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Title of each class of securities to which transaction applies: |
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Aggregate number of securities to which transaction applies: |
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): |
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Proposed maximum aggregate value of transaction: |
(5) | Total fee paid: |
o | Fee paid previously with preliminary materials. | |
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
(1) | Amount previously paid: |
(2) | Form, schedule or registration statement no.: |
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• | held directly in your name with our transfer agent as a “shareholder of record”; and | |
• | held for you in an account with a broker, bank or other nominee (shares held in “street name”). |
• | are present and vote in person at the Annual Meeting; or | |
• | have properly submitted a proxy card prior to the Annual Meeting. |
• | the election of | |
• | the |
• | the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending October 31, | |
• | “FOR” the election of the Class I director nominees named in this Proxy Statement; | |
• | “FOR” the | |
• | “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting | |
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However, under our Principles of Corporate Governance, if any nominee receives a greater number of “WITHHELD” votes than “FOR” votes, that nominee will tender his or her resignation, and will otherwise be subject to the procedures set forth in Ciena’s Principles of Corporate Governance, as more fully described under the heading “Election of Directors and Ciena’s Principles of Corporate Governance” in Proposal No. 1 below.
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CienaClass I director and for those directors whose terms of office will continue after the meeting.Annual Meeting.
Lawton W. Fitt | Ms. Fitt, age 53, has served as a director of Ciena since November 2000. Since October 2006, Ms. Fitt has served as a senior advisor to GSC Group, Inc., an alternative asset investment management firm. From October 2002 to March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner from 1994 to October 2002, and a managing director from 1996 to October 2002. Ms. Fitt is a director of Reuters PLC and Citizens Communications Company. | |
Patrick H. Nettles, Ph.D | Dr. Nettles, age 63, has served as a director of Ciena since April 1994 and as Executive Chairman of the Board of Ciena since May 2001. From October 2000 to May 2001, Dr. Nettles was Chairman of the Board and Chief Executive Officer of Ciena, and he was President and Chief Executive Officer from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the California Institute of Technology and serves on the board of directors of Axcelis Technologies, Inc. and The Progressive Corporation. Dr. Nettles also serves on the board of directors of Carrius Technologies, Inc., a privately held company. | |
Michael J. Rowny | Mr. Rowny, age 56, has served as a director of Ciena since August 2004. Mr. Rowny has been Chairman of Rowny Capital, a private equity firm, since 1999. From 1994 to 1999, and previously from 1983 to 1986, Mr. Rowny was with MCI Communications in positions including President and Chief Executive Officer of MCI’s International Ventures, Alliances and Correspondent group, acting Chief Financial Officer, Senior Vice President of Finance, and Treasurer. Mr. Rowny serves on the board of directors of Neustar, Inc. Mr. Rowny also serves on the board of directors of Llamagraphics, Inc., a privately held company. |
Harvey B. Cash | Mr. Cash, age 68, has served as a director of Ciena since April 1994. Mr. Cash is a general partner of InterWest Partners, a venture capital firm in Menlo Park, California that he joined in 1985. Mr. Cash serves on the board of directors of First Acceptance Corp., i2 Technologies, Inc., Silicon Laboratories, Inc., Argonaut Group, Inc. and Staktek |
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Holdings, Inc. Mr. Cash also serves on the board of directors of Voyence Inc., a privately held company. | ||
Judith M. O’Brien | Ms. O’Brien, age 56, has served as a director of Ciena since July 2000. Since November 2006, Ms. O’Brien has served as executive vice president of Obopay, Inc., a provider of a comprehensive U.S. mobile payment service. From February 2001 until October 2006, Ms. O’Brien served as a managing director at Incubic Venture Fund, a venture capital firm. From February 1984 until February 2001, Ms. O’Brien was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate finance, mergers and acquisitions and general corporate matters. Ms. O’Brien serves on the board of directors of Adaptec, Inc. Ms. O’Brien also serves on the board of directors of AviaraDx, Inc., Grandis Inc. and Mistletoe Technologies, Inc., all of which are privately held companies. | |
Gary B. Smith | Mr. Smith, age 46, has served as Ciena’s President and Chief Executive Officer since May 2001 and has served as a director of Ciena since October 2000. Mr. Smith serves on the board of directors for CommVault Systems, Inc. and the American Electronics Association. Mr. Smith also serves as a member of the Global Information Infrastructure Commission. |
Stephen P. Bradley, | ||
Bruce L. Claflin | Mr. Claflin, age 55, has served as a director of Ciena since August 2006. Mr. Claflin served as president and Chief Executive Officer of 3Com Corporation, from January 2001 until his retirement in February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998. Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he held various sales, marketing and management positions, including general manager of IBM PC Company’s worldwide research and development, product and brand management, as well as president of IBM PC Company Americas. Mr. Claflin also serves on the | |
Gerald H. Taylor |
Class III Director with Term Expiring in 2006
Class I Directors with Terms Expiring in 2007
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Election of Directors and Ciena’s Principles of Corporate Governance
Board of Directors.
The Board’s decision to adopt Section 16 of Ciena’s Principles of Corporate Governance, “Voting for Directors,” and its relative merits in comparison to a majority voting standard in the election of directors, is discussed more fully under Proposal No. 4 below. Ciena’s Principles of Corporate Governance are available on the Corporate Governance page of Ciena’s website atwww.ciena.com.
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Ciena has previously adopted
including as follows:
Mr. Claflin’s election by the Board of Directors in August 2004 is subject to ratification at the Annual Meeting. See Proposal No. 2 “Ratification of the Board of Directors’ Election of a Class III Director in accordance with Ciena’s Principles of Corporate Governance” below.
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• | the Audit Committee, which held | |
• | the Compensation Committee, which held | |
• | the Governance and Nominations Committee, which held |
Governance and | |||||||||||||
Audit | Compensation | Nominations | |||||||||||
Director Name | Committee | Committee | Committee | ||||||||||
Stephen P. Bradley, Ph.D. | X | X | |||||||||||
Harvey B. Cash | X | Chairperson | |||||||||||
Bruce L. Claflin | X | ||||||||||||
Lawton W. Fitt | Chairperson | ||||||||||||
Judith M. O’Brien | Chairperson | X | |||||||||||
Michael J. Rowny | X | ||||||||||||
Gerald H. Taylor | X | ||||||||||||
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Annual Retainer for Each Non-Employee Director | $ | 20,000 | ||||
Lead Outside Director Retainer | $ | 7,500 | ||||
Audit Committee Chairperson Retainer | $ | 7,500 | ||||
Board Meeting Attendance (excluding telephonic meetings) | $ | 1,500 | ||||
Audit Committee Meeting Attendance (in person) | $ | 3,000 | (Chairperson) | |||
$ | 2,000 | (other directors) | ||||
Other Committee Meeting Attendance (in person) | $ | 1,500 | (Chairperson) | |||
$ | 1,000 | (other directors) | ||||
All Committee Meeting Attendance (telephonic) | $ | 500 |
Cash Compensation | ||||
Fiscal 2006 | Fiscal 2007 | |||
Annual Retainer for Each Non-Employee Director | $20,000 | $25,000 | ||
Additional Lead Outside Director Retainer | $7,500 | $7,500 | ||
Audit Committee Chairperson Retainer | $7,500 | $20,000 | ||
Other Committee Chairperson Retainer | — | $7,500 | ||
Board Meeting Attendance | $1,500 | $1,500 | ||
Board Meeting Attendance (telephonic) | — | $500 | ||
Audit Committee Meeting Attendance (in person) | $3,000 (Chairperson) | $2,000 (Chairperson) | ||
$2,000 (other directors) | $2,000 (other directors) | |||
Other Committee Meeting Attendance (in person) | $1,500 (Chairperson) | $1,000 (Chairperson) | ||
$1,000 (other directors) | $1,000 (other directors) | |||
All Committee Meeting Attendance (telephonic) | $500 | $500 |
Stephen P. Bradley, Ph.D | $ | 37,500 | ||||
Harvey B. Cash | $ | 39,000 | ||||
Don H. Davis, Jr. | $ | 30,000 | ||||
Lawton W. Fitt | $ | 50,000 | ||||
Judith M. O’Brien | $ | 38,500 | ||||
Michael J. Rowny | $ | 32,500 | ||||
Gerald H. Taylor | $ | 31,500 |
Cash Compensation | ||||||
Director Name | Fiscal 2006 | |||||
Stephen P. Bradley, Ph.D. | $ | 39,500 | ||||
Harvey B. Cash | $ | 43,500 | ||||
Bruce L. Claflin | $ | 6,500 | ||||
Lawton W. Fitt | $ | 47,000 | ||||
Judith M. O’Brien | $ | 36,000 | ||||
Michael J. Rowny | $ | 35,500 | ||||
Gerald H. Taylor | $ | 30,000 |
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Equity Compensation | ||||||||
Fiscal 2006 | Fiscal 2007 | |||||||
Initial Restricted Stock Unit Grant | 6,500 shares | |||||||
Initial Stock Option Grant | — | |||||||
Annual Restricted Stock Unit Grant | 1,071 shares | 3,250 shares | ||||||
Annual Stock Option Grant | 3,214 shares | — |
8. | Selection of Board Members; Vacancies. The Board is responsible for filling vacancies in its membership, replacing directors who are unable to continue to serve effectively, and nominating candidates to stand for election at the annual meeting of stockholders. The Board has delegated to the Governance and Nominations Committee the process of identifying and screening candidates when a vacancy is to be filled and making preliminary recommendations for nominations. For so long as the Board of Directors is classified, the Board shall endeavor, where reasonably practicable, to appoint nominees for vacancies or newly created directorships to such class of director that will stand for election at the next annual meeting of the Corporation’s stockholders. If appointment to such class is not reasonably practicable, the election of the newly appointed director, to serve in the class to which he or she was appointed, will be ratified at the next annual meeting of the Corporation’s stockholders, notwithstanding that other directors serving in that class are not required to stand for election. If the election of the newly appointed director fails to be ratified at the next annual meeting of the Corporation’s stockholders, he or she shall tender his or her resignation to the Board. |
Reverse Split Ratio | Authorized Shares of Common Stock | Authorized Shares of Capital Stock | ||||||
1-for-5 | 196,000,000 | 216,000,000 | ||||||
1-for-7 | 140,000,000 | 160,000,000 | ||||||
1-for-10 | 98,000,000 | 118,000,000 |
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Reverse Split Ratio | Authorized Shares of Common Stock | Authorized Shares of Capital Stock | ||||||
1-for-5 | 196,000,000 | 216,000,000 | ||||||
1-for-7 | 140,000,000 | 160,000,000 | ||||||
1-for-10 | 98,000,000 | 118,000,000 |
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Board Discretion to Implement the Reverse Stock Split and Authorized Stock Reduction
If Proposal No. 2 is approved by shareholders, the reverse stock split will be effected, if at all, only upon a determination by the Board of Directors that a reverse stock split is in the best interests of Ciena and its shareholders. The Board’s determination as to whether the reverse stock split will be effected and, if so, at which Approved Option, will be based upon certain factors, including existing and expected marketability and liquidity of Ciena’s common stock, prevailing stock market conditions, business developments affecting Ciena, actual or forecasted results of operations and the likely effect on the market price of Ciena’s common stock.
If the Board of Directors determines to implement the reverse stock split, Ciena intends to issue a press release announcing the Approved Option, the record date and the effective date of the reverse stock split before it files the Amendment with the Delaware Secretary of State. If the Board does not implement a reverse stock split and corresponding authorized stock reduction prior to the date of the 2007 Annual Meeting of Shareholders, the authorization granted by shareholders pursuant to this Proposal No. 2 would be deemed abandoned and without any further effect. In that case, the Board of Directors may again seek shareholder approval at a future date for a reverse stock split if it deems it to be advisable.
