
the market for system equipment. For example, the Company buys certain key
components from Lucent, Alcatel, Nortel, NEC and Siemens, each of which offers
optical communications systems and equipment which are competitive with the
Company's MultiWave 1600 system. Lucent is the sole source of two integrated
circuits and is one of two suppliers of Erbium-doped fiber. Alcatel and Nortel
are suppliers of lasers used in the MultiWave 1600 system. NEC is a supplier
of certain testing equipment. The Company's business, financial condition and
results of operations could be materially and adversely affected if these
supply relationships were to decline in reliability or otherwise change in any
manner adverse to the Company.
Limited Operating History; History of Losses. The Company was founded
in November 1992 and introduced its MultiWave 1600 system in field trials in
May 1996. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company, its product and prospects can be based.
The Company's prospects must be considered in light of the risks, expenses
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and difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets and
companies experiencing rapid expansion in their operations. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified management and
other employees, continue to upgrade its technologies and commercialize
products and services which incorporate such technologies and achieve market
acceptance for its MultiWave 1600 system. There can be no assurance that the
Company will be successful in addressing such risks. The Company incurred net
losses in each quarter from inception through the second quarter of fiscal
1996. While the Company reported net income for fiscal 1996, there can be no
assurance that the Company will sustain profitability.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key technical and management employees. The
loss of the services of any of the Company's key employees, non of whom is
bound to a term of employment an employment agreement, would have a material
adverse effect on the Company. The Company generally does not maintain
insurance policies on the lives of such employees. In addition, while key
employees are generally bound by Company-wide standard non-disclosure and
proprietary rights agreements, the Company has not entered into separate
non-competition agreements with any of its employees. The Company's success
will also depend in large part upon its ability to attract and retain
highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. Competition for such personnel is intense and there can be no
assurance that the Company will be successful in retaining its existing key
personnel and in attracting and retaining the personnel it requires. Failure
to attract and retain key personnel will have a material adverse effect on the
Company's business, financial condition and results of operations.
Control by Existing Stockholders. The Company's officers, directors
and their affiliates beneficially own approximately 54% of the Company's
outstanding shares. As a result, these stockholders, if acting together, would
be able effectively to control substantially all matters requiring approval by
the stockholders of the Company, including the election of directors. This
ability may have the effect of delaying or preventing a change in control of
the Company, or causing a change in the control of the Company which may not
be favored by the Company's other stockholders.
Effect of Certain Charter, Bylaw and Other Provisions. Certain
provisions of the Company's Third Amended and Restated Certificate of
Incorporation, as amended, and bylaws and certain other contractual provisions
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issued preferred stock with rights
senior to those of the Common Stock without any further vote or action by the
stockholders, provide for a classified board of directors, eliminate the right
of the stockholders to call a special meeting of stockholders, eliminate the
right of stockholders to act by written consent, and impose various procedural
and other requirements which could make it difficult for stockholders to effect
certain corporate actions.
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