Proposal No. 2 — Recommendation of the Board of Directors
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
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the end of each fiscal year. or fiscal 2006. OWNERSHIP OF SECURITIES 2006: governance practice.governance. In the event that shareholders fail to ratify the appointment, the Audit Committee will reconsider whether or not to retain PwC, but may ultimately determine to retain PwC as our independent registered public accounting firm. Even if the appointment is ratified, the Audit Committee, in its sole discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of Ciena and its shareholders. unanimously recommends that Ciena shareholders vote “FOR” the ratification of the appointment of PwC as our independent registered public accounting firm for the current fiscal year.20042005 and 2005.2006. In compliance with the Audit Committee’s internal policy and auditor independence rules of the SEC, all audit and permissible non-audit services provided by PwC to Ciena for the fiscal years ended October 31, 20042005 and 20052006 were pre-approved by the Audit Committee. Fee Category 2004 2005 Audit Fees $ 617,000 $ 2,014,000 Audit-Related Fees $ 141,000 $ — Tax Fees $ 280,000 $ 91,000 All Other Fees $ 104,000 $ — Total Fees $ 1,142,000 $ 2,105,000 2005 2006 Audit Fees $ 2,014,000 $ 2,046,149 Audit-Related Fees $ — $ 86,985 Tax Fees $ 91,000 $ 66,672 All Other Fees $ — $ — Total Fees $ 2,105,000 $ 2,199,806
12for the year ended October 31, 2005 included, for the first time,includes compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the preparation, by PwC, of an attestation report expressing its opinion regarding management’s assessment of our internal control over financial reporting and on the effectiveness of our internal control over financial reporting. As a result, audit fees for fiscal 2005 and 2006 reflect PwC’s integrated audit of our financial statements and our internal control over financial reporting as of October 31, 2005.These services forFor fiscal 2004 included accounting advice and2006, audit related fees include services in connection with acquisitions.Ciena’s convertible note offering. Ciena did not incur any audit related fees during fiscal 2005.1820042005 and fiscal 20052006 include tax return preparation, expatriate tax services and international VAT tax planning. products and services provided by PwC that are not included in the servicesservice categories reported above. These services for fiscal 2004 include consulting services and Sarbanes-Oxley Act related services in connection with our preparation for compliance with Section 404. Because Section 404 of the Sarbanes Oxley Act was effective for our fiscal 2005 audit,Ciena did not incur any other fees incurred during fiscal 2005 related to compliance with Section 404 are included under “Audit Fees.”formally accepted by the Audit Committee before the audit commences. Our independent registered public accounting firm also submits an audit services fee proposal, which also must be approved by the Audit Committee before the audit commences.all applicable legal requirements. The Audit Committee must approve both the list of non-audit services and the budget for each such service before commencement of the work. Our management and our independent registered public accounting firm report to the Audit Committee at each of its regular meetings as to the non-audit services actually provided by the independent registered public accounting firm and the approximate fees incurred by Ciena for those services.20042005 and 20052006 were pre-approved by the Audit Committee.
13PROPOSAL NO. 4SHAREHOLDER PROPOSAL REQUESTING THE BOARD TO ADOPTA MAJORITY VOTE STANDARD FOR THE ELECTION OF DIRECTORS A shareholder of Ciena, The United Brotherhood of Carpenters and Joiners of America, 101 Constitution Avenue, NW, Washington, DC 20001, which claims to be the beneficial owner of 9,200 shares of Ciena stock, has notified Ciena of its intention to propose the following item of business at the Annual Meeting. The SEC’s proxy regulations require Ciena to present the proposal and the supporting statement below, although Ciena has no responsibility for either. Following the shareholder’s proposal and supporting statement is the response of our Board of Directors. While the shareholder recommends that you vote “FOR” its proposal, our Board of Directors unanimously recommends you vote “AGAINST” this proposal.19
Shareholder Proposal and Supporting StatementResolved: That the shareholders of Ciena Corporation (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders.Supporting Statement: Our Company is incorporated in Delaware. Delaware law provides that a company’s certificate of incorporation or bylaws may specify the number of votes that shall be necessary for the transaction of any business, including the election of directors. (DCGL, Title 8, Chapter 1, Subchapter VII, Section 216). The law provides that if the level of voting support necessary for a specific action is not specified in a corporation’s certificate or bylaws, directors “shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.” Our Company presently uses the plurality vote standard to elect directors. This proposal requests that the Board initiate a change in the Company’s director election vote standard to provide that nominees for the board of directors must receive a majority of the vote cast in order to be elected or re-elected to the Board. We believe that a majority vote standard in director elections would give shareholders a meaningful role in the director election process. Under the Company’s current standard, a nominee in a director election can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from that nominee. The majority vote standard would require that a director receive a majority of the vote cast in order to be elected to the Board. The majority vote proposal received high levels of support last year, winning majority support at Advanced Micro Devices, Freeport McMoran, Marathon Oil, Marsh and McClennan, Office Depot, Raytheon, and others. Leading proxy advisory firms recommended voting in favor of the proposal. Some companies have adopted board governance policies requiring director nominees that fail to receive majority support from shareholders to tender their resignations to the board. We believe that these policies are inadequate for they are based on continued use of the plurality standard and would allow director nominees to be elected despite only minimal shareholder support. We contend that changing the legal standard to a majority vote is a superior solution that merits shareholder support. Our proposal is not intended to limit the judgment of the Board in crafting the requested governance change. For instance, the Board should address the status of incumbent director nominees who fail to receive a majority vote under a majority vote standard and whether a plurality vote standard may be appropriate in director elections when the number of director nominees exceeds the available board seats.We urge your support for this important director election reform.Statement of the Board of Directors in Opposition to the Proposal The Board of Directors of Ciena is committed to strong corporate governance policies and, as described elsewhere in this Proxy Statement, has implemented a number of modifications and proposals to strengthen our policies this year. The Board has always believed that shareholders should actively participate and play a meaningful role in the election of directors. While the Board is sensitive to the concerns underlying the shareholder’s proposal, the Board believes that implementation of a majority vote standard as proposed by the shareholder would result in ambiguity and uncertainty in the conduct of elections to the Board. The Board believes that the revision it has recently made to Ciena’s Principles of Corporate Governance better achieves the goal of giving greater weight to the withholding of shareholder votes for a nominee. The shareholder’s proposal does not adequately address what would occur under the provisions of Delaware corporation law governing elections of directors if a nominee fails to receive the requisite vote under a majority vote standard. Delaware law provides that directors hold office until their successors are duly elected and qualified. As a result, an incumbent director running unopposed for election, who fails to attain a majority vote, would nonetheless remain in office. Such a “failed election” would result in an awkward20situation in which the director would “hold over” and continue to serve on the Board despite what amounts to a vote of “no confidence” by the shareholders. If the nominee in such a failed election is not the incumbent, the holdover rule would result in the incumbent’s remaining in office (unless he or she resigned), even though he or she was not a candidate. The shareholder’s proposal would leave the Board with no clear process for addressing these situations. The majority vote standard proposed by the shareholder also could have other unintended consequences. For example, if it resulted in a failure to elect a candidate nominated to serve as the “financial expert” on the Audit Committee, the Company could find itself in violation of Nasdaq’s listing standards. The application of a shareholder’s majority vote standard could present particular difficulties in a contested election. It could lead to a failed election simply because the votes were spread so that no nominee received a majority of the votes cast. In a failed contested election, the incumbent, holdover director would remain in office, notwithstanding the voting results and whether or not the incumbent was the nominee for re-election or was the nominee who received the most votes. In the event of a failed election to fill a vacancy or new board seat, Delaware law and Ciena’s bylaws would provide for the remaining directors to fill this vacancy. The application of a majority vote standard to these situations would not strengthen the voice of shareholders in director elections. At the time it received the shareholder’s proposal, the Board of Directors was engaged in a comprehensive review of Ciena’s governance policies; and the Board considered the proposal as part of that review. After thorough deliberation, the Board determined that it would be better to address the concerns underlying the proposal by amending Ciena’s Principles of Corporate Governance to provide that, in an uncontested election for the Board, a nominee for whom a greater number of votes are “withheld” than are cast for his or her election must promptly tender his or her resignation. The Board, with the recommendation of its Governance and Nominations Committee, must either accept or reject the resignation within 90 days following the shareholder meeting. The determination of the Board, including an explanation of how the decision was reached, would then be publicly disclosed in an SEC filing. This new provision of our Principles of Corporate Governance, which is similar to those recently adopted by several other public companies, is set forth in its entirety below:16. Voting for Directors. In an uncontested election of directors (i.e., an election in which the only nominees are those recommended by the Board of Directors), any nominee for director for whom a greater number of votes are “withheld” than are cast for his or her election will tender his or her resignation promptly after certification of the shareholder vote. The Governance and Nominations Committee will promptly consider the resignation and recommend to the Board whether to accept or reject it. In making its recommendation, the Governance and Nominations Committee will consider all factors it considers relevant, including the stated reasons shareholders “withheld” their votes, the length of service and qualifications of the director, the director’s contributions to the Company, and the Company’s Principles of Corporate Governance.The Board will act on the Governance and Nominations Committee’s recommendation no later than 90 days following the date of the shareholders’ meeting. Promptly following the Board’s decision, the Company will disclose the nature of the decision, providing a full explanation of the process by which the decision was reached and, if applicable, the reasons for rejecting the resignation, in a Form 8-K filed with the Securities and Exchange Commission.To the extent that one or more directors’ resignations are accepted by the Board, the Governance and Nominations Committee will recommend to the Board whether to fill such vacancy or vacancies or to reduce the size of the Board.Any director who tenders his or her resignation pursuant to this provision will not participate in the Governance and Nominations Committee’s recommendation or the Board’s decision on the resignation. If a majority of the members of the Governance and Nominations Committee have been required to tender their resignations because of this provision, then the remaining independent21directors will appoint a special committee from among themselves for the purpose of considering the resignations and recommending whether to accept or reject them.This corporate governance guideline will be summarized or included in each proxy statement relating to an election of directors of the Company. The shareholder suggests that governance guidelines of this type are “inadequate for they are based on continued use of the plurality standard and would allow director nominees to be elected despite only minimal support.” In the past five years, our directors have, on average, received the affirmative vote of approximately 95% of the shares voted through the plurality process; none has received less than 87.6% of the vote. It can hardly be said, therefore, that Ciena’s directors have been “elected despite only minimal support.” The shareholder also proposes that the Board should address this issue by amending the certificate of incorporation or bylaws. The Board believes that law and practice in this area are evolving and that it would be premature for the Board to introduce an alternative system beyond that set forth in the Principles of Corporate Governance until the issues associated with failed elections and the application of a majority vote standard have been further clarified. For the reasons above, the Board believes that its revision to Ciena’s Principles of Corporate Governance provides shareholders with a greater voice in the election of directors and a better structure for director accountability than the majority vote proposal.The Board believes that the adoption of the shareholder’s proposal would not be in the best interests of Ciena and its shareholders and unanimously recommends that you vote AGAINST the proposal.222005,2006, the beneficial ownership of Ciena’s common stock for the following persons: • all shareholders known by us to own beneficially own more than 5% of our common stock; • our Chief Executive Officer and the other Named Executive Officers (as that term is defined in the Summary Compensation Table included in this Proxy Statement); • each of our directors; and • all of our directors and executive officers as a group. as amended, shares are deemed to be beneficially owned by a person on a particular date if that person has the right to acquire shares (for example, upon exercise of an option) within sixty days of the date that information is provided.date. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of such acquisition rights. As a result, the percentage of outstanding shares held by any person in the table below does not necessarily reflect the person’s actual voting power. As of December 31, 2005,2006, there were 580,879,13284,993,768 shares of Ciena common stock outstanding. Number Beneficial Percent of of Shares Right to Ownership Outstanding Name of Beneficial Owner Owned(1) Acquire(2) Total(3) Shares FMR Corp.(4) 68,529,939 522,824 69,052,763 11.9 % Patrick H. Nettles, Ph.D. 2,446,761 2,982,800 5,429,561 * Gary B. Smith 38,073 2,952,737 2,990,810 * Stephen B. Alexander 130,116 (5) 1,259,942 1,390,058 * Joseph R. Chinnici 276,052 1,096,097 1,372,149 * James F. Collier III 4,666 768,438 773,104 * Stephen P. Bradley, Ph.D. 40,000 310,500 350,500 * Harvey B. Cash(6) 378,898 200,500 579,398 * Don H. Davis, Jr. 10,000 120,000 130,000 * Lawton W. Fitt — 218,866 218,866 * Judith M. O’Brien 29,349 (7) 215,466 244,815 * Michael J. Rowny — 20,000 20,000 * Gerald H. Taylor 2,000 208,532 210,532 * All executive officers and directors as a group (15 persons) 3,381,185 12,492,212 15,873,397 2.7 % Number Beneficial Percent of of Shares Right to Ownership Outstanding Owned(1) Acquire(2) Total(3) Shares FMR Corp.(4) 8,848,136 534,586 9,382,722 11.0 % Patrick H. Nettles, Ph.D. 349,557 176,112 525,669 * Gary B. Smith 32 437,668 437,700 * Stephen B. Alexander(5) 30,077 184,820 214,897 * Michael G. Aquino 902 64,488 65,390 * Joseph R. Chinnici(6) 14,736 140,274 155,010 * Arthur D. Smith, Ph.D. 8,540 123,544 132,084 * Stephen P. Bradley, Ph.D. 5,714 47,212 52,926 * Harvey B. Cash(7) 54,128 31,498 85,626 * Bruce L. Claflin — — — * Lawton W. Fitt — 34,122 34,122 * Judith M. O’Brien(8) 4,231 33,636 37,867 * Michael J. Rowny — 7,380 7,380 * Gerald H. Taylor 286 32,645 32,931 * All executive officers and directors as a group (15 persons) 476,872 1,519,761 1,996,633 2.3 % * *Represents less than 1%. (1) Excludes shares that may be acquired through the exercise of stock options, the vesting of restricted stock units or other convertible or exercisable rights.equity awards. (2) Except as otherwise set forth in the footnotes below, represents shares of common stock that can be acquired upon the exercise of stock options orand vesting of restricted stock units within sixty days of December 31, 2005.2006. (3) TheExcept as indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table.applicable.
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(4) This shareholder’sShareholder’s address is 82 Devonshire Street, Boston, MA 02109. TheOwnership information concerning this shareholder is based solely on a Schedule 13G/A, filed jointly by FMR Corp. (“FMR”), and Edward C. Johnson 3d and Abigail P. Johnson with the Securities and Exchange Commission on February 14, 2005,October 10, 2006, and reflects their beneficial ownership at December 31, 2004.as of September 30, 2006. Based on the Schedule 13G/A, FMR is the parent holding company of Fidelity Management & Research Company (“Fidelity”). By acting as investment adviser to various investment companies, Fidelity is the beneficial owner of 57,139,9439,111,872 shares of Ciena’s common stock, or 9.8%10.7% of the outstanding shares of Ciena common stock at December 31, 2005.2006. Shares included in the “Right to Acquire” column above reflect shares of common stock exercisableissuable upon conversion of Ciena’s 3.75%outstanding convertible notes held by Fidelity and another subsidiary of FMR. These notes are convertible at the option of the holder into 9.5808 shares of common stock for each $1,000 in principal amount.FMR as reported on Schedule 13G/A. (5) Voting and investment power is shared with Mr. Alexander’s spouse. (6) Includes 221,4868,176 shares of stock held by a trust, of which Mr. Chinnici’s spouse is the beneficiary.(7) Includes 31,640 shares of common stock owned by InterWest Partners VI, L.P. and 7,0221,003 shares owned by InterWest Investors VI, L.P., which Mr. Cash may be deemed to beneficially own by virtue of his status as a Managing Director of InterWest Management Partners VI, LLC, which is the general partner of each limited partnership. Mr. Cash disclaims beneficial ownership of these shares except to the extent of his proportionate partnership interest therein. Also includes 145,000 shares owned by the Harvey B. Cash self-directed IRA, 2,691 shares owned by InterWest Management Profit Sharing Retirement Plan FBO Harvey B. Cash and direct ownership of 2,699 shares. (7) (8)Voting and investment power is shared with Ms. O’Brien’s spouse.
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2003, 2004, 2005 and 20052006 for Ciena’s Chief Executive Officer and the other four highest-paid executive officers as of October 31, 2005.2006. The fivefollowing table also discloses compensation information for Ciena’s Executive Chairman. The individuals included in the compensation information below are collectively referred to as the “Named Executive Officers.” Information in the table below regarding Restricted Stock Unit Awards reflects the dollar value of the shares subject to the grant based upon the closing price per share of Ciena common stock on the grant date. Footnotes (1) and (2)Additional information regarding the value of unvested restricted stock units as of the end of fiscal 2006 is set forth in the footnotes to the table below describe the vesting terms of the restricted stock unit grants, the forfeiture of certain grants containing performance-based vesting, and the year end dollar value of such grants based upon the closing price per share of Ciena common stock of $2.37 on October 28, 2005, the last trading day of Ciena’s fiscal year.below. Long Term Compensation Awards Annual Compensation (4) Restricted Securities Stock Unit Underlying All Other Name and Principal Position Year Salary Bonus Award(s)(1) Options Compensation(3) Patrick H. Nettles, Ph.D. 2005 $ 300,000 $ — $ — — $ 11,701 Executive Chairman of 2004 300,000 — — 300,000 12,012 the Board of Directors 2003 300,000 — — 450,000 17,785 Gary B. Smith 2005 $ 528,846 $ — $ — 700,000 $ 6,737 President, Chief Executive 2004 650,000 — 405,600 230,000 6,662 Officer and Director 2003 650,000 — — 700,000 6,002 Stephen B. Alexander 2005 $ 300,000 $ — $ — 250,000 $ 3,438 Senior Vice President, 2004 300,000 — 94,640 55,000 3,342 Products and Technology 2003 300,000 — — 300,000 1,110 Chief Technology Officer Joseph R. Chinnici 2005 $ 350,000 $ — $ — 250,000 $ 7,538 Senior Vice President, 2004 350,000 — 94,640 55,000 9,463 Finance and Chief 2003 350,000 — — 300,000 10,770 Financial Officer James F. Collier III 2005 $ 300,000 $ 200,012 $ — 250,000 $ 4,519 Senior Vice President, 2004 298,558 125,000 166,240 (2) 455,000 4,447 Worldwide Sales 2003 210,975 116,847 — 90,000 1,416 Long-Term Compensation Awards Restricted Securities Annual Compensation Stock Unit Underlying All Other Year Salary Bonus Award(s)(1) Options Compensation(3) Patrick H. Nettles, Ph.D. 2006 $ 300,000 — $ 40,109 (2) 3,214 (2) $ 14,355 Executive Chairman of the 2005 $ 300,000 — — — $ 11,701 Board of Directors 2004 $ 300,000 — — 42,857 $ 12,012 Gary B. Smith 2006 $ 500,000 $ 312,500 $ 1,179,990 107,142 $ 7,183 President, Chief Executive 2005 $ 528,846 — — 100,000 $ 6,737 Officer and Director 2004 $ 650,000 — $ 405,600 32,857 $ 6,662 Stephen B. Alexander 2006 $ 325,000 $ 101,563 $ 471,976 39,285 $ 3,678 Senior Vice President and 2005 $ 300,000 — — 35,714 $ 3,438 Chief Technology Officer 2004 $ 300,000 — $ 94,640 7,857 $ 3,342 Michael G. Aquino 2006 $ 487,410 (4) — $ 336,741 28,571 $ 3,778 Senior Vice President,
Worldwide Sales Joseph R. Chinnici 2006 $ 350,000 $ 164,063 $ 353,974 35,714 $ 8,141 Senior Vice President, 2005 $ 350,000 — — 35,714 $ 7,538 Finance and Chief 2004 $ 350,000 — $ 94,640 7,857 $ 9,463 Financial Officer Arthur D. Smith, Ph.D. 2006 $ 325,000 $ 101,563 $ 471,976 46,428 $ 4,449 Chief Operating Officer 2005 $ 275,000 — — 35,714 $ 4,159 2004 $ 275,000 — $ 74,339 6,000 $ 4,474 (1) For fiscal 2006, information includes the value of restricted stock units and performance stock units, based on the closing price per share on the date of grant. Restricted stock units were granted on November 1, 2005 in the following amountsamounts: 46,428 shares to Mr. Smith, 21,428 shares to Mr. Alexander, 14,285 shares to Mr. Chinnici and 21,428 shares to Dr. Smith. A restricted stock unit for 10,714 shares was issued to Mr. Aquino on December 9, 2003: (a) 60,000June 1, 2006. Restricted stock units vest as to one-sixteenth of the grant amount on the last day of each fiscal quarter over a four-year period from the date of grant. Based on the $23.59 closing price per share of Ciena common stock on October 27, 2006, at the end of fiscal 2006 the aggregate remaining unvested restricted stock units to Mr. Smith, and (b) 14,000held by each Named Executive Officer were as follows: 40,538 restricted stock units to eachwith a value of Messrs. Chinnici, Collier and Alexander. One third of the total number of$956,291 held by Mr. Smith, 17,406 restricted stock units granted became vested on December 9, 2005. An additional one thirdwith a value of the total grant amount will vest on December 9, 2006$410,608 held by Mr. Alexander, 9,376 restricted stock units with a value of $221,180 held by Mr. Aquino, 12,050 restricted stock units with a value of $284,260 held by Mr. Chinnici, and 2007, provided the recipient remains employed17,120 restricted stock units with a value of $403,861 held by Ciena. All of the unvestedDr. Smith. Unvested restricted stock units vest upon a termination of service due to death or disability. Performance stock units were granted on November 1, 2005 in the following amounts: 25,000 shares to Mr. Smith, and 7,142 shares to each of Mr. Alexander, Mr. Chinnici and Dr. Smith. Performance stock units vested in their entirety during fiscal 2006 upon Ciena’s achievement of certain corporate financial measures.(2) Reflects equity compensation payable for service on the Board of Directors. Based uponon the $2.37$23.59 closing price per share of Ciena common stock on October 28, 2005,27, 2006, the 1,071 aggregate remaining unvested restricted stock units held by Dr. Nettles had a dollar value of $25,265 at the end of fiscal 2005: (a) the 40,000 restricted stock units that remained held by Mr. Smith had a dollar value of $94,800, and (b) the 9,334 restricted stock units held by each of Messrs. Chinnici, Collier and Alexander, had a dollar value of $22,122.(2) In addition to the restricted stock units granted to Mr. Collier described in footnote (1), the amount set forth for Mr. Collier reflects the grant of 20,000 additional restricted stock units on May 18, 2004, valued at $71,600 based upon the $3.58 closing price per share of Ciena common stock on the date of the grant. These restricted stock units contained certain performance-based vesting terms. As a result of these terms, the 20,000 restricted stock units subject to this grant have been forfeited and therefore had no dollar value at the end of fiscal 2005.2006.
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(3) Includes the following for fiscal 2005:2006: (a) (a) life insurance premiums, paid by Ciena on behalf of all employees, in the amount of $714 for each of the Named Executive Officers,$3,564 to Dr. Nettles, $810 to Mr. Smith, $810 to Mr. Alexander, $1,053 to Mr. Aquino, $1,242 to Mr. Chinnici and $532 to Dr. Smith for group term life insurance coverage equal to two times annual salary and bonus, up to a maximum of $500,000; (b) (b) additional life insurance premium of $199 for Mr. Smith pursuant to a supplemental term life insurance policy that offers $235,000 in additional coverage above the limitation in footnote (a);coverage; (c) (c) long-term disability premiums, paid by Ciena on behalf of all employees, in the amount of $570 for Dr. Nettles, $855 for Mr. Smith, $570$618 for Mr. Alexander, $475 for Mr. Aquino, $665 for Mr. Chinnici and $482$618 for Mr. Collier;Dr. Smith; (d) (d) supplemental long-term disability premiums of $6,921 for Dr. Nettles, $1,819$2,019 for Mr. Smith, and $3,084 for Mr. Chinnici, paid by Ciena on their respective behalf, pursuant to executive long-term disability insurance policies held by those individuals; and (e) (e) 401(k) plan matching contributions, available to all employees, paid by Ciena in the amount of $3,496$3,300 to Dr. Nettles, Mr. Smith and Dr. Smith, $2,250 to Mr. Alexander and Mr. Aquino, and $3,150 to Mr. Smith, $2,154 to Mr. Alexander, $3,075 to Mr. Chinnici and $3,323 to Mr. Collier.Chinnici.(4) Salary information includes a compensation deferralIncludes sales commissions of $10,000$237,410 earned by Mr. Smith in fiscal 2005. During fiscal 2005, Ciena’s Board of Directors terminated the deferred compensation plan and distributed all amounts previously deferred.Aquino.2005: Individual Grants Percentage of Total Potential Realizable Value at Number of Options Assumed Annual Rates of Securities Granted to Stock Price Appreciation for Underlying Employees Exercise Option Term(4) Options in Fiscal Price Per Expiration Granted 2005 Share(3) Date 5% 10% Patrick H. Nettles, Ph.D. — — — — — — Gary B. Smith 350,000 (1) 2.45 % $ 2.85 12/10/2014 $ 627,322 $ 1,589,758 350,000 (2) 2.45 % $ 2.85 12/10/2014 $ 627,322 $ 1,589,758 Stephen B. Alexander 125,000 (1) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 125,000 (2) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 Joseph R. Chinnici 125,000 (1) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 125,000 (2) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 James F. Collier III 125,000 (1) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 125,000 (2) 0.87 % $ 2.85 12/10/2014 $ 224,044 $ 567,771 Individual Grants Percentage of Total Number of Options Potential Realizable Value at Securities Granted to Assumed Annual Rates of Underlying Employees Exercise Stock Price Appreciation for Options in Fiscal Price Per Expiration Option Term(4) Granted(1) 2006(2) Share(3) Date 5% 10% Patrick H. Nettles, Ph.D. 3,214 0.6 % $ 37.45 3/15/2016 $ 75,696 $ 191,830 Gary B. Smith 107,142 19.9 % $ 16.52 11/1/2015 $ 1,113,135 $ 2,820,902 Stephen B. Alexander 39,285 7.3 % $ 16.52 11/1/2015 $ 408,145 $ 1,034,320 Michael G. Aquino 28,571 5.3 % $ 31.43 6/1/2016 $ 564,739 $ 1,431,159 Joseph R. Chinnici 35,714 6.6 % $ 16.52 11/1/2015 $ 371,045 $ 940,301 Arthur D. Smith, Ph.D. 46,428 8.6 % $ 16.52 11/1/2015 $ 482,356 $ 1,222,385 (1) Except for the grant to Dr. Nettles, options reported above vest in equal monthly amounts over a48-month period. Options granted on December 10, 2004 were initially to vest and become exercisable as to 25% of the total grantreported for Dr. Nettles reflect equity compensation payable for service on the last dayBoard of the monthDirectors and such options vest in whichfull on the first anniversary of the grant occurs, and 2.084% per month thereafter. As described in the “Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values” table below, the vestingdate of these options and other “out-of-the-money” options held by employees was accelerated as of October 26, 2005.grant. (2) Percentage of Total Options granted on December 10, 2004 vestGranted to Employees reflects the unusual timing of broad-based stock option grants to non-executive employees in fiscal years 2005, 2006 and become fully exercisable on the last day2007. Ciena made broad-based grants of the month following two consecutive quarters of achievement by Ciena of certain financial performance measures. If these goals are not met byequity to non-executives at the end of fiscal 2005 and, just over a year later, early in fiscal 2007. Because neither of these grants fell in fiscal 2006, the total number of options will not vest. These options were not subjectgranted to the October 26, 2005 acceleration of vesting.non-executives in 2006 was substantially lower than normal. See “Compensation Committee Report on Executive Compensation” below for a discussion regarding changes in Ciena’s equity award practices. (3) Options were granted at exercise prices equal to the fair market value of Ciena’s common stock based on the closing price on the Nasdaq NationalThe NASDAQ Stock Market on the date of the grant. Upon exercise, the aggregate exercise price is to be paid to Ciena in cash.26(4) The dollar amounts set forth under these columns are the result of calculations of assumed annual rates of stock price appreciation of 5% and 10% from the date of grant to the date of expiration of such options. These assumptions are not intended to forecast future appreciation of Ciena’s stock price. Ciena’s stock price may increase or decrease in value over the time period set forth above.
1720052006 by the Named Executive Officers. Information on the number and value of exercisable options in the table below reflects the October 26, 2005 acceleration of vesting of unvested“out-of-the-money” stock options for approximately 14.1 million shares held by employees, officers and directors under Ciena equity compensation plans. For purposes of this acceleration of vesting, options having an exercise price of $2.50 or greater (reflecting the closing price per share of $2.49 on the Nasdaq National Market on the date preceding the acceleration of vesting) were considered“out-of-the-money.” The acceleration of vesting did not include stock options granted to executive officers that vest upon Ciena’s achievement of certain financial performance measures as set forth in footnote (2) in the “Option Grants in Last Fiscal Year” table above. Number of Securities Value of Unexercised Underlying Unexercised in-the-Money Options at Shares Options at 10/31/2005 10/31/2005 (2) Acquired Value on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable Patrick H. Nettles, Ph.D. — — 2,982,800 — $ 2,135,000 — Gary B. Smith — — 2,869,924 350,000 — — Stephen B. Alexander — — 1,227,650 125,000 $ 58,621 — Joseph R. Chinnici 200,000 $ 429,000 1,069,014 125,000 $ 73,705 — James F. Collier III — — 745,000 125,000 — — Number of Securities Value of Unexercised Shares Underlying Unexercised in-the-Money Options at Acquired Value Options at 10/31/2006 10/31/2006(2) on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable Patrick H. Nettles, Ph.D. 249,999 $ 5,944,026 176,112 3,214 — — Gary B. Smith 15,625 $ 243,009 418,917 132,589 $ 245,121 $ 765,904 Stephen B. Alexander 6,864 $ 140,031 177,514 48,139 $ 128,651 $ 279,093 Michael G. Aquino — — 31,899 36,667 $ 72,139 $ 66,570 Joseph R. Chinnici 26,487 $ 296,914 134,410 45,387 $ 57,861 $ 259,637 Arthur D. Smith, Ph.D. — — 115,806 53,645 $ 140,224 $ 318,021 (1) Calculated on the basis of the fair market value of the shares acquired on the exercise date, less the aggregate exercise price. (2) Calculated on the basis of the fair market value of the underlying common stock as of the end of fiscal 2005, based upon the $2.37$23.59 closing price per share of Ciena common stock on October 28, 2005,27, 2006, less the aggregate exercise price.During fiscal 2005, the all future grants of stock options, restricted stock, or other forms of equity-based compensation will be issued only under the Ciena Corporation 2000 Equity Incentive Plan (the “2000 Plan”). The Board of Directors capped future equity grants under all other current equity incentive plans, excluding Ciena’s 2003 Employee Stock Purchase Plan (“ESPP”). The following table provides information as of October 31, 20052006 with respect to the shares of Ciena’s common stock that may be issued under Ciena’s existing equity compensation plans. (A) (C) Number of securities to be (B) Number of securities remaining issued upon exercise of Weighted-average exercise available for future issuance under outstanding options, price of outstanding equity compensation plans (excluding Plan category warrants and rights options, warrants and rights securities reflected in Column (A)) Equity compensation plans approved by security holders(1) 21,545,190 $ 7.22 65,494,051 (2)(3) Equity compensation plans not approved by security holders(4) 39,045,656 $ 5.95 — (5) Total 60,590,846 $ 6.40 65,494,051 27 (A) (B) (C) Number of securities to be Number of securities remaining issued upon exercise of Weighted average exercise available for future issuance under outstanding options, price of outstanding equity compensation plans (excluding warrants and rights options, warrants and rights securities reflected in Column(A) Equity compensation plans approved by security holders(1) 2,990,589 (2) $ 51.50 8,528,270 (3)(4) Equity compensation plans not approved by security holders(5) 4,119,640 $ 46.35 — (6) Total 7,110,229 $ 48.51 8,528,270 (1) Consists of the following equity compensation plans: • 1994 Third Amended and Restated Stock Option Plan; • 1996 Outside Directors Stock Option Plan; • 2000 Plan; • ESPP; and • equity compensation plans assumed by Ciena in connection with its merger with ONI Systems Corp. (“ONI”), including, the ONI 1999 Equity Incentive Plan, the ONI 1998 Equity Incentive Plan and the ONI 1997 Stock Option Plan (“ONI Plans”). (2) Does not include 162,329 shares underlying restricted stock units issued and outstanding under the 2000 Plan. (3) Consists solely of shares remaining available for future issuance under the 2000 Plan and the ESPP. The 2000 Plan incorporates an evergreen provision pursuant to which, on January 1 of each year, the aggregate number of
18shares reserved for issuance under the 2000 Plan automatically increases by 5% of the total number of shares of Ciena’s common stock outstanding on December 31 of the preceding year, unless the Compensation Committee determines to reduce the increase in that year. The Compensation Committee determineddid not to increase the number of shares available under the 2000 Plan at January 1,in 2005 andor 2006. On March 16, 2005, Ciena shareholders approved an amendment to the ESPP pursuant to which 11.8 million shares were added to the ESPP on March 16, 2005, increasing the number of shares available under the ESPP to 25 million. The amendment to the ESPP also providedprovides for an “evergreen”evergreen provision, pursuant to which, beginning on December 31 2005,of each year, the number of shares available for issuance under the ESPP annually increases by up to four million571,428 shares, provided that the total number of shares available for issuance at any time under the ESPP shall not exceed 25 million.3,571,428 shares. On December 31, 2005, the evergreen provision automatically added an additional 2.1 million306,735 shares to the ESPP. An additional 571,428 shares were added to the ESPP on December 31, 2006 (not reflected in the table at fiscal year end above), increasing the total number of shares available to 25 million.3,547,758. (3) (4)There are no shares available for future issuance under the ONI Plans. However, any shares subject to outstanding options or other awards under the ONI Plans that are forfeited upon cancellation become available for grant and issuance under the 2000 Plan. (4) (5)Consists of the following equity compensation plans: • 1999 Non-Officer Stock Option Plan; and • equity compensation plans assumed by Ciena in connection with mergers or acquisitions, including the Cyras Systems, Inc. 1998 Stock Plan, the Omnia Communications, Inc. 1997 Stock Plan, the Lightera Networks, Inc. 1998 Stock Plan, the WaveSmith Networks, Inc. 2000 Stock Option and Incentive Plan, the Internet Photonics, Inc. 2000 Corporate Stock Option Plan and the Catena Networks, Inc. 1998 Equity Incentive Plan. (5) (6)By operation of the determination of the Board of Directors to cap future grants from equity incentive plans other than the 2000 Plan and the ESPP. Change-in Change in Control Arrangements-Control Arrangements
19• the officer’s willful or continued failure substantially to perform the duties of his or her position as determined by the Board; • any willful act or omission constituting dishonesty, fraud or other malfeasance; • any act or omission constituting immoral conduct or a willful material violation of Ciena’s Code of Business Conduct and Ethics, that is injurious to Ciena’s financial condition or business reputation; • a final adjudication of liability of the officer in any SEC or other civil or criminal securities law action; or • the officer’s conviction of, or plea of nolo contendere to, a felony. • removal from, or failure to be reappointed to, the officer’s principal position immediately prior to the change in control; • material diminution in the officer’s position, duties or responsibilities immediately prior to the change in control; • reduction in base salary, incentive compensation opportunity or participation in other benefit plans as in effect immediately before the change in control; • relocation of principal workplace more than 50 miles; or • the failure to obtain the assumption of the change in control severance agreement by any successor to Ciena.
20• the sale or exchange by shareholders of all or substantially all of Ciena’s stock, or a merger, consolidation, sale or exchange transaction, in each case, where the shareholders before such transaction do not retain at least a majority voting interest in the acquiring corporation after such transaction; • the sale or transfer of all or substantially all of Ciena’s assets; • a liquidation or dissolution of Ciena; or • any other event determined to be a change in control by Ciena’s Board of Directors. “cause,” as defined in the employment agreement,“cause”, he will receive continuation of benefits and payment of his monthly base salary until the earlier of the expiration of six months from such termination, or the commencement of his employment with a person or entity other than Ciena.has alsohave entered into transfer of control/a severance agreement substantially on the same terms as the amended and restated severance agreements with all of its executive officers includingdescribed above. Dr. Nettles and Messrs. Smith, Alexander, Chinnici and Collier. The agreements automatically renew for successive one year-terms unless Ciena gives notice of non-renewal at least 90 days prior to the anniversary of such agreement. These agreements generally provide for the continuation of payment of up to one year of salary and bonus in the event that the officer’s employment is terminated without “cause,” or, upon a termination of employment by the officer for “good reason,” as each term is defined in theNettles’ agreement within28one year following a change in control of Ciena. In addition, the terminated officer, and his or her family, are eligible to continue to participate in Ciena’s benefit plans or receive payment of the equivalent cost of such benefits until the earlier of the first anniversary of termination or the last day of the month in which the officer begins employment with another employer. Under the agreements, officers are eligible to receive a tax gross up payment to cover any additional taxes incurred by reason of the continued benefits coverage and any imposition of excise tax upon severance benefits payable. Officers also remain covered by directors and officers insurance and indemnification agreements until the period under the applicable statute of limitations has ended. The agreements also provideprovides for the vesting of his stock options held by the officer to continue for up to one year following a covered termination. PaymentThe agreement does not include a provision for the conversion of the severance benefits above will also apply where the officer is terminated in advance ofperformance-based equity awards upon a change in control andor the officer can reasonably demonstrate that such termination was in connection with or in anticipationacceleration of vesting of restricted stock units upon a covered termination. Under the change in control. The agreements continue in effect for one year following such change in control andagreement, Dr. Nettles is eligible to receive agross-up payment equal to the amount of any excise tax imposed upon his severance under the agreement is conditioned on the officer delivering a one-year non-competition agreement and waiver. The agreement with Mr. Smith is generally upon the same terms above, but provides that, in the event that his employment is terminated without cause by Ciena, or for good reason by Mr. Smith, within one year following a change in control of Ciena, Mr. Smith is entitled to a payment of the greater of $3,000,000 or three times his then current base salary and bonus, continuation of benefits for up to three years and immediate vesting of all of his unvested options.benefits.as amended, except to the extent that Ciena specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.various equity compensation plans and its bonus plan, and exercises general oversight over Ciena’s compensation practices.Policy and PracticesPhilosophyThe Committee has a charter and procedures that it follows in carrying out its responsibilities and it has developed a set of practices and guidelines that it uses to reach its decisions. It reviews the charter and its policies annually, modifying them as it believes desirable. While the Committee generally adheres to its compensation guidelines, significant changes in Ciena’s business or the markets in which it operates may cause us to deviate from these guidelines as we deem appropriate in order to attract, motivate, and retain talented executives and to serve the best interests of Ciena and its shareholders.Generalsuccessfullysuccessfully. The Committee is also conscious of designing compensation packages that provide incentives for employees both to
21increase shareholder value. We generally seek to offerachieve defined financial and operational objectives in the short- to intermediate-term.compensation packageswith other opportunities that might be available to Ciena’s employees. As a general guideline, the Committee seeks to set base salaries at or above the 50th percentile of salaries for similar positions at comparable companies, taking into account the nature of the position, the responsibilities, skills and experience of the executive, and his or her performance. The Committee may depart from this guideline in whichparticular cases, when it believes that the need to retain the services and the unique skills and experience of a portionparticular executive justifies paying a higher salary. In view of each executive’s compensation is tiedCiena’s financial performance over the last few years and its need to make prudent use of its cash, the Committee has generally not increased the base salaries of its executive leadership team since 2001, except to recognize promotions or changes in responsibility.financialindividual, departmental or team objectives.operational objectives. In implementing this policyresponsibilities; and for executives they range from 50% to 100%. These percentages are based on market data for bonus programs of companies similar to Ciena. The Committee reviewed that data during fiscal 2006 to assure that the bonus program is competitive.attemptsbelieves is generally undesirable. In addition to bonuses paid to eligible employees under the plan, the Committee also approved the payment of a special bonus to “non-exempt” hourly-paid employees in December of 2006.
22long-dilution and short-term intereststhe compensation expense resulting from equity grants.
23we believe will increase shareholder value over the long term.executive is responsible. Which type of goal is used for a given individual depends on the nature of his or her function and what behaviors the Committee wishes to reward. Because it believes that overall corporate performance is the ultimate objective, and fostering teamwork is important, the Committee generally uses company-wide goals for at least a part of the performance-based compensation of all of the executives.29uses the services of outside compensation consultants when it believes to do so would assist it carrying out its responsibilities. The Committee generally develops compensation plans, for both the executive leadership team and the majority of Ciena’s salaried workforce, based on three principal elements: a base salary, bonuses that depend on performance, and equity-based long-term incentive compensation.Base Salary The Committee generally seeks to set base salaries for executives at or slightly above the 50th percentile of salaries for similar positions at comparable companies, taking into account the naturethese market data are important indicators of the position, the responsibilities, skills and experiencelevels of the officer, and his or her performance. In view of Ciena’s financial performance over the last few years and its need to make prudent use of its cash, the Committee has generally not increased the base salaries of its executive leadership team since 2001, except to recognize promotions or changes in responsibility.Bonus Program Until the beginning of fiscal 2002, members of the executive leadership team were eligible under Ciena’s bonus program to receive quarterly bonus paymentscompensation that were dependent on Ciena’s success in achieving performance objectives established by the Committee. The percentage was based on the particular officer’s position and responsibilities and the extent to which the objectives were met. Ciena has not paid cash bonusesmust provide to its executive leadership team since 2001 (with the exception of sales incentive compensation paid to the Senior Vice Presidents of sales during that period). If Ciena’s financial performance continues to improve, the Committee expects to be able to reinstitute a bonus program.Equity-Based Long-Term Incentive Compensation The Committee believes that long-term incentive compensation performs an essential role in attracting and retaining senior executives and providing them long-term incentives to maximize shareholder value. Historically, Ciena has relied primarily on stock options for its long-term incentive program. A stock option becomes valuable only if Ciena’s stock price increases above the option exercise price and the holder of the option remains employed for the period required for the option to “vest.” This provides an incentive for an option holderemployees to remain employed by Ciena. In addition, stock options link a portion of an employee’s compensationcompetitive in the market for executive talent and thus to shareholders’ interests by providing an incentive to maximize shareholder value. Over the last four years, because we have generally not increased the base salaries of the executive leadership team or paid them bonuses, we have relied heavily on stock options, making substantial grants to the executive leadership team in each of these years.retain its key executives.Ciena has also historically used stock options as a part of the compensation of its non-executive employees. Ciena has typically made grants to all employees at the time they are hired, in connection with promotions, and to reward exceptional performance. also routinely made regular semi-annual grants in amounts based on an employee’s level within the organization and his or her performance.retained Compensia, a compensation consultant, to assist it with its work. Among other services Compensia:Ciena’s equity-based compensation program has consisted primarily of four plans: • 1994 Third Amended and Restated Stock Option Plan,Assists with the establishment of a plan under which executive officers, key employees and non-employee directors may be granted options;peer group of companies; • 1999 Non-Officer Stock Option Plan, a broad-based plan under which options may be grantedProvides information on compensation paid by those companies to all employees other than executivetheir officers; • Ciena Corporation 2000 Equity Incentive Plan (the “2000 Plan”), a plan under whichProvides survey data to supplement publicly available information on compensation paid by peer group companies;• Advises on alternative structures and forms of compensation; • Advises the Committee on appropriate levels of compensation for the Chief Executive Officer and the Executive Chairman; • Advises the CEO on appropriate levels of compensation for other members of the executive leadership team; and • Prepares “tally sheets” showing the amounts of all of the elements of compensation proposed for each of the executive officers key employees and non-employee directors may be granted options, restricted stock,the current and other formsprojected value both of equity-based compensation;proposed grants and of vested and unvested outstanding grants.
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• ADC Telecommunications 1996 Outside Directors Stock Option Plan, a plan that provides for automatic grants to non-employee directors. • Juniper Networks • ADTRAN • McDATA • Brocade Communications Systems • Redback Networks • Extreme Networks • Sonus Networks • Foundry Networks • TEKELEC • Harmonic • Tellabs • JDS Uniphase There also are options outstanding under various plans originally established by companies that Ciena has acquired but under which Ciena cannot or does not intend to grant options or other awards in the future.During fiscal 2005, we conducted a review of Ciena’s equity compensation program. Insofar as they relate to changes in the way we use equity-based compensation, the results of that review are described below. We also reviewed our existing option plans with a view toward simplifying their administrationsignificantly reducing the number of shares available under these plans to a number more realistically related to Ciena’s needs. At our regular meeting in October 2005, we formally resolved to “cap” allExecutive Chairmanoptions plans exceptCommittee works with Compensia, in conjunction with the Committee, to develop proposed compensation packages for the 2000 Plan,Chief Executive Officer and to make no further grants from anythe Executive Chairman. Meeting in executive session, the Committee reviews and discusses those packages in light of its assessment of the other plans.Perquisites Ciena’s executive leadership team are eligible forperformance of the same health and dental insurance, accidental death insurance, disability insurance, vacation, and other similar benefits as the rest of Ciena’s employees. Ciena provides supplemental, executive long-term disability insurance coverage for Messrs. Nettles, Smith and Chinnici. In addition, Ciena offers the executive leadership team an annual physical, tax preparation and financial planning services, and life insurance up to two times annual salary and bonus, subject to a $500,000 cap. Supplemental life insurance procured on behalf of Mr. Smith provides an additional $235,000 of coverage in excess of this limitation.Significant Compensation Decisions for Fiscal 2005Salaries The Committee determined at its meeting in October 2004,officers, making any modifications that it would again generally make no changes to the salariesconsiders desirable.executive leadership team (except in cases of promotions or changes of responsibility).Executive Leadership TeamBonus Program While the Committee considered the possibility of reinstituting a bonus program for fiscal 2005, it concluded that Ciena’s financial performance did not yet warrant doing so.Long-Term Incentive Compensation of Members of the Executive Leadership Team At its regular meeting in October 2004, the Committee approved a semi-annual grant of stock optionsThe Chief Executive Officer works with Compensia to employees other than the executive leadership team. At its regular meeting in December 2004, the Committee approved grants of stock options to the executive leadership team. One half of these options vest in equal monthly installments over four years. For the first time, we introduced an element of performance-based vesting to the equity-baseddevelop proposed compensation program, providing that the remaining half of the options will vest upon the timely achievement of corporate targets for positive cash flow from operations.Executive Chairman Compensation The Committee made no change in Dr. Nettles’ base salary for fiscal 2005 and made no long-term incentive grants.Chief Executive Officer Compensation At a special meeting in November 2004, Mr. Smith recommended that the Committee approve a reduction of his annual base salary from $650,000 to $500,000. This recommendation to the Committee was voluntarily offered by Mr. Smith and was not related to his or Ciena’s performance. The Committee considered and accepted this recommendation. At its December 2004 meeting the Committee determined to grant Mr. Smith an option to purchase 700,000 shares of stock, with the same vesting provisions as the options31described abovepackages for the other members of the executive leadership team. He presents his recommendations to the Compensation Committee, which then discusses them, often in consultation with Compensia, makes any modifications it considers desirable, and approves the final results.determining the form and amount of this grant, the Committee took into account Mr. Smith’s performance, and the importance of providing him with sufficient incentives to remain with Ciena and carry on the workevent it becomes necessary to continue to effect Ciena’s repositioning, corporate transformation and return to profitability. The Committee also took into account information about recent stock option grants tofill a vacancy in the executive leadership team by hiring a new employee or promoting an existing one, the Chief Executive OfficersOfficer consults with the Chair, and often the other members of similarthe Committee, with respect to the proposed compensation for the position. The Committee is asked to ratify the salary and bonus package of the new officer at its next regular meeting, at which it also approves any equity grants for the new officer.advice of its independentexecutive leadership team to join other companies. Under these circumstances, in formulating compensation consultant.for fiscal 2007, the Committee has paid particular attention to developing compensation packages that provide strong retention incentives for the executive leadership team.
25Significant Compensation Decisions for Fiscal 2006SalariesSalariesourits regular meeting in October 2005,2006 that it would again make no changes to the salaries of the executive leadership team with the exception of two executives who had been asked to take on increased responsibilities. It approved an increase in salary for Mr. Alexander from $325,000 to $375,000, and increased the target bonus percentages for Mr. Alexander and Dr. Smith from 50% to 75% of their base salaries.Bonus Programour Octoberthe Committee’s May 2006 meeting, we also concluded that it was still prematuredetermined to reinstitute athe corporate bonus program for fiscal 2006. We did, however, agree to reconsiderand approved the issue lateradoption of the formal Ciena Corporation Incentive Bonus Plan. It made no changes in the yeartarget bonus percentages for the executive leadership team, keeping them at the same levels in place in 2002 when the bonus program was suspended. In order to limit the expense and cash drain from the bonus for the third quarter of fiscal 2006, the Committee reduced the bonus payout to 50% of the target percentages if the bonus goal was achieved, but provided that the bonus payout could be as high as 100% of the target percentages if Ciena overachieved the goal. The Committee based the goal on Ciena’s financial performance continuesresults of operations for the quarter. Ciena did overachieve the goal and paid bonuses at the 100% level.improve, with150% of the target percentages on overachievement of the goal. The goal was surpassed, and Ciena paid bonuses at the 150% level. The Committee approved a view towards possibly reinstitutingsimilar bonus goal for the first quarter of fiscal 2007, and expects to continue to authorize bonuses on a program later inquarterly basis during the remainder of the fiscal year.Long-Term Incentive Program • to reexamine and revise Ciena’s overall strategy for using equity in compensating employees and executives in view of changes in the needs of the company and in the external environment; • to develop an approach to equity grants for the executive leadership team in view of athe revised strategy; and • to arrive at specific grants for the executive team for fiscal 2006. As in past years, we made a single grant to the members of the executive leadership team at the beginning of the fiscal year, and as a general rule we do not plan to make any further grants for the remainder of the year. The Committee also considered possible changes in the use of stock options and restricted stock in compensating non-executive employees. We retained an independent compensation consultant to assist with this review. Working with the consultant, we considered recent changes in practices relating to equity-based compensation. We believe those changes to be partly the result of changing perceptions of the advantages and disadvantages of equity-based compensation, including an increased sensitivity to the dilutive effects on existing shareholders. The new accounting requirement that companies expense grants of stock options is also likely to have significant effects on the use of options as a compensatory vehicle. In light of the increased expense associated with option grants, many companies will likely reduce their use of stock options. Many will also make increased use of restricted stock and similar vehicles in lieu of stock options.that we believe shouldto guide our actions in making grants of equity to the executive leadership team underat the current circumstances, includingbeginning of 2006. We believe that those principles still apply. They include the following: • SinceBecause we have paid no bonuses between the end of 2001 and the second half of 2006, and we approved only isolated increases in salary, since 2001, substantial equity grants are, and may continue to be, appropriate to assure the retention of key executives and provide appropriate incentives. • A portion of the equity grants should includeprovide for performance-based vesting to provide amplifiedadditional incentives to achieve Ciena’s key financial goals.32 • The gross “burn rate” for all grants under the 2000 Plan should remain at or below the burn rate of comparable companies and generally should in any event not exceed a maximum3%. (In determining the burn rate, the Committee multiplies the number of 2.5% to 3%shares of Ciena’s outstanding common shares.restricted stock by 1.5 in recognition that they are more valuable than shares underlying options.) especially given its current situation, Ciena’s future will depend in substantial part on the efforts of the executive leadership team. The principal goals of anythe compensation program for these individuals should beare to retain their services and to provide them incentives to continue to work to make Ciena successful and thereby create shareholder value. WeThe former goal has assumed even greater significance because the improvements in the business climate in our sector and Ciena’s relative success in effecting its turnaround have increased the possibility that other companies will try to recruit our key executives.
26our analysis by seeking to determineestablishing the value that we believed needed to be delivered to members of the executive leadership team in the form of equity awards appropriatecompensation in order to accomplish thosethe twin goals of retaining their services and providing them incentives to achieve Ciena’s goals. In determining how much value should be delivered to each executive, the Chief Executive Officer and the Committee considered the other elements of compensation for the executive, primarily salary and bonus. For each of the other executives, the Chief Executive Officer reviewed the role he plays at Ciena, the importance of that role to Ciena’s success, and the quality of the executive’s performance in the role. The Committee made its own similar evaluation for the Chief Executive Officer and the Executive Chairman. The Chief Executive Officer and the Committee also considered the existing holdings of stock, options, and restricted stock, both vested and unvested, for each executive. Finally, the Committee examined the percentage of the outstanding shares of Ciena represented by each of the executive’s equity holdings, as we believe that it is important both to retention and alignment with shareholder interest that senior executives hold a meaningful interest in the company’s equity base.As a starting point, workingour consultant, we developed a listthe compensation and equity holdings of their counterparts in the peer group of companies described above. It determined that, represent an appropriate peer group with which to compare Ciena’s compensation practices. We comparedthe restoration of the bonus program, the total cash compensation (salary plus bonus) for the senior executives of those companies with the cash compensation (which has recently consisted of salary only) for Ciena’s executive leadership team, and concluded that, in general, the cash compensation being received by Ciena’s executives is at or below the 25th percentilenow competitive with that of executives occupying comparable positions in the peer group. On the other hand, the holdings of Ciena’s executives as a percentage of its outstanding stock are, on the whole, substantially lower than for the peer companies. The Committee believes this level of cash compensation raises concerns for retention of key executives, particularly given the significant progress that Ciena has made over the last two years and the nature of the challenges ahead. We considered the values, at the 25th, 50th and 75th percentile levels, of long-term incentive grants made by the peer group companies to their counterparts of Ciena’s executive leadership team. We werewas also cognizant that Ciena provides its executives only veryrelatively modest benefits and perquisites. Becauseperquisites by contrast to many other companies.our concerns aboutthis analysis, and in consultation with the relatively low level of cash compensation paid toChief Executive Officer and its consultant, the Ciena team, weCommittee determined that, we should usein order to provide sufficient assurance of retaining the higherkey executives, it was necessary, as a general matter, to make equity awards having a value delivered at the high end of the range of awards made by the peer group as measured by the total value delivered to each executive. Based on all of the considerations above, the Committee approved the grants described elsewhere in this range as a guideproxy statement. The size of the awards to particular executives in establishingrelation to their equity awards.peer group counterparts varies considerably due to differences in the individual situations of the executives, the particular nature of the functions they perform at Ciena, their perceived importance to Ciena’s future, and the risk that they would leave the Company if not appropriately rewarded and incentivized.Thethreetwo basic forms of equity-based compensation: stock options and restricted stock. For a given value to be delivered to the executives, the Committee decided, on the advice of its consultant, that it should treat one share of restricted stock as roughly equivalent to an option for two shares. (According to the Black-Scholes formula, a share of restricted stock has a value equivalent to approximately 1.7 option shares. The Committee used the 2:1 ratio because it believes it more accurately represents the risks related to the two instruments.) The Committee then compared the outcomes for the executives of holding various combinations of options and restricted stock over a five-year period, under varying assumptions about increases in Ciena’s stock price. On the basis of that comparison, the Committee concluded that, in general, a mix of options and restricted stock would be appropriate, as it combines the relative certainty offered by restricted stock and the leverage offered by stock options. The mix of the two varied from individual to individual, depending on his role in Ciena and his personal circumstances. (restricted stock” the vesting of which is conditioneddepends on achieving specified performance goals). After comparingcorporate financial goals set by the resultsCommittee on the basis of different combinationsCiena’s operating plan, and thus designed to incentivize the holders to achieve that plan. The remaining performance-based grants were in the form of “performance-accelerated” restricted shares. These instruments vest after four years, and thus provide a retention incentive. However, they are structured so that one-third vests at the end of each of the first three given various assumptions for increasesyears upon the achievement of annual corporate performance goals set by the Committee on the basis of Ciena’s annual operating plan. The Committee also made some grants in Ciena’s stock price over a five-year period, we determined that a combination consisting of roughly 50% in value of options, 30% in value of restricted stock, and 20% in value of performance shares would best serve the goals we sought to achieve. We decided, for administrative convenience, to grant restricted stock units and performance share units (contracts that give the recipients the right to receive shares as the units vest) rather than make outright grantsform of stock subject to vesting. Before reaching a decision on specific awards,options that vest over four years, which the Committee consideredbelieves will provide an incentive for the potential dilutive effect on current shareholders of grants of the general magnitude proposed. Since 2002, theexecutive officers to work to increase Ciena’s share price. The Committee had managed Ciena’s stock option program based on the guideline that the totalnet option grants for any fiscal year should not exceed 2.25% of the common shares outstanding. In the course of its review, the Committee determined that it should adopt a revised guideline based on thegrossnumber of shares used in grants during any fiscal year. After considering the equity compensation “burn rates” of the companies in the peer group, guidelines used by certain institutional advisory services, and the advice of our compensation consultant, we decided to adopt a guideline of an equity compensation burn rate on the order of 3% of the common shares outstanding (on a gross basis) in any fiscal year. We believebelieves that this is not only consistent with our previous guideline, but that it is conservative when compared to the practices of our peer companies. Restricted stockstructure combines strong incentives for both performance and performance shares dilute the outstanding shares when they vest regardless of the market price of the stock, whereas options actually become dilutive only if they are “in the money.” Accordingly, it is generally considered that restricted stock and performance shares are more dilutive than options. In calculating “burn rates,” therefore, it is necessary to convert restricted stock and performance share grants into their equivalent in stock options. No standard practice has yet emerged as to how this conversion should be made. On the advice of our consultant, and consistent with the practices of at least one institutional shareholder advisory service, we determined that, in applying our burn rate guideline, we will convert restricted stock and performance shares into “option equivalents” using a conversion ratio of 1.5 to one. We plan to monitor practices in this area as they evolve.retention. As described above, we initially established the general magnitude of the proposed grants based on the value of grants made by companies in the peer group. As an additional check we also compared the proposed
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grants as a percentage of Ciena’s outstanding shares against grants made by peer companies as a percentage of their outstanding shares. This comparison produced results that were nearly identical with the value-based analysis and confirmed our belief that the general magnitude of proposed grants was both reasonable and within the range necessary to be competitive.Finally, the Committee considered the total grants to be made to the executive leadership team in the context of Ciena’s overall equity-based compensation program. Based on projections of equity grants to be made to employees during the balance of fiscal 2006, we determined that we could make the proposed executive grants and the projected additional grants to employees and still remain within our newly-established guideline of a burn rate on the order of 3% of common shares outstanding. Beginning with a preliminary analysis provided by the Committee’s compensation consultant, the Chief Executive Officer made recommendations for the level of specific grants for each member of the executive leadership team other than himself and the Executive Chairman. In doing so, he took into account their performance, the value of their role to Ciena, and the need to provide them sufficient incentives to remain with Ciena and continue their work toward its success. The recommendations each included a stock option that would vest in equal monthly installments over four years, a restricted stock unit that would vest in equal quarterly installments over four years, and a performance share unit that would vest upon Ciena’s achieving certain profitability targets. Under the terms of the restricted stock units and the performance share units, at the option of the holder, Ciena will pay the withholding tax due as the units vest and will reduce the number of shares issued by the amount of withholding, based on the fair market value of the shares on the date of vesting. The Committee reviewed and approved these recommendations, and made grants based on them effective on the first day of fiscal 2006.Executive Chairman Compensationno long-term incentivea grant to him of restricted stock units and stock options equal to the annual grants to him.the non-executive directors serving on the Board. The Committee considers his salarycompensation to be appropriate and not excessive for the services he is performing for Ciena.Chief Executive Officer Compensation750,00075,000 shares, performance-accelerated restricted stock units for 325,00060,000 shares and performance share units for 175,000,20,000 shares, all on terms similar to those granted to the other members of the executive team. The Committee considers this compensation to be appropriate and not excessive for the services he is performing for Ciena.Other Actions As part of its review of the equity compensation strategy, the Committee considered the desirability of accelerating the vesting of some or all of the unvested stock options that were out of the money. The Committee conducted a joint special meeting with the Audit Committee during which the two committees considered a report on Statement of Financial Accounting Standard 123(R), which requires Ciena to commence in fiscal 2006 recording compensation expenses when it grants stock options. The two committees discussed the accounting effects of SFAS 123(R), the reaction of the financial community to it, and various alternatives for reducing the accounting expense that Ciena will be required to record as a result of outstandingout-of-the-money options. At its regular meeting in October 2005 the Committee discussed these alternatives further and agreed to refer the matter to the Board of Directors without recommendation. At its meeting on October 26, 2005, the Board voted unanimously to accelerate allout-of-the-money stock options with the exception of certain options whose vesting depends on achieving certain financial goals. InSubmitted by the past, members of the executive leadership team have been eligible to participate in Ciena’s Employee Stock Purchase Plan (ESPP), which enables employees to purchase shares of Ciena common stock34at a discount to fair market value by using funds deducted from paychecks during the preceding six months. During fiscal 2005, we reviewed the ESPP with a view to determining how it was being used and whether any modifications were in order. Although we determined not to make any significant modifications in the ESPP for the time being, we did conclude that, because they were receiving significant grants of equity in other forms, members of the executive leadership team should not be eligible to participate in the ESPP in the future. The Committee is continuing to study the costs and benefits of this program.Compensation Committee:At our October 2005 meeting, at the request of management, we also considered the continued value to Ciena, in light of recent changes to the income tax laws, of its deferred compensation plan, pursuant to which eligible executives could elect to defer receipt of a portion of their cash compensation. On the recommendation of management, we concluded that the program was no longer worth the cost of maintaining it, and we decided to terminate the program and distribute to participants the amounts they held in the plan.Submitted by the members of the Compensation Committee:Judith O’Brien (Chairperson)Harvey B. CashDon H. Davis, Jr.Gerald H. Taylor Davis and Taylor and Ms. O’Brien, who comprised the Compensation Committee in fiscal 2005,2006, were not at any time during fiscal 2005,2006, or at any other time, officers or employees of Ciena. During fiscal 2005,2006, no member of the Compensation Committee was an executive officer of another entity on whose compensation committee or board of directors an executive officer of Ciena served. as amended,, except to the extent that Ciena specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.20052006 to consider the adequacy of Ciena’s internal controls, and discussed these matters with Ciena’s independent registered public accounting firm, PricewaterhouseCoopers LLP, and with appropriate Ciena financial personnel. The Committee also discussed with senior management and PricewaterhouseCoopers LLP Ciena’s disclosure controls and procedures and the certifications by Ciena’s Chief Executive Officer and Chief Financial Officer, which are required by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 for certain filings with the Securities and Exchange Commission. The Committee has established a procedure for receiving and addressing anonymous complaints regarding financial or accounting irregularities. It has also considered and overseen the implementation of accounting policies and their communication to financial and management personnel.
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20052006 with management and with PricewaterhouseCoopers LLP. The Audit Committee has discussed with PricewaterhouseCoopers LLP the matters required to be discussed by Statement on Auditing Standards No. 61, which relates to the conduct of the audit. The Audit Committee has received the written disclosures and the letter from PricewaterhouseCoopers LLP required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and has discussed with PricewaterhouseCoopers LLP its independence. Based on the Audit Committee’s review of the audited financial statements and the review and discussions described in this report, the Audit Committee recommended to the Board of Directors that the audited financial statements for fiscal 20052006 be included in Ciena’s Annual Report onForm 10-K for fiscal 20052006 for filing with the Securities and Exchange Commission.
29Submitted by the members of the Audit Committee:Lawton W. Fitt (Chairperson)Stephen P. Bradley, Ph.D.Michael J. Rowny36
NasdaqNASDAQ Telecommunications Index and the S&P 500 Index from October 31, 20002001 to October 31, 2005.2006. The NasdaqNASDAQ Telecommunications Index includes manufacturerscontains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Telecommunications and Telecommunications Equipment. They include providers of fixed-line and mobile telephone services, and makers and distributors of digital equipment used in telecommunication, operators of wireless and fixed-line telecommunication services, independent radio and television contractors, film production, providers of television, and media services and programming facilities including those driven by subscription.high-technology communication products. This graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the SEC’s proxy rules or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and the graph shall not be deemed to be incorporated by reference into any prior or subsequent filing by Ciena under the Securities Act of 1933 as amended, or the Exchange Act.Nasdaq Telecomthe NASDAQ Telecommunications Index and the S&P 500 Index on October 31, 20002001 with all dividends reinvested at month-end.20072008 ANNUAL MEETING as amended, some proposals by shareholders may be eligible for inclusion in Ciena’s proxy statement for the 20072008 Annual Meeting. Shareholder proposals must be submitted, along with proof of ownership of Ciena common stock in accordance withRule 14a-8(b)(2), to Ciena Corporation, 1201 Winterson Road, Linthicum, Maryland 21090, Attention: Corporate Secretary. These submissions must comply with the rules of the SEC for inclusion in Ciena’s Proxy Statement and must be received no later than October 4, 2006.September 29, 2007. Submitting a shareholder proposal does not guarantee that we will include it in our proxy statement. We strongly encourage any shareholder interested in submitting a proposal to contact our Corporate Secretary in advance of this deadline to discuss the proposal, and shareholders may want to consult knowledgeable counsel with regard to the detailed requirements of applicable securities laws.
303720072008 Annual Meeting is December 18, 2006.13, 2007. If a shareholder gives notice of such a proposal after the December 18, 2006that deadline, proxies for Ciena’s 20072008 Annual Meeting may grant discretionary voting authority to the proxy holders to vote against the shareholder proposal when and if the proposal is raised at Ciena’s 20072008 Annual Meeting. To make a submission, shareholders should provide written notice to Ciena Corporation, 1201 Winterson Road, Linthicum, Maryland 21090, Attention: Corporate Secretary. as amended, requires Ciena’s directors and officers, and persons who own more than 10% of Ciena’s common stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission and the Nasdaq NationalThe NASDAQ Stock Market. Such persons are required by Securities and Exchange Commission regulations to furnish Ciena with copies of all Section 16(a) forms that they file.PetrikAquino filed one late Form 4 reporting a single transactiontwo equity grants and that all other Section 16(a) filing requirements of our directors and executive officers were met.20052006 has been mailed concurrently with this Proxy Statement to all shareholders entitled to notice of and to vote at the Annual Meeting. The Annual Report is not incorporated into this Proxy Statement and is not considered proxy-soliciting material.12, 2006.10, 2007. Ciena will mail without charge, upon written request, a copy of its Annual Report onForm 10-K for the fiscal year ended October 31, 2005,2006, excluding exhibits. Please send a written request to Investor Relations, Ciena Corporation, 1201 Winterson Road, Linthicum, Maryland 21090, or complete the request form on the investor relations page of Ciena’s website atwww.ciena.com. www.ciena.com.
3138RouteInterstate 95 North95I-95 North to Exit 53 (395 Downtown). At the third light turn right onto Pratt Street. Proceed on Pratt Street through eight lights, take a right on President Street and proceed three lights, getting into the right hand lane after the second light (Eastern Avenue). Go straight at the third light towards the Katyn Memorial. Enter the traffic circle and follow to the first right onto Aliceanna Street. The hotel entrance is approximately 100 yards on the right.RouteInterstate 95 South95I-95 South through the Fort McHenry Tunnel to Exit 53 (395 Downtown). At the third light turn right onto Pratt Street. Proceed on Pratt Street through eight lights, take a right on President Street and proceed three lights, getting into the right hand lane after the second light (Eastern Avenue). Go straight at the third light towards the Katyn Memorial. Enter the traffic circle and follow to the first right onto Aliceanna Street. The hotel entrance is approximately 100 yards on the right.RouteInterstate 83 South83I-83 South until it turns into President Street at Fayette Street. Follow President Street for five lights, getting into the right hand lane after the fourth light (Eastern Avenue). Go straight at the fifth light towards the Katyn Memorial. Enter the traffic circle and follow to the first right onto Aliceanna Street. The hotel entrance is approximately 100 yards on the right. Ciena has retained the services of The Altman Group, for a fee of approximately $6,000 and reimbursement of reasonable out of pocket expenses, to assist in the solicitation. Copies of solicitation material may be furnished to brokers, custodians, nominees and other fiduciaries for forwarding to beneficial owners of shares of Ciena common stock, and normal handling charges may be paid for such forwarding service. Officers and other Ciena management employees, who will receive no additional compensation for their services, may solicit proxies by mail,e-mail, personal interview or telephone.
32By Order of the Board of Directors,Russell B. Stevenson, Jr.SecretaryFebruary 1, 2006Linthicum, Maryland39
ANNEX AElectronic Voting InstructionsCIENA CORPORATIONYou can vote by Internet or telephone!
Available 24 hours a day, 7 days a week!CHARTER OF THE AUDIT COMMITTEEMission The Audit Committee is a standing committeeInstead of mailing your proxy, you may choose one of the Company’s Board of Directors. Its mission istwo voting methods outlined below to assist the Board in fulfilling its oversight responsibilities by assessing and monitoring the Company’s financial information, potential financial, legal and regulatory exposures, systems of internal controls and the independent audit process.vote your proxy.Membership The Committee shall consist of at least three members of the Board of Directors (“Board”), all of whom shall be “independent” as defined by federal securities law and the listing requirements of the Nasdaq Stock Market and any securities exchanges on which the Company’s securities are listed. The members shall be appointed by vote of the full Board at the regular meeting of the Board that falls closest to the date of the annual meeting of shareholders. The Board shall appoint one member of the Committee to act as its Chair. At least one member of the Committee shall have a financial/accounting background and qualify as an “expert” in accounting matters as definedVALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Securities and Exchange Commission. The members of the Committee shall serve terms of one year, and shallInternet or telephone must be eligible for re-appointment.received by 1:00 a.m., Central Time, on March 14, 2007.Duties and Responsibilities The Committee shall have the following duties and responsibilities:Vote by Internet • Appoint and establish the compensation of the Company’s independent auditors, and oversee their work; • Approve in advance all audit and non-audit services Vote by telephonebe performedyou for the call.Company’s independent auditors, unless Committee approval is not required by applicable laws, rules or regulations;recorded message. • Resolve disagreements between management and
this example. Please do not write outside the Company’s independent public accountants regarding financial reporting;designated areas • Facilitate communication between the independent public accountants and the Board;• At least annually review and approve the procedures established by the Company for collecting and processing information required to be included in its periodic reports filed with the Securities and Exchange Commission;• Periodically review and discuss with management and the independent public accountants the Company’s selection, application and disclosure of critical accounting policies, any significant changes in the Company’s accounting policies and any proposed changes in accounting or financial reporting that may have a significant impact on the Company. When appropriate, the Committee will consider the effect of alternative GAAP methods on the Company’s financial statements;• Oversee financial reporting processes of the Company with a view to the fulfillment of its responsibilities for the fair and accurate presentation of financial statements in accordance with generally accepted accounting principles and SEC regulations;• Review the Company’s annual report onForm 10-K and discuss it with management and the Company’s independent public accountants prior to its filing with the SEC;• Review legal, environmental and regulatory matters that may have a material impact on the Company’s financial statements or operations;• Oversee the accounting processes of the Company including the maintenance of adequate systems of internal controls encompassing management information systems, computer systems, security, disasterxA-1recovery and a code of business conduct. In addition, review compliance with these controls as well as significant proposed changes;• Assess with management and the independent public accountants significant risks and exposures and evaluate measures management has implemented to reduce such risks;• Review with the Company’s Chief Financial Officer and the independent public accountants the audit scope and audit plan of the independent public accountants;• Review with management and the independent public accountants at the completion of the annual audit:• The Company’s annual financial statements and related footnotes.• The independent public accountant’s audit of the Company’s financial statements and the report thereon including recommended changes in reporting policies or internal controls.• Any significant changes required in the independent public accountant’s audit plan.• Any significant difficulties or disputes with management during the course of the audit.• Other matters related to the audit which are to be communicated to the Committee under generally accepted auditing standards.• Review with the Board of Directors the results of the annual audit including the scope, effectiveness and cost of the audit;• Review, confirm and assure the independence of the independent accountants by reviewing non-audit services performed by external accountants;• Review the cost of audit and non-audit services performed by the independent accountants;• Discuss with the Chief Financial Officer and the independent accountants their qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and financial disclosure practices used or proposed to be adopted by the Company and particularly, about the degree of aggressiveness or conservatism of its accounting principles and underlying estimates;• Establish procedures for (i) processing complaints regarding accounting, internal controls or auditing matters and (ii) confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters;• Report Committee actions to the Board of Directors with such recommendations as the Committee may deem appropriate;• At least annually, review and update the Committee’s Charter;• The Committee shall perform such other functions as required the Company’s charter or bylaws, the Board of Directors or applicable laws, rules and regulations, including the rules of the SEC and the NASDAQ stock exchange. The Committee shall have the power to conduct or authorize investigations into any matters within the Committee’s scope of responsibilities;• The Committee shall be empowered to retain independent counsel, accountants or others to the extent the Committee considers necessary to carry out its duties. The Company will pay the expenses associated with all advisors to the Committee.Meetings The Committee shall meet at least four times per year (usually in conjunction with regularly scheduled meetings of the Board of Directors). In addition to the members of the Committee, the Company’s Chief Executive Officer, Chief Financial Officer, Controller and independent public accountants shall attend all regular meetings of the Committee. Other persons may be invited to attend as appropriate. During each of the regular meetings, the Committee members shall meet separately with the Company’s independent public accountants with no members of management present. The Committee shall report to the Board on the majorA-2items covered at each Committee meeting and shall make recommendations to the Board and management as appropriate. A majority of the members of the Committee shall constitute a quorum for the transaction of business. The Committee shall maintain written minutes of its meetings.Reporting The Committee shall prepare and, through its Chair, submit periodic reports of the Committee’s work and findings to the Board of Directors; including recommendations for Board actions when considered appropriate by the Committee.Authority The Committee shall have the authority to retain special legal, accounting or other consultants to advise the Committee. The Committee may request any officer or employee of the Company or any outside counsel or consultants to meet with any members of the Committee.Staff The Corporate Secretary shall provide the Committee such staff support as it may require.A-3ANNEX BCERTIFICATE OF AMENDMENTTOTHIRD RESTATED CERTIFICATE OF INCORPORATIONOF▼CIENA CORPORATION Ciena Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:Proposals — The Board of Directors recommends a vote FOR Proposal 1, Proposal 2 and Proposal 3 below. 1. 1. The nameElection of the corporation is Ciena Corporation.three Class I directors. 2. This Amendment to Third Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 3. This Amendment to Third Restated Certificate of Incorporation amends Article Fourth of the Third Restated Certificate of Incorporation of the corporation, as heretofore amended, supplemented and restated, by deleting the first paragraph of Article Fourth thereof and substituting in lieu thereof the a new paragraph, which shall read in its entirety as follows: FOURTH: The Corporation shall have the authority to issue two classes of shares to be designated respectively “Preferred Stock” and “Common Stock.” The total number of shares of stock that the Corporation shall have the authority to issue is[216,000,000][160,000,000] or [118,000,000] shares of capital stock, par value $0.01 per share. The total number of shares of Preferred Stock that the Corporation shall have authority to issue is 20,000,000, par value $0.01 per share. The total number of shares of Common Stock which the Corporation shall have the authority to issue is[196,000,000][140,000,000] or [98,000,000], par value $0.01 per share. 4. This Amendment to Third Restated Certificate of Incorporation further amends Article Fourth of the Third Restated Certificate of Incorporation of the corporation, as heretofore amended, supplemented and restated, by adding at the end of Article Fourth a new paragraph, which shall read in its entirety as follows: Upon the filing and effectiveness (the “Effective Time”) of this amendment to the Corporation’s Certificate of Incorporation pursuant to the Delaware General Corporation Law, each[five] [seven] or [ten] shares of the Common Stock (the “Old Common Stock”) issued and outstanding immediately prior to the Effective Time shall be reclassified and combined into one validly issued, fully paid and non-assessable share of the Corporation’s common stock, $.01 par value per share (the “New Common Stock”), without any action by the holder thereof. The Corporation shall not issue fractions of shares of New Common Stock in connection with such reclassification and combination. Shareholders who, immediately prior to the Effective Time, own a number of shares of Old Common Stock which is not evenly divisible by[five] [seven] or [ten]shall, with respect to such fractional interest, be entitled to receive cash from the Corporation in lieu of fractions of shares of New Common Stock from the disposition of such fractional interest as provided below. The Corporation shall arrange for the disposition of fractional interests by those otherwise entitled thereto, by the mechanism of having (x) the transfer agent of the Corporation aggregate such fractional interests and (y) the shares resulting from the aggregation sold and (z) the net proceeds received from the sale be allocated and distributed among the holders of the fractional interests as their respective interests appear. Each certificate that theretofore represented shares of Old Common Stock shall thereafter represent that number of shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified and combined; provided, that each person holding of record a stock certificate or certificates thatB-1represented shares of Old Common Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to which such person is entitled under the foregoing reclassification and combination. 5. This Amendment to Third Restated Certificate of Incorporation shall be effective at[effective time], Eastern Time, on[effective date].IN WITNESS WHEREOF, this Certificate of Amendment to Third Restated Certificate of Incorporation has been executed by a duly authorized officer of the corporation this[ ]day of[ ].Ciena CorporationBy: Name: Title:B-2CIE-PS-06 DETACH HEREForWithhold For Withhold For Withhold 01 – Lawton W. Fitt o o 02 – Patrick H. Nettles, Ph.D. o o 03 – Michael J. Rowny o o For Against Abstain 2. Ratification of the election by the Board of Directors of Bruce L. Claflin as a Class III director in accordance with Ciena’s Principles of Corporate Governance. o o o For Against Abstain 3. Ratification of the appointment of PricewaterhouseCoopers LLP as Ciena’s independent registered public accounting firm for the current fiscal year. o o o Non-Voting Items Change of Address— Please print your new address below. Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below Date (mm/dd/yyyy) — Please print date below. Signature 1 — Please keep signature within the box. Signature 2 — Please keep signature within the box. CIENA CORPORATIONIF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.▼
Linthicum, Maryland 2109015, 2006
14, 2007Solicitedsolicited on behalf of the Board of Directors15, 200614, 2007 at 3:00 p.m., or any adjournment thereof, as follows on the reverse side.THIS PROXY, WHEN PROPERLY EXECUTED AND TIMELY RETURNED, WILL BE VOTED AS INDICATED. IF NO VOTING DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED “FOR” PROPOSALS 1, 2 AND 3, AND “AGAINST” PROPOSAL 4 AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER PROPERLY COMING BEFORE THE ANNUAL MEETING OR ANY ADJOURNMENT.
thereof.SEE REVERSESIDECONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDESEE REVERSESIDECIENA CORPORATIONC/O COMPUTERSHAREP.O. BOX 8694EDISON, NJ 08818-8694Your vote is important. Please vote immediately.OR If you vote over the Internet or by telephone, please do not mail your card.DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAILxPlease markvotes as inthis example.#CIEThe Board of Directors recommends a vote “FOR” the election of each of the nominees listed below.1.Election of two Class III Directors by Shareholders.Nominees:(01) Stephen P. Bradley, Ph.D. (02) Gerald H. TaylorFOR ALL NOMINEESLISTED ABOVE EXCEPTAS MARKED BELOWTO THE CONTRARYooWITHHOLD AUTHORITYTO VOTE FORALL NOMINEESLISTED ABOVE(INSTRUCTION: To withhold authority to vote for any individual nominee(s), write the name or number of the nominee(s) in the space provided above).The Board of Directors recommends a vote “FOR” Proposal 2.2.To authorize the Board of Directors, in its discretion, to amend Ciena’s Third Restated Certificate of Incorporation to effect a reverse stock split of its outstanding commonFORoAGAINSToABSTAINostock at a ratio of (i) one-for-five, (ii) one-for-seven, or (iii) one-for-ten, together with a corresponding reduction in the number of authorized shares of Ciena common stock and capital stock, at any time prior to the date of Ciena’s 2007 Annual Meeting of Shareholders, without further approval or authorization of Ciena’s shareholders.The Board of Directors recommends a vote “FOR” Proposal 3.3.Ratification of the appointment of PricewaterhouseCoopers LLP as Ciena’s independent registered public accounting firm.FORoAGAINSToABSTAINoThe Board of Directors recommends a vote “AGAINST” Proposal 4.4.Shareholder proposal requesting the Board to adopt a majority vote standard for the election of directors.FORoAGAINSToABSTAINoPLACE AN "X" HERE IF YOU PLAN TO VOTE YOUR AT THE MEETING.oExecute proxy exactly as your name appears on this proxy card. If stock is registered in more than one name, each joint holder should sign. When signing as trustee, executor or other fiduciary, please so indicate.Signature:Date:Signature:Date: