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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-21969
Ciena Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2725311 |
(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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Identification No.) |
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1201 Winterson Road, Linthicum, MD
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21090-2205 |
(Address of principal executive offices)
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(Zip Code) |
(410) 865-8500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value
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The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
The aggregate market value of the Registrants Common Stock held by non-affiliates of the
Registrant was $2,294,480,968 based on the closing price of the Common Stock on the NASDAQ Global
Select Market on April 28, 2007.
The number of shares of Registrants Common Stock outstanding as of December 14, 2007 was
86,798,914.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrants definitive
proxy statement for its 2008 Annual Meeting of Shareholders to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this report.
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2007
TABLE OF CONTENTS
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PART I |
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Item 1. |
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Business |
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Item 1A. |
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Risk Factors |
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Item 1B. |
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Unresolved Staff Comments |
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Item 2. |
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Properties |
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Item 3. |
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Legal Proceedings |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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PART II |
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Item 5. |
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Market for Registrants Common
Stock, Related Stockholder Matters and Issuer Purchases of Equity
Securities |
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Item 6. |
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Selected Consolidated Financial Data |
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Item 7. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Quantitative and Qualitative Disclosures about Market Risk |
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Item 8. |
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Financial Statements and Supplementary Data |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Controls and Procedures |
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Item 9B. |
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Other Information |
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PART III |
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Item 10. |
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Directors, Executive Officers and
Corporate Governance |
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Item 11. |
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Executive Compensation |
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Item 12. |
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
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Certain Relationships and Related
Transactions, and Director Independence |
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Item 14. |
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Principal Accountant Fees and Services |
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PART IV |
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Item 15. |
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Exhibits and Financial Statement Schedules |
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Signatures |
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Index to Exhibits |
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PART I
The information in this annual report contains certain forward-looking statements, including
statements related to markets for our products and services and trends in our business that involve
risks and uncertainties. Our actual results may differ materially from the results discussed in
these forward-looking statements. Factors that might cause such a difference include those
discussed in Risk Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations, Business and elsewhere in this annual report.
Item 1. Business
Overview
Ciena Corporation is a supplier of communications networking equipment, software and services
that support the transport, switching, aggregation and management of voice, video and data traffic.
Our products are used, individually or as part of an integrated solution, in communications network
infrastructures operated by telecommunications service providers, cable operators, governments and
enterprises around the globe. Our products facilitate the cost-effective delivery of enterprise and
consumer-oriented communication services. Through our FlexSelect Architecture, we specialize in
transitioning legacy communications networks to converged, next-generation architectures, better
able to handle increased traffic and to deliver more efficiently a broader mix of high-bandwidth
communications services. By improving network productivity, reducing costs and enabling integrated
service offerings, our converged Ethernet infrastructure and broadband access products create
business and operational value for our customers.
During the past several years, our business has grown as a result of improving market
conditions and the execution of our strategy to continue to invest in our product portfolio and
target our development toward high-growth segments of the market for communications network
equipment. The increasing importance of communications services to consumer and enterprise end
users has driven growth in network capacity requirements and the expansion of high-bandwidth
applications and services, including IPTV, peer-to-peer connectivity, video on demand and mobile
video and storage. The broader mix of high-volume traffic related to these applications is driving
a transition from legacy network infrastructures typically consisting of multiple, disparate
networks to more efficient, simplified, Ethernet-based network architectures. Service providers
are seeking network infrastructures better suited to handle higher bandwidth, multiservice traffic
with greater efficiency, performance, resiliency, security and reliability, while ensuring a return
on their network investment. We believe that our product portfolio and development efforts, focused
on Ethernet/IP-related enhancements and the expansion of our FlexSelect Architecture, have enabled
us to benefit from both increasing capacity requirements and the transition to more efficient and
economical network architectures.
Financial Overview Fiscal 2007
We had revenue of $779.8 million for our fiscal year ended October 31, 2007, an increase of
38.2% from fiscal 2006 revenue of $564.1 million. Income from operations increased from a loss of
$31.4 million in fiscal 2006 to income of $48.7 million in fiscal 2007. Net income increased from
$0.6 million, or $0.01 per diluted share, in fiscal 2006, to $82.8 million, or $0.87 per diluted
share, in fiscal 2007. We generated $108.7 million in cash from operations during fiscal 2007
compared to our use of $79.4 million in cash during fiscal 2006. We manage our business in one
operating segment. The matters discussed in this Business section should be read in conjunction
with the Consolidated Financial Statements found under Item 8 of Part II of this annual report,
which includes additional financial information about our total assets, revenue, measures of
profits and loss, and financial information about geographic areas.
Corporate Information and Access to SEC Reports
Ciena Corporation was incorporated in Delaware in November 1992, and completed its initial
public offering on February 7, 1997. Our principal executive offices are located at 1201 Winterson
Road, Linthicum, Maryland 21090. Our telephone number is (410) 865-8500, and our web site address
is www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of charge on the
Investor Relations page of our web site as soon as reasonably practicable after we file these
reports with the Securities and Exchange Commission (SEC). Information contained on our web site is
not a part of this annual report.
3
Industry Background
The markets in which we sell our communications networking equipment have been subject to
dynamic changes in recent years, including increased competition, growth in communications services
and related traffic, and evolving market opportunities.
Increased Competition and Consolidation of Communications Service Providers
Competition among communications services providers to offer a broader mix of
revenue-generating services continues to be fierce. Traditional communications service providers
face new competitors, new technologies and intense price competition. In addition, the last two
years have witnessed significant consolidation among large communications service providers,
including a number of our largest customers. SBC acquired AT&T in November 2005 and, in
December 2006, the combined company, known as AT&T, acquired BellSouth. In January 2006, Verizon
acquired MCI. Similar consolidation has taken place abroad. These mergers are likely to have a
major impact in shaping the future of the communications industry. The consolidation and future
development of these merged networks likely will present opportunities, as well as significant
challenges, for communications network equipment providers.
Emergence of Enterprise and Government Markets
As competition among communications service providers has increased, the needs of some of
their largest customers have changed. Enterprises require additional bandwidth capacity to satisfy
compliance and business continuity requirements, to facilitate global expansion of operations and
to support increasing use of video services. Enterprises and government agencies have also become
more concerned about network reliability and security. These changing requirements have driven
communications service providers to offer a wider range of enterprise-oriented, carrier-managed
applications. A number of large enterprises, government agencies and research and education
institutions have decided to forego carrier-managed communications services, however, in favor of
building their own, secure private networks, some on a global scale.
Consumer End Users and Broadband Applications
Consumer adoption of broadband technologies, including peer-to-peer Internet applications,
video services, online gaming, and mobile video and data services has increased dramatically in
recent years. This has increased the drive for service providers to expand their services offering
to include voice, video and data services in a bundled offering; the
so-called triple play.
Meanwhile, increased use of these services to access a growing range of content and applications
has accelerated demand for bandwidth. Increased capacity needs and multiservice offerings have
caused carriers to transition existing or legacy infrastructures to more efficient, next-generation
network infrastructures better suited to handle this traffic.
Increased Multiservice Traffic and Network Transition
Expanding enterprise and consumer reliance upon communications services continues to increase
overall traffic on communications networks, particularly in the metro aggregation segment of
communications networks. Meanwhile, communications service providers have found traditional sources
of revenue from voice and enterprise data services under pressure in the face of increased
competition and new technologies. As a result, they are seeking to augment or replace these revenue
sources by offering a broader mix of revenue-generating services. Expansion of these services is
driving a transition from multiple, disparate networks based on SONET/SDH to more efficient,
converged, mutli-purpose Ethernet/IP-based network infrastructures. Consequently, legacy networks
primarily designed to support voice and private lines are being converted to packet-oriented
networks, which are better able to deliver efficiently video and data alongside traditional voice
traffic. The key operational focus of service providers is to make this transition as efficient and
cost-effective as possible.
These industry trends and market conditions have been significant contributors to the growth
of our business. We believe that the capabilities of our product portfolio have positioned us to
benefit from both increasing communications network capacity requirements and the transition by
carriers to more efficient, converged network architectures. As a result of these market
conditions, and the execution of our strategy to continue to invest in our product portfolio, we
were able to improve our financial performance and grow our revenue from $427.3 million in fiscal
2005, to $564.1 million in fiscal 2006 and to $779.8 million in fiscal 2007.
4
Strategy
We believe that growing network capacity requirements, the expansion of communications
services and the need to converge multiple, disparate networks to single, Ethernet/IP-based
infrastructures will be significant drivers of our customers communications network equipment
needs. In response to these needs, we introduced our FlexSelect Architecture, a standards-based,
multi-service network architecture that facilitates the transition to next-generation networks
while preserving the value of our customers investment in existing architectures. Our FlexSelect
Architecture combines programmable hardware and integrated control software with service-specific
management functionality, automating delivery and management of a broad mix of services including
SONET/SDH, IP/Ethernet, storage and video. By creating a software-defined, service-agnostic network
and integrating standards-based control planes, our FlexSelect products deliver services over
communications networks that offer enhanced flexibility and that are cost-effective to deploy,
scale and manage.
Since Ethernet is ubiquitous and supports many consumer and enterprise applications, we
believe it is well suited as a technology for network consolidation. We believe that our customers
will evolve their communications networks toward increasing reliance on Ethernet as an efficient,
cost-effective transport and switching protocol. During fiscal 2007, we announced FlexSelect for
Ethernet, which seeks to apply the attributes of our FlexSelect Architecture approachnetwork
flexibility, adaptability, manageability and reliabilityto carrier Ethernet
services. We introduced two new Ethernet-based product platforms during fiscal 2007: the CN 3000
Ethernet Access Series and the CN 5060 Multiservice Carrier Ethernet Platform.
To implement the network vision underpinning our FlexSelect Architecture, we are pursuing the
following strategic initiatives:
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Establish technology leadership in the transition from legacy network infrastructures to
Ethernet-based infrastructures. We seek to differentiate Ciena from competitors through our
network specialist role and our FlexSelect network architecture vision. We are focusing our
research and development investments on enabling customers to transition legacy
circuit-switched networks to Ethernet/IP-based network infrastructures. We seek to provide
customers the cost-effective means by which to support new applications and deliver
services over communications network infrastructures with improved performance, resiliency,
security and flexibility. Our current research and development initiatives include: |
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Applying our expertise in carrier networks and mission-critical
applications to develop Ethernet-based communications networks, improve the
reliability of those networks and enable automated service provisioning; |
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Continuing to add advanced Ethernet capabilities and functionality across
our product portfolio with the goal of developing a comprehensive performance-grade
Ethernet portfolio; |
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Adding software-driven reconfigurability and automation across our portfolio; |
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Enabling broadband and Ethernet access over copper and fiber access lines; and |
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Focusing on cross-product integration and driving a common set of
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Expand our market opportunity. We are seeking to expand our geographic reach, increase
our addressable markets and penetrate new market segments, thereby enabling us to grow and
diversify our customer base. Our current sales and marketing initiatives include: |
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Increasing our use of channel partners to expand into select geographic
markets and penetrate new market segments, including cable, government and
enterprise; |
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Increasing market awareness and acceptance of our Ethernet products and
technologies in the core, metro and access portions of the network; |
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Expanding our participation in additional applications for our
technology, including carrier-managed services and wireless backhaul; |
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Leveraging our incumbency to sell our expanded product portfolio to
existing customers; and |
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Pursuing strategic technology opportunities, including original equipment
manufacturer (OEM) arrangements and technology acquisitions, to offer products that
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Leverage our operating model in the growth of our business. As a result of our efforts
in recent years to align our resources with market opportunities and make more efficient
use of our resources, we were able to reduce operating expense as a percentage of revenue
and increase income from operations during fiscal 2007. We seek to drive further
efficiencies and improve our operating model through initiatives that include: |
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Continuing to grow our development facility in India; |
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Streamlining internal business processes to be more efficient; and |
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Improving information systems to drive increased automation and coordination. |
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Customers and Markets
Our customer base and the markets in which we sell our equipment, software and services have
expanded in recent years as new market opportunities have emerged and our product portfolio has
grown to include additional products in the metro and access portions of communications networks.
The networking equipment needs of our customers vary, depending upon their size, location, the
nature of their end users and the applications or services that they support. During fiscal 2007,
AT&T and Sprint each represented more than 10% of our total revenue and 38.1% in the aggregate.
Revenue from customers within the United States was 71.0% of total revenue in fiscal 2007 and 75.1%
in fiscal 2006. Information regarding 10% customers over our last three fiscal years can be found
in Note 18 to the Consolidated Financial Statements in Item 8 of Part II of this annual report. We
sell our products and services through our direct sales force and third party channel partners in
the following markets:
Telecommunications Service Providers
Our telecommunications service provider customers include regional, national and international
telecommunications carriers, both wireline and wireless. Telecommunications service providers are
our historical customer base and the largest contributor to our revenue. We provide products that
enable telecommunications service providers to support consumer demand for video delivery,
broadband data and wireless broadband services, while continuing to support legacy voice services.
Our products also enable telecommunications carriers to support private networks and applications
for enterprise users, including managed services, wide area network consolidation, inter-site
connectivity, storage and Ethernet services.
Cable Operators
Our customers include leading cable and multiservice operators in the U.S. and
internationally. Our cable and multiservice operator customers rely upon us for carrier-grade,
optical Ethernet transport and switching equipment. Our communications networking platforms allow
cable operators to integrate voice, video and data applications over a converged infrastructure.
Our products support key cable applications including broadcast and digital video, voice over IP,
video on demand, broadband data services and services for enterprises.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including
participants in the financial, healthcare, transportation and retail industries. We offer
equipment, software and services that facilitate data center connectivity, wide area network
consolidation, and storage extension for business continuity and disaster recovery. Our products
enable inter-site connectivity between data centers, sales offices, manufacturing plants, retail
stores and research and development centers, using an owned or leased private fiber network or a
carrier-provided service. Our products facilitate key enterprise applications including data,
voice, video, chat, online collaboration, conferencing and other business services. Our products
also enable our enterprise customers to prevent unexpected network downtime and ensure the safety,
security and availability of their data.
Government, Research and Education
Our government customers include federal and state agencies in the U.S. as well as government
entities outside of the U.S. Our customers also include domestic and international research and
education institutions seeking to take advantage of technology innovation and facilitate increased
collaboration. Our products, software and services enable these customers to improve network
performance, security, reliability and flexibility. Our products also enable government agencies
and research and education institutions to build their own secure, private networks.
Products and Services
Our product portfolio includes a range of communications networking equipment and software
that is utilized from the core of communications networks, to metropolitan network infrastructures
to the network edge, where end users gain access to communications services. We are applying our
FlexSelect Architecture vision across our product portfolio, which includes transport and switching
platforms, packet interworking products and access products. These products are complemented by a
comprehensive suite of network and service management tools and consulting, installation and
support services. We refer to our transport and switching products and packet interworking products
collectively as converged Ethernet infrastructure
products.
6
Transport & Switching
Our transport and switching platforms serve as the foundation for our converged Ethernet
infrastructure portfolio and address both the core and metro segments of communications networks.
Our principal transport and switching products are our CoreDirector® Multiservice Optical Switch,
our CoreStream® Agility Optical Transport System and our CN 4200® FlexSelect Advanced Services
Platform family. By increasing capacity and enhancing bandwidth utilization, our transport and
switching products enable service providers to increase network efficiency, allowing them to
support more service types, higher bandwidth applications and higher volumes of traffic. By
facilitating the convergence of disparate service networks to a multiservice network, these
products also enable service providers to reduce capital expenditures and operational costs through
equipment reductions, increased automation and network simplification.
Packet Interworking
Our packet interworking products include our multiservice edge switching and aggregation
platforms. Our principal packet interworking products are our CN 5000 Packet Services Series and DN
7000 Series Multiservice Edge Switching and Aggregation Platform. These products adapt and
aggregate incoming network traffic and act as a bridge between IP/MPLS devices such as routers and
an Ethernet transport and switching structure. These products enable communications service
providers to transition their networks to carrier Ethernet and IP/MPLS from legacy technologies,
such as ATM and Frame Relay. These platforms more cost-effectively support the aggregation and
delivery of multiple application and service types, including mobile wireless backhaul, business
data services and residential broadband. By converging traditional and emerging data services in
carrier aggregation and service edge networks, these products enable service providers to
transition to high-performance, packet-optimized networks while enhancing network reliability,
bandwidth efficiency, ease of provisioning and scalability.
Access
Our access portfolio addresses consumer and enterprise broadband services. Our principal
access products for consumer broadband are our CNX-5 Broadband DSL System and CNX-5Plus Modular
Broadband Loop Carrier. These broadband access platforms allow service providers to transition
legacy voice networks to support next-generation services such as Internet-based (IP) telephony,
video services and DSL, and enable cost-effective migration to higher bandwidth Ethernet network
infrastructures. For enterprise broadband services, our CN 3000 Ethernet Access Series platforms
enable carriers to extend Ethernet services to all customer sites, regardless of whether they are
connected to the carriers network by copper or fiber access lines.
Network and Service Management Tools
We offer integrated network and service management software across our product portfolio.
Designed to simplify network management and operation, our ON-Center® Network & Service
Management Suite facilitates rapid and simplified provisioning of new services or service
modifications and enables efficient allocation of bandwidth for service delivery. ON-Center employs
a distributed, scalable architecture capable of managing a series of network elements as a
standalone solution or as part of an integrated infrastructure. Our management system can track
individual services across multiple product suites, facilitating planned network maintenance,
outage detection and identification of customers or services affected by network troubles. By
increasing network automation, minimizing network downtime and monitoring network performance and
service metrics, ON-Center® enables customers to improve cost effectiveness, while
increasing the performance and functionality of their network operations.
Global Network Services
To complement our product portfolio, we offer a broad range of consulting and support
services. We provide these professional services through our internal Global Network Services
resources as well as through service partners. Our services portfolio includes:
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Network analysis, planning and design; |
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Network optimization and tuning; |
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Project management, including staging, site preparation and installation activities; |
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Deployment services, including turnkey installation and turn-up and test services; and, |
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Maintenance and support services, including helpdesk and technical assistance and
training, spares and logistics
management, software updates, engineering dispatch, advanced technical support and hardware
and software warranty extensions. |
7
Product Development
Our industry is subject to rapid technological developments, evolving standards, and protocols
and shifts in customer demand. To remain competitive, we must continue to enhance existing product
platforms by adding new features and functionality and introducing new products that extend our
FlexSelect Architecture and broaden our reach into existing and new market segments. As the markets
in which we sell our products and the technologies that support these products have evolved, our
research and development strategy has been to pursue technology and product convergence. This
convergence allows us to consolidate multiple technologies and functionalities on a single
platform, ultimately creating more robust and cost-effective products.
Our product development investments are driven by market demand and involve close
collaboration among our marketing, sales and product development organizations. We also incorporate
feedback from customers in our product development process. We conduct research and development
through our internal resources as well as in collaboration with third parties. In some cases, we
work with third parties pursuant to technology licenses, OEM arrangements and other strategic
technology relationships or investments, to develop new products or modify existing platforms. In
addition, we participate in industry and standards organizations where appropriate and incorporate
information from these affiliations throughout the product development process. We regularly review
our product offerings and development projects to determine their fit within our portfolio. We
assess the market demand, prospective return on investment and growth opportunities, as well as the
costs and resources necessary to support these products or development projects.
During fiscal 2007, our product development initiatives focused on adding advanced Ethernet
capabilities across our product portfolio and expanding our FlexSelect Architecture. We released
Ethernet-oriented enhancements to our ON-Center network management software and our CN 4200
FlexSelect Advanced Services Platform and CoreDirector platforms and added wavelength switching
capabilities to the CN 4200. We introduced two new Ethernet-based product platforms: the CN 3000
Ethernet Access Series and CN 5060 Multiservice Carrier Ethernet Platform. We also expanded our CN
4200 product from a single product to a product family, which includes platforms with different
capacities and form factors. Part of our research and development strategy is to continue to extend
Ethernet functionality across our products, developing a comprehensive performance-grade Ethernet
portfolio.
Our research and development expense was $137.2 million, $111.1 million and $127.3 million for
fiscal 2005, 2006 and 2007, respectively. For more information regarding our research and
development expense, see Managements Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 of Part II of this report.
Sales and Marketing
We sell our communications networking equipment, software and services through our direct
sales efforts and channel relationships. In addition to securing new customers, our sales strategy
has focused on building long-term relationships with existing customers that allow us to leverage
our incumbency by extending existing platforms and selling additional products to support new
applications.
We maintain a direct sales presence in locations in North America, South America, Europe and
Asia. Through these offices we sell and support our product and service offerings into each of our
customer markets. In support of our sales efforts, we engage in marketing activities intended to
position and promote both our brand and our product, software and service offerings.
We also maintain a channel program that works with resellers, systems integrators and service
providers to market and sell our products, software and services. Our third party channel sales and
other distribution arrangements enable us to leverage our direct sales resources and reach
additional geographic regions and customer segments, including government and enterprise customers.
We believe this channel strategy affords us expanded market opportunities and reduces the financial
risk of entering new markets and pursuing new customer segments.
Manufacturing
We rely on contract manufacturers to perform the majority of the manufacturing for our
products. We believe that this allows us to conserve capital, lower costs of product sales,
efficiently adjust to changes in market demand and operate without dedicating significant resources
to manufacturing-related plant and equipment. We utilize a direct order fulfillment model for
certain products. Direct order fulfillment allows us to rely on our contract manufacturers to
perform final system integration
and test, prior to direct shipment of products from their facilities to our customers. For certain
product lines, we continue to perform a portion of the module assembly, final system integration
and testing. We work closely with our contract manufacturers to manage material, quality, cost and
delivery times and we continually evaluate their services to ensure performance on a reliable and
cost-effective basis. In recent years we have consolidated our base of suppliers and increasingly
utilized a global sourcing strategy. During fiscal 2007, we significantly reduced supply chain
costs through greater sourcing of materials in lower cost regions such as Asia.
8
Our products include some components that are proprietary in nature and only available from
one or a small number of suppliers. In some cases, significant time would be required to establish
relationships with alternate suppliers or providers of proprietary components. We do not have
long-term contracts with any supplier or contract manufacturer that guarantees supply of components
or manufacturing services. If component supplies become limited, which has occurred on occasion, or
if a supplier is unable to meet our needs, we may encounter manufacturing delays that could
adversely affect our business. In an effort to limit our exposure to such delays and to satisfy
customer needs for shorter delivery terms, we rely upon a build-to-forecast model across our
product portfolio. This inventory purchase model exposes us to the risk that our customers will not
order those products for which we have forecast sales, or will purchase less than we have forecast.
Backlog
Generally, we make sales pursuant to purchase orders issued under master purchase agreements
that govern the terms and conditions of the sale of our products and services. These agreements
typically do not provide for minimum order quantities. At any given time, we have orders for
products that have not been shipped and for services that have not yet been performed. We also have
products and services awaiting customer acceptance. Generally, our customers may cancel or change
these orders with limited advance notice, or they may decide not to accept these products and
services. As a result, we do not consider these orders to be firm.
Competition
Competition among providers of communications networking equipment, software and services is
intense. The markets for our products, software and services are characterized by rapidly changing
and converging technologies. Competition in these markets is based on any one or a combination of
the following factors:
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product functionality and performance; |
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price; |
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incumbency and existing business relationships; |
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installation and support capability; |
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manufacturing and lead-time capability; |
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flexibility and scalability of products; and |
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the ability of products and services to meet customers immediate and future network
requirements. |
Competition for sales of communications networking equipment is dominated by a small number of very
large, multi-national companies. Our competitors include Alcatel-Lucent, Cisco, Ericsson, Fujitsu,
Huawei, Nokia Siemens Networks, Nortel and Tellabs. These competitors have substantially greater
financial, operational and marketing resources than Ciena. Many of them also have well-established
relationships with large carriers. In recent years, mergers among some of our larger competitors
have intensified these advantages. In November 2006, Alcatel completed its acquisition of Lucent.
In June 2006, Nokia and Siemens agreed to combine their communications service provider businesses
to create a new joint venture, and in January 2006, Ericsson completed its acquisition of certain
key assets of Marconis telecommunications business. Our industry has also experienced increased
competition from low-cost producers in Asia, which can contribute to pricing pressure.
We also compete with several smaller, but established, companies that offer one or more
products that compete directly or indirectly with our offerings or whose products address specific
niches within the markets we address. In addition, there are a variety of earlier-stage companies
with products targeted at the communications networking market. These competitors, particularly
those that are privately-held, often employ aggressive competitive and business tactics as they
seek to gain entry with certain customers or markets. Due to these practices and the narrower focus
of their development efforts, which may allow introduction of products more quickly, these
competitors may have offerings that are more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
We rely upon patents, copyrights, trademarks, and trade secret laws to establish and maintain
proprietary rights in our
technology. We regularly file applications for patents and trademarks and have a significant number
of patents and trademarks in the United States and other countries where we do business. We also
rely on non-disclosure agreements, other contracts, and policies regarding confidentiality, with
employees, contractors and customers to establish proprietary rights and protect trade secrets and
confidential information. Our practice is to require employees and consultants to execute
non-disclosure and proprietary rights agreements upon commencement of employment or consulting
arrangements with us. These agreements acknowledge our exclusive ownership of intellectual property
developed by the individual during the course of his or her work with us. The agreements also
require that these persons maintain the confidentiality of all proprietary information disclosed to
them.
9
Enforcing proprietary rights, especially patents, can be costly and uncertain. Moreover,
monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps
that we are taking will detect or prevent unauthorized use, particularly as we expand our
operations, product development and the manufacturing of our products internationally, into
countries that may not provide the same level of intellectual property protection as the United
States. In recent years, we have filed suit to enforce our intellectual property rights and have
been subject to several claims related to patent infringement. In some cases, resolution of these
claims has resulted in our payment of substantial sums. We believe that the frequency of patent
infringement claims is increasing as patent holders, including entities that are not in our
industry and who purchase patents as an investment or to monetize such rights by obtaining
royalties, use such claims as a competitive tactic and source of additional revenue. Third party
infringement assertions, even those without merit, could cause us to incur substantial costs. If we
are not successful in defending these claims, we could be required to enter into a license
requiring ongoing royalty payments, we may be required to redesign our products, or we may be
prohibited from selling any infringing technology.
Our network and service management software and other products incorporate software and
components under licenses from third parties. We may be required to license additional technology
from third parties in order to develop new products or product enhancements. There can be no
assurance that these licenses will be available on acceptable commercial terms. Failure to obtain
such licenses or other rights could affect our development efforts and harm our business, financial
condition and operating results.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around
the world. We seek to operate our business in compliance with such laws. We are currently subject
to laws relating to the materials and content of our products and certain requirements relating to
product takeback and recycling. Environmental regulation is increasing, particularly outside of the
United States, and we expect that our international operations will be subject to additional
environmental compliance requirements, which may expose us to additional costs. To date, our
compliance costs relating to environmental regulations have not resulted in a material adverse
effect on our business, results of operations or financial condition.
Employees
As of October 31, 2007, we had 1,797 employees. None of our employees is represented by labor
unions or covered by a collective bargaining agreement. We have not experienced any work stoppages
and we consider the relationships with our employees to be good.
10
Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive
officers:
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Name |
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Age |
|
Position |
Patrick H. Nettles, Ph.D. |
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64 |
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Executive Chairman of the Board of Directors |
Gary B. Smith |
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47 |
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President, Chief Executive Officer and Director |
Stephen B. Alexander |
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48 |
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Senior Vice President, Products & Technology and Chief |
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Technology Officer |
Michael G. Aquino |
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51 |
|
Senior Vice President, World Wide Sales |
Joseph R. Chinnici |
|
53 |
|
Senior Vice President, Finance and Chief Financial Officer |
James E. Moylan, Jr. |
|
56 |
|
Senior Vice President, Finance and Chief Financial |
|
|
|
|
Officer Designate |
Andrew C. Petrik |
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44 |
|
Vice President, Controller and Treasurer |
Arthur D. Smith, Ph.D. |
|
41 |
|
Senior Vice President, Chief Operating Officer |
Russell B. Stevenson, Jr. |
|
66 |
|
Senior Vice President, General Counsel and Secretary |
Stephen P. Bradley, Ph.D. (2)(3) |
|
66 |
|
Director |
Harvey B. Cash (1)(3) |
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69 |
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Director |
Bruce L. Claflin (2) |
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56 |
|
Director |
Lawton W. Fitt (2) |
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54 |
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Director |
Judith M. OBrien (1)(3) |
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57 |
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Director |
Michael J. Rowny (2) |
|
57 |
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Director |
Gerald H. Taylor (1) |
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66 |
|
Director |
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|
|
(1) |
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Member of the Compensation Committee |
|
(2) |
|
Member of the Audit Committee |
|
(3) |
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Member of the Governance and Nominations Committee |
Cienas Directors hold staggered terms of office, expiring as follows: Ms. OBrien and
Messrs. Cash and Smith in 2008; Messrs. Bradley, Claflin and Taylor in 2009; and Ms. Fitt,
Dr. Nettles and Mr. Rowny in 2010.
Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and as Executive
Chairman of the Board of Directors 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 boards of directors of
Apptrigger, Inc., a privately held company.
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer
since May 2001. Mr. Smith has also served on Cienas Board of Directors since October 2000.
Mr. Smith serves on the boards 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 B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since
September 1998 and as a Senior Vice President since January 2000. Mr. Alexander currently serves as
Senior Vice President of Products & Technology, a position he has held since October 2005. During
2004 and 2005, Mr. Alexander served as General Manager of Products & Technology and General Manager
of Transport and Switching and Data Networking. Mr. Alexander serves on the Federal Communications
Commission Technology Advisory Council.
Michael G. Aquino joined Ciena in June 2002 and has served as Cienas Senior Vice President,
Worldwide Sales since April 2006. Mr. Aquino previously held positions as Cienas Vice President of
Americas, with responsibility for sales activities in the region, and Vice President of Government
Solutions, where he focused on supporting Cienas relationships with the U.S. and Canadian
government.
Joseph R. Chinnici joined Ciena in 1994 and has served as Senior Vice President, Finance and
Chief Financial Officer since August 1997. Mr. Chinnici serves on the boards of directors for
Sourcefire, Inc. and Optium Corporation. Mr. Chinnici also serves on the board of directors for
Brix Networks, Inc. a privately held company. Mr. Chinnicis resignation as Chief Financial Officer
is effective upon the filing of this annual report on Form 10-K.
11
James E. Moylan, Jr. has served as Senior Vice President, Finance since December 2007 and will
become Cienas Chief
Financial Officer effective following the filing of this annual report on Form 10-K. From June
2006 to December 2007, Mr. Moylan served as Executive Vice President and Chief Financial Officer of
Swett & Crawford, a wholesale insurance broker. From March 2004 to February 2006, Mr. Moylan served
as Executive Vice President and Chief Financial Officer of PRG-Shultz International, Inc., a
publicly held recovery audit and business services firm. From June 2002 to April 2003, Mr. Moylan
served as Executive Vice President in charge of Composite Panel Distribution and Administration for
Georgia-Pacific Corporations building products distribution business. From November 1999 to May
2002, Mr. Moylan served as Senior Vice President and Chief Financial Officer of Sonat, Inc., an
electronics contract manufacturing company.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller and
Treasurer since August 1997.
Arthur D. Smith, Ph.D. joined Ciena in May 1997 and has served as Chief Operating Officer
since October 2005. Dr. Smith served as Senior Vice President, Global Operations from September
2003 to October 2005. Previously, Dr. Smith served as Senior Vice President, Worldwide Customer
Services and Support from June 2002 to September 2003.
Russell B. Stevenson, Jr. has served as Senior Vice President, General Counsel and Secretary
since joining Ciena in August 2001.
Stephen P. Bradley, Ph.D. has served as a Director of Ciena since April 1998. Professor
Bradley is the William Ziegler Professor of Business Administration and teaches Competitive and
Corporate Strategy in the Advanced Management Program at the Harvard Business School. A member of
the Harvard faculty since 1968, Professor Bradley is also Chairman of Harvards Executive Program
in Competition and Strategy: Building and Sustaining Competitive Advantage. Professor Bradley
serves on the boards of directors of i2 Technologies, Inc. and the Risk Management Foundation of
the Harvard Medical Institutions.
Harvey B. Cash 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 boards of directors of First Acceptance Corp., i2 Technologies, Inc.,
Silicon Laboratories, Inc., Argonaut Group, Inc. and Staktek Holdings, Inc.
Bruce L. Claflin 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
Companys worldwide research and development, product and brand management, as well as president of
IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro
Devices (AMD).
Lawton W. Fitt has served as a Director of Ciena since November 2000. 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, Citizens Communications Company and Overture Acquisition Corporation, and
a Senior Advisor to GSC Group.
Judith M. OBrien has served as a Director of Ciena since July 2000. Since November 2006, Ms.
OBrien has served as Executive Vice President of Obopay, Inc., a provider of mobile payment
services. From February 2001 until October 2006, Ms. OBrien served as a Managing Director at
Incubic Venture Fund, a venture capital firm. From February 1984 until February 2001, Ms. OBrien
was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate finance,
mergers and acquisitions and general corporate matters. Ms. OBrien serves on the board of
directors of Grandis Inc., a privately held company.
Michael J. Rowny 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 MCIs 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.
Gerald H. Taylor has served as a Director of Ciena since January 2000. Mr. Taylor has served
as a Managing Member of mortonsgroup, LLC, a venture partnership specializing in telecommunications
and information technology, since January 2000. From 1996 to 1998, Mr. Taylor was Chief Executive
Officer of MCI Communications Corporation.
12
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. In addition to the other
information contained in this report, you should consider the following risk factors before
investing in our securities.
Our ability to grow our business and increase revenue depends upon continued growth of
communications network traffic and the adoption of communications services and applications by
enterprise and consumer end users.
We have experienced considerable annual revenue growth over the past two fiscal years, in
part, due to growing demand and improved conditions in our markets. The growth of our business and
revenue is dependent upon a number of market factors, including the continued growth of
communications network traffic and increased reliance by consumers and businesses upon
high-capacity communications services. We believe our business has benefitted from increases in the
amount of data transmitted over communications networks and the desire among service providers to
address capacity needs and offer additional consumer and enterprise services over more efficient,
economical network architectures. There is no assurance that that these improved market conditions
or our success in competing in these markets will continue. If growth in demand for bandwidth, or
the adoption of new communications services, does not continue, or slows, the growth of our
business and our revenues would be negatively impacted.
A small number of communications service provider customers account for a significant portion of
our revenue and the loss of any of these customers, or a significant reduction in their spending,
would have a material adverse effect on our business, financial condition and results of
operations.
Our revenue has become increasingly concentrated among a relatively small number of customers.
AT&T accounted for 25.3%, and Sprint for 12.8% of our fiscal 2007 revenue. The loss of, or
significant reductions in spending by, one or more of our large customers would have a material
adverse effect on our business, financial condition and results of operations. Our increased
concentration in revenue has been affected, in part, by consolidations among a number of our
largest customers. These consolidations have resulted in increased concentration of customer
purchasing power, which in turn may lead to constraints on pricing, fluctuations in revenue,
increases in costs to meet demands of large customers and pressure to accept onerous contract
terms. Consolidation may result in fewer opportunities to participate in larger network builds and
could increase our exposure to changes in customer network strategy and reductions in customer
capital expenditures. In addition, because a significant part of our revenue remains concentrated
among telecommunications service providers, our business could be exposed to risks associated with
a market-wide change in business prospects, competitive pressures or other conditions affecting our
carrier customers.
We face intense competition that could hurt our sales and profitability.
The markets in which we compete for sales of networking equipment, software and services are
extremely competitive, particularly the market for sales to communications service providers.
Competition in these markets is based on any one or a combination of the following factors: price,
product features and functionality, manufacturing capability and lead-times, incumbency and
existing business relationships, scalability and the ability of products to meet the immediate and
future network requirements of customers. A small number of very large companies has historically
dominated our industry. These competitors have substantially greater financial, technical and
marketing resources, greater manufacturing capacity and better established relationships with
telecommunications carriers and other potential customers than we do. Recent consolidation activity
among large networking equipment providers has caused some of our competitors to grow even larger,
which may increase their strategic advantages. In 2006, Alcatel acquired Lucent, Nokia and Siemens
combined their communications service provider businesses to create a new joint venture, and
Ericsson acquired certain telecommunications business assets of Marconi. These transactions may
adversely affect our competitive position.
We also compete with a number of smaller companies that provide significant competition for a
specific product, application, customer segment or geographic market. These competitors often base
their products on the latest available technologies. Due to the narrower focus of their efforts,
these competitors may achieve commercial availability of their products more quickly and may be
more attractive to customers.
Increased competition in our markets has resulted in aggressive business tactics, including:
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one-stop shopping options; |
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significant price competition, particularly from competitors in Asia; |
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customer financing assistance; |
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early announcements of competing products and extensive marketing efforts; |
13
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competitors offering equity ownership positions to customers; |
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competitors offering to repurchase our equipment from existing customers; |
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marketing and advertising assistance; and |
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intellectual property assertions and disputes. |
The tactics described above can be particularly effective in an increasingly concentrated base
of potential customers such as telecommunications service providers. If we fail to compete
successfully in our markets, our sales and profitability would suffer.
Our revenue and operating results can fluctuate unpredictably from quarter to quarter.
Our revenue can fluctuate unpredictably from quarter to quarter. Fluctuations in our revenue
can lead to even greater fluctuations in our operating results. Our budgeted expense levels depend
in part on our expectations of future revenue. Any substantial adjustment to expense in order to
account for lower levels of revenue is difficult and takes time. Consequently, if our revenue
declines, our levels of inventory, operating expense and general overhead would be high relative to
revenue, and this could result in operating losses.
Other factors contribute to fluctuations in our revenue and operating results, including:
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the level of demand for our products and the timing and size of customer orders,
particularly from large telecommunications carrier customers; |
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satisfaction of contractual acceptance criteria and related revenue recognition requirements; |
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delays, changes to or cancellation of orders from customers; |
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the effects of consolidation of our customers, including increased exposure to any
changes in network strategy and reductions in customer capital expenditures; |
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the availability of an adequate supply of components and sufficient manufacturing
capacity; |
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the introduction of new products by us or our competitors; |
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readiness of customer sites for installation; and |
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changes in general economic conditions as well as those specific to our market segments. |
Many of these factors are beyond our control, particularly in the case of large carrier orders
and multi-vendor or multi-technology network infrastructure builds where the achievement of certain
performance thresholds for acceptance is subject to the readiness and performance of the customer
or other providers, and changes in customer requirements or installation plans. As a consequence,
our revenue and operating results for a particular quarter may be difficult to predict and our
prior results are not necessarily indicative of results likely in future periods. Any one or a
combination of the factors above may cause our revenue and operating results to fluctuate from
quarter to quarter.
Our gross margin may fluctuate from quarter to quarter which may adversely affect our level of
profitability.
Our gross margin fluctuates from quarter to quarter and may be adversely affected by numerous
factors, including:
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customer, product and service mix in any period; |
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the effect of our services gross margin, which is generally lower than our product
gross margin; |
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sales volume during the period; |
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increased price competition; |
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charges for excess or obsolete inventory; |
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changes in the price or availability of components for our products; |
14
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our ability to continue to reduce product manufacturing costs; |
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introduction of new products, with initial sales at relatively small volumes with
resulting higher production costs; and |
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increased warranty or repair costs. |
The factors that contribute to fluctuations in revenue and operating results can also
significantly affect our gross margin. Fluctuations in gross margin may affect our level of
profitability in any period. As a consequence, our gross margin for a particular quarter may be
difficult to predict, and our prior results are not necessarily indicative of results likely in
future periods.
Network equipment sales to large communications service providers often involve lengthy sales
cycles and protracted contract negotiations and may require us to assume terms or conditions that
negatively affect our pricing, payment terms and the timing of revenue recognition.
Our future success will depend in large part on our ability to maintain and expand our sales
to large communications service providers. These sales typically involve lengthy sales cycles,
protracted or difficult contract negotiations, and extensive product testing and network
certification. We are sometimes required to assume contract terms or conditions that negatively
affect pricing, payment terms and the timing of revenue recognition in order to consummate a sale.
These terms may, in turn, negatively affect our revenue and results of operations and increase our
susceptibility to quarterly fluctuations in our results. Communications service providers may
ultimately insist upon terms and conditions that we deem too onerous or not in our best interest.
Moreover, our purchase agreements generally do not require that a customer guarantee any minimum
purchase level and customers often have the right to modify, delay, reduce or cancel previous
orders. As a result, we may incur substantial expense and devote time and resources to potential
relationships that never materialize or result in lower than anticipated sales.
Investment of research and development resources in technologies for which there is not a matching
market opportunity, or failure to sufficiently or timely invest in technologies for which there is
market demand, would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving
technologies and changes in market demand. To succeed in this market, we are continually investing
research and development resources into the enhancement of our existing products, the creation of
new products and the development or acquisition of new technologies. There is often a lengthy
period between commencing these development initiatives and bringing the new or revised product to
market, and, during this time, technology or the market may move in directions we had not
anticipated. There is a significant possibility, therefore, that at least some of our development
decisions will not turn out as anticipated, and that our investment in a project will be
unprofitable. There is also a possibility that we may miss a market opportunity because we fail to
invest, or invest too late, in a new product or an enhancement of an existing product that could
have been highly profitable. Changes in the market may also cause us to discontinue previously
planned investments in products, which can have a disruptive effect on relationships with customers
that were anticipating the availability of a new product or feature. If we fail to make the right
investments and to make them at the right time, our competitive position may suffer and our revenue
and profitability could be harmed.
We may be exposed to unanticipated risks and additional obligations in connection with our resale
of complementary products or technology of other companies.
We have entered into agreements with strategic partners that permit us to distribute their
products or technology. We rely upon these relationships to add complementary products or
technologies or to fulfill an element of our product portfolio. As part of our strategy to
diversify our product portfolio and customer base, we may enter into additional original equipment
manufacturer (OEM) or resale agreements in the future. We may incur unanticipated costs or
difficulties relating to our resale of third party products. Our third party relationships could
expose us to risks associated with delays in their development, manufacturing or delivery of
products or technology. We may also be required by customers to assume warranty, service and other
commercial obligations greater than the commitments, if any, made to us by these technology
partners. Some of our strategic partners are relatively small companies with limited financial
resources. If they are unable to satisfy their obligations to us or our customers, we may have to
expend our own resources to satisfy these obligations. Exposure to the risks above could harm our
reputation with key customers and negatively affect our business and our results of operations.
15
Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of
equipment that addresses rapidly growing, multi-service
communications network traffic is complicated. Due to their complexity, some of our products can be
fully tested only when deployed in communications networks or with other equipment. As a result,
new products or product enhancements can contain undetected hardware or software errors at the time
of release. We have introduced new or upgraded products recently and expect to continue to enhance
and extend our product portfolio. Product performance problems are often more acute for initial
deployments of new products and product enhancements. Unanticipated problems can relate to the
design, manufacturing, installation or integration of our products. If we experience significant
performance, reliability or quality problems with our products, or our customers suffer significant
network restoration delays relating to these problems, a number of negative effects on our business
could result, including:
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increased costs to address software or hardware defects; |
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payment of liquidated damages or claims for damages for performance failures or delays; |
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increased inventory obsolescence and warranty expense; |
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delays in collecting accounts receivable; |
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cancellation or reduction in orders from customers; and |
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damage to our reputation or legal actions by customers or end users. |
Product performance problems could damage our business reputation and negatively affect our
business and results of operations.
We may be required to write off significant amounts of inventory as a result of our inventory
purchase practices, the convergence of our product lines and our supplier transitions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our
contract manufacturers and suppliers to manufacture components and complete assemblies based on
forecasts of customer demand. As a result, our inventory purchases expose us to the risk that our
customers either will not order those products for which we have forecasted sales or will purchase
fewer than the number of products we have forecasted. Our purchase agreements generally do not
require that a customer guarantee any minimum purchase level, and customers often have the right to
modify, reduce or cancel purchase quantities. As a result, we may purchase inventory based on
forecasted sales and in anticipation of purchases that never come to fruition. Historically, our
inventory write-offs have resulted from the circumstances above. As features and functionalities
converge across our product lines, however, we face an increased risk that customers may elect to
forego purchases of one product we have inventoried in favor of purchasing another product with
similar functionality or application. We may be exposed to write-offs due to significant inventory
purchases that we deem necessary as we transition from one supplier to another, or resulting from a
suppliers decision to discontinue the manufacture of certain components. We may also be required
to write off inventory as a result of the effect of evolving domestic and international
environmental regulations. If we are required to write off or write down a significant amount of
inventory due to the factors above or otherwise, our results of operations for the period would be
materially adversely affected.
Shortages in component supply or manufacturing capacity could increase our costs, adversely affect
our results of operations and constrain our ability to grow our business.
As we have expanded our use of contract manufacturers, broadened our product portfolio and
increased sales volume in recent years, manufacturing capacity and supply constraints have become
increasingly significant issues for us. We have encountered component shortages that have affected
our operations and ability to deliver products in a timely manner. Growth in customer demand for
the communications networking products supplied by us, our competitors and other third parties, has
resulted in supply constraints among providers of some components used in our products. In
addition, environmental regulations, such as RoHS, have resulted in, and may continue to give rise
to, increased demand for compliant components. As a result, we may experience delays or difficulty
obtaining compliant components from suppliers. Component shortages and manufacturing capacity
constraints may also arise, or be exacerbated by difficulties with our suppliers or contract
manufacturers, or our failure to adequately forecast our component or manufacturing needs. If
shortages or delays occur or persist, the price of required components may increase, or the
components may not be available at all. If we are unable to secure the components or subsystems
that we require at reasonable prices, or are unable to secure adequate manufacturing capacity, we
may experience delivery delays and may be unable to satisfy our contractual obligations to
customers. These delays may cause us to incur liquidated damages to customers and negatively affect
our revenue and gross margin. Shortages
in component supply or manufacturing capacity could also limit our opportunities to pursue
additional growth or revenue opportunities and could harm our business reputation and customer
relationships.
16
We may not be successful in selling our products into new markets and developing and managing new
sales channels.
We continue to take steps to sell our expanded product portfolio into new geographic markets
and to a broader customer base, including enterprises, cable operators, wireless operators and
federal, state and local governments. We have less experience in these markets and believe, in
order to succeed in these markets, we must develop and manage new sales channels and distribution
arrangements. We expect these relationships to be an increasingly important part of the growth of
our business and our efforts to increase revenue. We may not be successful in reaching additional
customer segments or expanding into new geographic regions and may be exposed to increased expense
and business and financial risks associated with entering new markets and pursuing new customer
segments. We may expend time, money and other resources on channel relationships that are
ultimately unsuccessful. In addition, sales to federal, state and local governments require
compliance with complex procurement regulations with which we have little experience. We may be
unable to increase our sales to government contractors if we determine that we cannot comply with
applicable regulations. Our failure to comply with regulations for existing contracts could result
in civil, criminal or administrative proceedings involving fines and suspension, or exclusion from
participation in federal government contracts. Failure to manage additional sales channels
effectively would limit our ability to succeed in these new markets and could adversely affect our
ability to grow our customer base and revenue.
We may experience delays in the development and enhancement of our products that may negatively
affect our competitive position and business.
To remain competitive, we must continue to enhance existing product platforms by adding new
features and functionality and introduce new products. Because our products are based on complex
technology, we can experience unanticipated delays in developing, improving, manufacturing or
deploying them. Each step in the development life cycle of our products presents serious risks of
failure, rework or delay, any one of which could decrease the timing and cost-effective development
of such products and could affect customer acceptance of such products. Unexpected intellectual
property disputes, failure of critical design elements, and other execution risks may delay or even
prevent the introduction of these products. Our development efforts may also be affected,
particularly in the near term, by the transfer of some of our research and development activity to
our facility in India. Modification of research and development strategies and changes in
allocation of resources could also be disruptive to our development efforts. If we do not develop
and successfully introduce products in a timely manner, our competitive position may suffer and our
business, financial condition and results of operations would be harmed.
We must manage our relationships with contract manufacturers effectively to ensure that our
manufacturing and production requirements are met.
We rely on contract manufacturers to perform the majority of the manufacturing operations for
our products and components and we are increasingly utilizing overseas suppliers, particularly in
Asia. The qualification of our contract manufacturers is a costly and time-consuming process, and
these manufacturers build products for other companies, including our competitors. We are
constantly reviewing our manufacturing capability, including the work of our contract
manufacturers, to ensure that our production requirements are met in terms of cost, capacity,
quality and reliability. From time to time, we may decide to transfer the manufacturing of a
product from one contract manufacturer to another, to better meet our production needs. Efforts to
transfer to a new contract manufacturer or consolidate our use of suppliers may result in temporary
increases in inventory volumes purchased in order to ensure continued supply. We may not
effectively manage these contract manufacturer transitions, and our new contract manufacturers may
not perform as well as expected. Our reliance upon contract manufacturers could also expose us to
risks that could harm our business related to difficulties with lead times, on-time delivery,
quality assurance and product changes required to meet evolving environmental standards and
regulations. These risks can result in strategic harm to our business, including delays affecting
our time to market for new or enhanced products. In addition, we do not have contracts in place
with some of these providers and do not have guaranteed supply of components or manufacturing
capacity. Our inability to effectively manage our relationships with our contract manufacturers,
particularly overseas, could negatively affect our business and results of operations.
We depend on sole and limited source suppliers for some of our product components and the loss of a
source, or a lack of availability of key components, could increase our costs and harm our customer
relationships.
We depend on a limited number of suppliers for our product components and subsystems, as well
as for equipment used to manufacture and test our products. Our products include several components
for which reliable, high-volume suppliers are particularly limited. Some key optical and electronic
components we use in our products are currently available only from sole or limited sources. As a
result of this concentration in our supply chain, particularly for optical components, our business
would be negatively affected if our suppliers were to experience any significant disruption in
their operations affecting the
price, quality, availability or timely delivery of components. Concentration in our supply chain
can exacerbate our exposure to risks associated with vendors discontinuing the manufacture of
certain components for our products. The loss of a source of supply, or lack of sufficient
availability of key components, could require us to redesign products that use those components,
which would increase our costs and negatively affect our product gross margin. The partial or
complete loss of a sole or limited source supplier could result in lost revenue, added costs and
deployment delays that could harm our business and customer relationships.
17
Our failure to manage our relationships with service delivery partners effectively could adversely
impact our financial results and relationship with customers.
We rely on a number of service delivery partners, both domestic and international, to
complement our global service and support resources. We rely upon third party service delivery
partners for the installation of our equipment in some large network builds. These projects often
include onerous customization, installation, testing and acceptance terms. In order to ensure the
timely installation of our products and satisfaction of obligations to our customers, we must
identify, train and certify our partners. The certification of these partners can be costly and
time-consuming, and these partners provide similar services for other companies, including our
competitors. We may not be able to effectively manage our relationships with our partners and
cannot be certain that they will be able to deliver services in the manner or time required. If our
service partners are unsuccessful in delivering services:
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we may suffer delays in recognizing revenue; |
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our services revenue and gross margin may be adversely affected; and |
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our relationship with customers could suffer. |
Difficulties with service delivery partners could cause us to transition a larger share of
deployment and other services from third parties to internal resources, thereby increasing our
service overhead costs and negatively affecting our services gross margin and results of
operations.
We may incur significant costs and our competitive position may suffer as a result of our efforts
to protect and enforce our intellectual property rights or respond to claims of infringement from
others.
Our business is dependent upon the successful protection of our proprietary technology and
intellectual property. We are subject to the risk that unauthorized parties may attempt to access,
copy or otherwise obtain and use our proprietary technology, particularly as we expand our product
development into India and increase our reliance upon contract manufacturers in Asia. These and
other international operations could expose us to a lower level of intellectual property protection
than in the United States. Monitoring unauthorized use of our technology is difficult, and we
cannot be certain that the steps that we are taking will prevent or minimize the risks of
unauthorized use. If competitors are able to use our technology, our ability to compete effectively
could be harmed.
In recent years, we have filed suit to enforce our intellectual property rights. From time to
time we have also been subject to litigation and other third party intellectual property claims,
including as a result of our indemnification obligations to customers or resellers that purchase
our products. The frequency of these assertions is increasing as patent holders, including entities
that are not in our industry and that purchase patents as an investment or to monetize such rights
by obtaining royalties, use infringement assertions as a competitive tactic and a source of
additional revenue. Intellectual property claims can significantly divert the time and attention of
our personnel and result in costly litigation. Intellectual property infringement claims can also
require us to pay substantial damages or royalties, enter into costly license agreements or develop
non-infringing technology. Accordingly, the costs associated with third party intellectual property
claims could adversely affect our business, results of operations and financial condition.
Our international operations could expose us to additional risks and result in increased operating
expense.
We market, sell and service our products globally. We have established offices around the
world, including in North America, Europe, Latin America and the Asia Pacific region. We have also
established a major development center in India and are increasingly relying upon overseas
suppliers, particularly in Asia, for sourcing of components and contract manufacturing of our
products. We expect that our international activities will be dynamic in the near term, and we may
enter new markets and withdraw from or reduce operations in others. These changes to our
international operations may require significant management attention and result in additional
expense. In some countries, our success will depend in part on our ability to form relationships
with local partners. Our inability to identify appropriate partners or reach mutually satisfactory
arrangements for international sales of our products could impact our ability to maintain or
increase international market demand for our products.
International operations are subject to inherent risks, including:
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effects of changes in currency exchange rates; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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difficulties and costs of staffing and managing foreign operations; |
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the impact of economic changes in countries outside the United States; |
18
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less protection for intellectual property rights in some countries; |
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adverse tax and customs consequences, particularly as related to transfer-pricing issues; |
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social, political and economic instability; |
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trade protection measures, export compliance, qualification to transact business and
other regulatory requirements; and |
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natural disasters and epidemics. |
These and other factors related to our international operations may result in increased risk
to our business and could give rise to unanticipated expense or other effects that could adversely
affect our financial results.
Our use and reliance upon development resources in India may expose us to unanticipated costs or
liabilities.
We have established a development center in India and expect to continue to increase hiring of
personnel for this facility. There is no assurance that our reliance upon development resources in
India will enable us to achieve meaningful cost reductions or greater resource efficiency. Further,
our development efforts and other operations in India involve significant risks, including:
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difficulty hiring and retaining appropriate engineering resources due to intense
competition for such resources and resulting wage inflation; |
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the knowledge transfer related to our technology and exposure to misappropriation of
intellectual property or confidential information, including information that is
proprietary to us, our customers and other third parties; |
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heightened exposure to changes in the economic, security and political conditions of India; |
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fluctuation in currency exchange rates and tax risks associated with international
operations; and |
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development efforts that do not meet our requirements because of language, cultural or
other differences associated with international operations, resulting in errors or delays. |
Difficulties resulting from the factors above and other risks related to our operations in
India could expose us to increased expense, impair our development efforts, harm our competitive
position and damage our reputation.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect
receivables and could adversely affect our operating results and financial condition.
In the course of our sales to customers, we may have difficulty collecting receivables and
could be exposed to risks associated with uncollectible accounts. We may be exposed to similar
risks relating to third party resellers and other sales channel partners. While we monitor these
situations carefully and attempt to take appropriate measures to protect ourselves, it is possible
that we may have to write down or write off doubtful accounts. Such write-downs or write-offs could
negatively affect our operating results for the period in which they occur, and, if large, could
have a material adverse effect on our operating results and financial condition.
Efforts to restructure our operations and align our resources with market opportunities could
disrupt our business and affect our results of operations.
Over the last several years, we have taken steps, including reductions in force, office
closures, and internal reorganizations to reduce the size and cost of our operations and to better
match our resources with our market opportunities. We may take similar steps in the future to
improve efficiency and match our resources with market opportunities. Any such changes could be
disruptive to our business and may result in the recording of accounting charges. These include
inventory and technology-related write-offs, workforce reduction costs and charges relating to
consolidation of excess facilities. If we
are required to take a substantial charge related to any future restructuring activities, our
results of operations would be adversely affected in the period in which we take such a charge.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business
effectively.
Competition to attract and retain highly skilled technical and other personnel with experience
in our industry is increasing in intensity, and our employees have been the subject of targeted
hiring by our competitors. We may experience difficulty retaining and motivating existing employees
and attracting qualified personnel to fill key positions. It may be difficult to replace members of
our management team or other key personnel, and the loss of such individuals could be disruptive to
our business. Because we generally do not have employment contracts with our employees, we must
rely upon providing competitive compensation packages and a high-quality work environment in order
to retain and motivate employees. If we are unable to attract and retain qualified personnel, we
may be unable to manage our business effectively.
19
We may be adversely affected by fluctuations in currency exchange rates.
To date, we have not significantly hedged against foreign currency fluctuations. Historically,
our primary exposure to currency exchange rates has been related to non-U.S. dollar denominated
operating expense in Europe, Asia and Canada where we sell primarily in U.S. dollars. With the
growth of our international headcount, we have witnessed increases in operating expense resulting
from the weakening of the U.S. dollar. We expect these risks to continue as we further increase
headcount in India.
As we increase our international sales and utilization of international suppliers, we may
transact additional business in currencies other than the U.S. dollar. As a result, we will be
subject to the possibility of greater effects of foreign exchange translation on our financial
statements. For those countries outside the United States where we have significant sales, a
devaluation in the local currency would make our products more expensive for customers to purchase
or increase our operating costs, thereby adversely affecting our competitiveness. There can be no
assurance that exchange rate fluctuations in the future will not have a material adverse effect on
our revenue from international sales and, consequently, our business, operating results and
financial condition.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make strategic investments in other companies to expand the markets we
address and diversify our customer base. We may also engage in these transactions to acquire or
accelerate the development of technology or products. To do so, we may use cash, issue equity that
would dilute our current shareholders ownership, incur debt or assume indebtedness. These
transactions involve numerous risks, including:
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difficulty integrating the operations, technologies and products of the acquired companies; |
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diversion of managements attention; |
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difficulty completing projects of the acquired company and costs related to in-process
projects; |
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the loss of key employees of the acquired company; |
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amortization expenses related to intangible assets and charges associated with
impairment of goodwill; |
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ineffective internal controls over financial reporting; |
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dependence on unfamiliar supply partners; and |
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exposure to unanticipated liabilities, including intellectual property infringement claims. |
As a result of these and other risks, any acquisitions or strategic investments may not reap
the intended benefits and may ultimately have a negative impact on our business, results of
operation and financial condition.
Changes in government regulation could lead our customers to reduce investment in their
communications networks which would reduce the size of our market and could adversely affect our
business.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications
industry and similar agencies have jurisdiction over the communication industries in other
countries. Many of our most important customers are subject to the rules and regulations of these
agencies. Changes in regulatory requirements in the United States or other countries could inhibit
service providers from investing in their communications network infrastructures and thus could
adversely affect the sale of our products. Changes in regulatory tariff requirements or other
regulations relating to pricing or terms of carriage on communications networks could slow the
expansion of network infrastructures and adversely affect our business, operating results, and
financial condition.
The investment of our substantial cash balance and our investments in marketable debt securities
are subject to risks which may cause losses and affect the liquidity of these investments.
At October 31, 2007, we had $892.1 million in cash and cash equivalents and $856.1 million in
investments in marketable debt securities. We have historically invested these amounts in corporate
bonds, asset-backed obligations, commercial paper, securities issued by the United States,
certificates of deposit and money market funds meeting certain
20
criteria. These investments are
subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by
U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and
caused credit and liquidity issues. During the fourth quarter of fiscal 2007, we determined that
declines in the fair value of certain of our investments in commercial paper issued by two
structured investment vehicles (SIVs) were other-than-temporary. Each of these SIVs entered
receivership during our fourth quarter of fiscal 2007 and subsequently failed to make payment at
maturity. As of October 31, 2007, we recognized realized losses of $13.0 million related to these investments
and estimated the fair value of these investments at $33.9 million. See Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Policies
Investments in Item 7 of Part II of this report for
more information about this loss and our determination of the fair value of these
investments at October 31, 2007.
We may recognize further realized losses in the fair
value of these investments or a complete loss of these investments. Additional
losses would have a negative effect on our net income. Information
and the markets relating to investments that hold mortgage-related assets as collateral remain dynamic. There may be further
declines in the value of these investments and the value of the collateral held by these entities. As a result, we may experience a reduction in value or loss of liquidity
of other investments. In addition, should our other investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. These market risks associated with our investment portfolio may have a negative
adverse effect on our results of operations, liquidity and financial condition.
We may be required to take further write-downs of goodwill and other intangible assets.
As of October 31, 2007, we had $232.0 million of goodwill on our balance sheet. This amount
primarily represents the remaining excess of the total purchase price of our acquisitions over the
fair value of the net assets acquired. At October 31, 2007, we had $67.1 million of other
intangible assets on our balance sheet. The amount primarily reflects purchased technology from our
acquisitions. At October 31, 2007, goodwill and other intangible assets represented approximately
12.4% of our total assets. During the fourth quarter of 2005, we incurred a goodwill impairment
charge of approximately $176.6 million and an impairment of other intangibles of $45.7 million. If
we are required to record additional impairment charges related to goodwill and other intangible
assets, such charges would have the effect of decreasing our earnings or increasing our losses in
such period. If we are required to take a substantial impairment charge, our operating results
could be materially adversely affected in such period.
Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a
report containing managements assessment of the effectiveness of our internal controls over
financial reporting as of the end of our fiscal year and a statement as to whether or not such
internal controls are effective. Compliance with these requirements has resulted in, and is likely
to continue to result in, significant costs and the commitment of time and operational resources.
Growth of our business, including our broader product portfolio and increased transaction volume,
will necessitate ongoing changes to our internal control systems, processes and information
systems. Our increasingly global operations, including our development facility in India and
offices abroad, will pose additional challenges to our internal control systems as their operations
become more significant. We cannot be certain that our current design for internal control over
financial reporting will be sufficient to enable management or our independent registered public
accounting firm to determine that our internal controls are effective for any period, or on an
ongoing basis. If we or our independent registered public accounting firms are unable to assert
that our internal controls over financial reporting are effective our business may be harmed.
Market perception of our financial condition and the trading price of our stock may be adversely
affected, and customer perception of our business may suffer.
Obligations associated with our outstanding indebtedness on our convertible notes may adversely
affect our business.
At October 31, 2007, indebtedness on our outstanding convertible notes totaled $1.3 billion in
aggregate principal, of which $542.3 million in aggregate principal amount on our 3.75% convertible
notes becomes due and payable on February 1, 2008. Our indebtedness and repayment obligations could
have important negative consequences, including:
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increasing our vulnerability to general adverse economic and industry conditions; |
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limiting our ability to obtain additional financing; |
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reducing the availability of cash resources for other purposes, including capital
expenditures; |
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limiting our flexibility in planning for, or reacting to, changes in our business and
the markets in which we compete; and |
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placing us at a possible competitive disadvantage to competitors that have better
access to capital resources. |
We may also add additional indebtedness such as equipment loans, working capital lines of
credit and other long term debt.
21
Our business is dependent upon the proper functioning of our information systems and upgrading
these systems may result in disruption to our business, operating processes and internal controls.
The efficient operation of our business is dependent on the successful operation of our
information systems. In particular, we rely on our information systems to process financial
information, manage inventory and administer our sales transactions. In an effort to improve the
efficiency of our operations, achieve greater automation and support the growth of our business, we
are in the process of upgrading certain information systems and have recently implemented a new
version of our Oracle management information system. We anticipate that we will have to modify a
number of operational processes and internal control procedures as a result of this upgrade. Any
material disruption, malfunction or similar problems with our information systems could have a
negative effect on our business and results of operations in the period affected. In addition, in
recent years, we have experienced considerable growth in transaction volume, headcount and reliance
upon international resources in our operations. Our information systems need to be sufficiently
scalable to support the continued growth of our operations and the efficient management of
our business. If our information system resources are inadequate, we
may be required to undertake costly upgrades and the growth of our business could be harmed.
Our stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain
volatile in the future. Volatility can arise as a result of a number of the factors discussed in
this Risk Factors section, as well as divergence between our actual or anticipated financial
results and published expectations of analysts, and announcements that we, our competitors, or our
customers may make.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of October 31, 2007, all of our properties are leased. Our principal executive offices are
located in Linthicum, Maryland. We lease thirty-eight facilities related to our ongoing operations.
These include five buildings located at various sites near Linthicum, Maryland, including an
engineering facility, three manufacturing facilities, and one administrative and sales facility. We
have engineering and/or service facilities located in Alpharetta, Georgia; Acton, Massachusetts;
and Kanata, Canada. We also maintain a sales and service facility in London, England. During fiscal
2006, we commenced operations of our development facility in Gurgaon,
India, and our
manufacturing support office in Shenzhen, China. We also lease various small offices in the United
States and abroad to support our sales and services. We believe the facilities we are now using are
adequate and suitable for our business requirements.
We lease a number of properties that we no longer occupy. As part of our restructuring costs,
we provide for the estimated cost of the net lease expense for these facilities. The cost is based
on the fair value of future minimum lease payments under contractual obligations offset by the fair
value of the estimated future sublease payments that we may receive. As of October 31, 2007, our
accrued restructuring liability related to these properties was $4.7 million. If actual market
conditions relating to the use of these facilities are less favorable than those projected by
management, additional restructuring costs associated with these facilities may be required. For
additional information regarding our lease obligations, see Note 17 to the financial statements
included in Item 8 of Part II of this report.
Item 3. Legal Proceedings
On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United
States District Court for the Central District of California against Ciena and several other
defendants, alleging that optical fiber amplifiers incorporated into certain of those parties
products infringe U.S. Patent No. 4,859,016 (the 016 Patent). The complaint seeks injunctive
relief, royalties and damages. On October 10, 2003, the court stayed the case pending final
resolution of matters before the
U.S. Patent and Trademark Office (the PTO), including a request for and disposition of a
reexamination of the 016 Patent. On October 16, 2003, and November 2, 2004, the PTO granted
reexaminations of the 016 Patent, resulting in a continuation of the stay of the case. On
September 11, 2006, the PTO issued a Notice of Intent to Issue a Reexamination Certificate and
Statement of Reasons for Patentability/Confirmation, stating its intent to confirm certain claims
of the 016 Patent. On June 22, 2007, the district court issued an order lifting the stay of the
case. The parties are currently engaged in discovery. Separately, on July 2, 2007, defendant JDS
Uniphase filed with the PTO a request for ex parte reexamination of the 016 Patent and a request
that the district court reinstate the stay of the case on the basis of its reexamination request.
On November 20, 2007, the PTO granted the request for reexamination in part, including only claim
12 of the 016 Patent in the scope of its reexamination. On November 28, 2007, based on the PTOs
rationale in granting reexamination, defendant JDS Uniphase filed with the PTO another request for
ex parte reexamination of claim 11 of the 016 Patent. The court has not ruled on the motion to
reinstate the stay. On
December 11, 2007, the district court continued the final pretrial
conference to June 16, 2008. The case has not yet been scheduled for
trial. We are not able to predict the ultimate outcome of this matter at this time or
to reasonably estimate the amount or range of the potential loss, if any, that might result from an
adverse resolution of this matter. We believe that we have valid
defenses to the lawsuit and intend
to defend it vigorously.
22
As a result of our merger with ONI Systems Corp. in June 2002, Ciena became a defendant in a
securities class action lawsuit. Beginning in August 2001, a number of substantially identical
class action complaints alleging violations of the federal securities laws were filed in the United
States District Court for the Southern District of New York. These complaints name ONI, Hugh C.
Martin, ONIs former chairman, president and chief executive officer; Chris A. Davis, ONIs former
executive vice president, chief financial officer and administrative officer; and certain
underwriters of ONIs initial public offering as defendants. The complaints were consolidated into
a single action, and a consolidated amended complaint was filed on April 24, 2002. The amended
complaint alleges, among other things, that the underwriter defendants violated the securities laws
by failing to disclose alleged compensation arrangements (such as undisclosed commissions or stock
stabilization practices) in the initial public offerings registration statement and by engaging in
manipulative practices to artificially inflate the price of ONIs common stock after the initial
public offering. The amended complaint also alleges that ONI and the named former officers violated
the securities laws on the basis of an alleged failure to disclose the underwriters alleged
compensation arrangements and manipulative practices. No specific amount of damages has been
claimed. Similar complaints have been filed against more than 300 other issuers that have had
initial public offerings since 1998, and all of these actions have been included in a single
coordinated proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without
prejudice pursuant to a tolling agreement. In July 2004, following mediated settlement
negotiations, the plaintiffs, the issuer defendants (including Ciena), and their insurers entered
into a settlement agreement, whereby the plaintiffs cases against the issuers would be dismissed,
the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants
of at least $1 billion, and the issuer defendants would agree to assign or surrender to the
plaintiffs certain claims the issuers may have against the underwriters. The settlement agreement
did not require Ciena to pay any amount toward the settlement or to make any other payments. In
October 2004, the district court certified a class with respect to the Section 10(b) claims in six
focus cases selected out of all of the consolidated cases, which cases did not include Ciena, and
which decision was appealed by the underwriter defendants to the U.S. Court of Appeals for the
Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs
and issuer defendants for preliminary approval of the settlement agreement, subject to certain
modifications to the proposed bar order, and on August 31, 2005, the district court issued a
preliminary order approving the revised stipulated settlement agreement On December 5, 2006, the
U.S. Court of Appeals for the Second Circuit vacated the district courts grant of class
certification in the six focus cases. On April 6, 2007, the Second Circuit denied plaintiffs
petition for rehearing. In light of the Second Circuits decision, the parties agreed that the
settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed
by the plaintiffs and the issuer defendants terminating the proposed settlement. On August 14,
2007, the plaintiffs filed second amended complaints against the defendants in the six focus cases,
as well as a set of amended master allegations against the other issuer defendants, including
changes to the definition of the purported class of investors. On September 27, 2007, the
plaintiffs filed a motion for class certification based on their amended complaints and
allegations. On November 12, 2007, the defendants in the six focus cases moved to dismiss the
second amended complaints. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the matter at this time.
In addition to the matters described above, we are subject to various legal proceedings,
claims and litigation arising in the ordinary course of business. We do not expect that the
ultimate costs to resolve these matters will have a material effect on our results of operations,
financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2007.
PART II
Item 5.
Market for Registrants Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
(a) Cienas common stock is traded on the NASDAQ Global Select Market under the symbol CIEN.
The following table sets forth the high and low sales prices of Ciena common stock, as reported on
the NASDAQ Global Select Market, for the fiscal periods indicated. The sales prices below have been
adjusted to reflect the one-for-seven reverse stock split of Cienas authorized and outstanding
common stock effected on September 22, 2006.
23
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Price Range of Common Stock |
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Low |
Fiscal Year 2006 |
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First Quarter ended January 31 |
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$ |
28.77 |
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$ |
16.31 |
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Second Quarter ended April 30 |
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$ |
39.34 |
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$ |
26.04 |
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Third Quarter ended July 31 |
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$ |
33.67 |
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$ |
23.38 |
|
Fourth Quarter ended October 31 |
|
$ |
30.87 |
|
|
$ |
23.08 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
30.56 |
|
|
$ |
24.39 |
|
Second Quarter ended April 30 |
|
$ |
32.80 |
|
|
$ |
24.75 |
|
Third Quarter ended July 31 |
|
$ |
41.13 |
|
|
$ |
28.22 |
|
Fourth Quarter ended October 31 |
|
$ |
49.55 |
|
|
$ |
32.75 |
|
As of December 14, 2007, there were approximately 1,670 holders of record of Cienas common
stock and 86,798,914 shares of common stock outstanding. Ciena has never paid cash dividends on its
capital stock. We intend to retain earnings for use in our business and we do not anticipate paying
any cash dividends in the foreseeable future.
The following graph shows a comparison of cumulative total returns for an investment in the
common stock of Ciena, the NASDAQ Telecommunications Index and the S&P 500 Index from October 31,
2002 to October 31, 2007. The NASDAQ Telecommunications Index contains 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 high-technology communication products. This graph is not deemed to
be filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act
of 1934, 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 or the Exchange Act.
Assumes $100 invested in Ciena Corporation, the NASDAQ Telecommunications Index and the S&P
500 Index on October 31, 2002 with all dividends reinvested at month-end.
(b) Not applicable.
(c) Not applicable.
24
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and the notes thereto included in Item 8, Financial Statements
and Supplementary Data. Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest
to the last day of October in each year. For purposes of financial statement presentation, each
fiscal year is described as having ended on October 31. Fiscal 2003, 2004, 2005 and 2006 consisted
of 52 weeks and fiscal 2007 consisted of 53 weeks.
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, |
|
|
(in thousands) |
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
Cash and cash
equivalents |
|
$ |
294,914 |
|
|
$ |
185,868 |
|
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
$ |
892,061 |
|
Short-term
investments |
|
$ |
796,809 |
|
|
$ |
753,251 |
|
|
$ |
579,531 |
|
|
$ |
628,393 |
|
|
$ |
822,185 |
|
Long-term
investments |
|
$ |
519,744 |
|
|
$ |
329,704 |
|
|
$ |
155,944 |
|
|
$ |
351,407 |
|
|
$ |
33,946 |
|
Total
assets |
|
$ |
2,378,165 |
|
|
$ |
2,137,054 |
|
|
$ |
1,675,229 |
|
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
Short-term
convertible notes
payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
542,262 |
|
Long-term
convertible notes
payable |
|
$ |
730,428 |
|
|
$ |
690,000 |
|
|
$ |
648,752 |
|
|
$ |
842,262 |
|
|
$ |
800,000 |
|
Total
liabilities |
|
$ |
1,047,348 |
|
|
$ |
982,632 |
|
|
$ |
939,862 |
|
|
$ |
1,086,087 |
|
|
$ |
1,566,119 |
|
Stockholders
equity |
|
$ |
1,330,817 |
|
|
$ |
1,154,422 |
|
|
$ |
735,367 |
|
|
$ |
753,626 |
|
|
$ |
850,154 |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
(in thousands, except per share data) |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Revenue |
|
$ |
283,136 |
|
|
$ |
298,707 |
|
|
$ |
427,257 |
|
|
$ |
564,056 |
|
|
$ |
779,769 |
|
Cost of goods sold |
|
|
210,091 |
|
|
|
226,954 |
|
|
|
291,067 |
|
|
|
306,275 |
|
|
|
417,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
73,045 |
|
|
|
71,753 |
|
|
|
136,190 |
|
|
|
257,781 |
|
|
|
362,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
212,523 |
|
|
|
205,364 |
|
|
|
137,245 |
|
|
|
111,069 |
|
|
|
127,296 |
|
Selling and
marketing |
|
|
105,921 |
|
|
|
112,310 |
|
|
|
115,022 |
|
|
|
104,434 |
|
|
|
118,015 |
|
General and
administrative |
|
|
39,703 |
|
|
|
28,592 |
|
|
|
33,715 |
|
|
|
47,476 |
|
|
|
50,262 |
|
Amortization of intangible
assets |
|
|
17,870 |
|
|
|
30,839 |
|
|
|
38,782 |
|
|
|
25,181 |
|
|
|
25,350 |
|
In-process research and
development |
|
|
2,800 |
|
|
|
30,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
costs |
|
|
13,575 |
|
|
|
57,107 |
|
|
|
18,018 |
|
|
|
15,671 |
|
|
|
(2,435 |
) |
Goodwill
impairment |
|
|
|
|
|
|
371,712 |
|
|
|
176,600 |
|
|
|
|
|
|
|
|
|
Long-lived asset
impairment |
|
|
47,176 |
|
|
|
15,926 |
|
|
|
45,862 |
|
|
|
|
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,648 |
) |
|
|
(4,871 |
) |
Recovery of sale, export, use tax liabilities
and payments |
|
|
|
|
|
|
(5,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for doubtful
accounts |
|
|
|
|
|
|
(2,794 |
) |
|
|
2,602 |
|
|
|
(3,031 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
439,568 |
|
|
|
843,868 |
|
|
|
567,846 |
|
|
|
289,152 |
|
|
|
313,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(366,523 |
) |
|
|
(772,115 |
) |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
|
|
48,666 |
|
Interest and other income, net |
|
|
45,987 |
|
|
|
25,936 |
|
|
|
31,294 |
|
|
|
50,245 |
|
|
|
76,483 |
|
Interest expense |
|
|
(39,359 |
) |
|
|
(29,841 |
) |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
Gain (loss) on equity investments, net |
|
|
(4,760 |
) |
|
|
(4,107 |
) |
|
|
(9,486 |
) |
|
|
215 |
|
|
|
592 |
|
Loss, other-than-temporary, on marketable debt investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
Gain (loss) on extinguishment of debt |
|
|
(20,606 |
) |
|
|
(8,216 |
) |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(385,261 |
) |
|
|
(788,343 |
) |
|
|
(434,379 |
) |
|
|
1,976 |
|
|
|
85,732 |
|
Provision for income taxes |
|
|
1,256 |
|
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,381 |
|
|
|
2,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(386,517 |
) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(6.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
(6.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
63,814 |
|
|
|
74,493 |
|
|
|
82,170 |
|
|
|
83,840 |
|
|
|
85,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
63,814 |
|
|
|
74,493 |
|
|
|
82,170 |
|
|
|
85,011 |
|
|
|
99,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This section contains statements that discuss future events or expectations, projections of
results of operations or financial condition, changes in the markets for our products and services,
or other forward-looking information. Our forward-looking information is based on various
factors and was derived using numerous assumptions. In some cases, you can identify these
forward-looking statements by words like may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential or continue or the negative of
those words and other comparable words. You should be aware that these statements only reflect our
current predictions and beliefs. These statements are subject to known and unknown risks,
uncertainties and other factors, and actual events or results may differ materially. Important
factors that could cause our actual results to be materially different from the forward-looking
statements are disclosed throughout this report, particularly under the heading Risk Factors in
Item 1A of Part I of this annual report. You should review these risk factors for a more complete
understanding of the risks associated with an investment in our securities. We undertake no
obligation to revise or update any forward-looking statements. The following discussion and
analysis should be read in conjunction with our Selected Consolidated Financial Data and
consolidated financial statements and notes thereto included elsewhere in this annual report.
Overview
Ciena Corporation is a supplier of communications networking equipment, software and services
that support the transport, switching, aggregation and management of voice, video and data traffic.
Our products are used, individually or as part of an integrated solution, in communications network
infrastructures operated by telecommunications service providers, cable operators, governments and
enterprises around the globe. Our products facilitate the cost-effective delivery of enterprise and
consumer-oriented communication services. Through our FlexSelect Architecture, we specialize in
transitioning legacy communications networks to converged, next-generation architectures, better
able to handle increased traffic and to deliver more efficiently a broader mix of high-bandwidth
communications services. By improving network productivity, reducing costs and enabling integrated
service offerings, our converged Ethernet infrastructure and broadband access products create
business and operational value for our customers.
Over the past fiscal year, market conditions and the execution of our network specialist
strategy enabled us to generate revenue of $779.8 million, representing a 38.2% increase from
fiscal 2006 revenue of $564.1 million. Growth in consumer and enterprise reliance upon
communications services continues to drive increases in network capacity requirements and new
high-bandwidth applications and services. The resulting broader mix of high-volume traffic is
driving a transition from legacy network infrastructures to more efficient, simplified,
Ethernet-based network architectures. We believe that our FlexSelect Architecture and
Ethernet/IP-related enhancements to our product portfolio have enabled us to benefit from both
increasing capacity requirements and the convergence of networks to more efficient and economical
architectures. We believe that these conditions that have allowed us to achieve significant revenue
growth over the past two fiscal years will enable continued growth of our business during fiscal
2008, although we currently expect a somewhat lower annual growth rate than we achieved in fiscal
2007.
Consolidation within the telecommunications industry and among several of our largest
customers continues to affect our concentration of revenue. For fiscal 2007, two customers each
accounted for greater than 10% of our fiscal 2007 revenue, and 38.1% in the aggregate. AT&T
represented 25.3% and Sprint represented 12.8%. We believe that our fiscal 2007 results illustrate
our success in leveraging our incumbent position within large carriers. However, this concentration
of our revenue exposes us to additional risks, including greater pricing pressure and increased
susceptibility to changes in customers network strategy or reductions in their capital
expenditures.
Our percentage of international revenue increased from $140.4 million, or 24.9% of total
revenue, in fiscal 2006 to $226.2 million, or 29.0% of total revenue in fiscal 2007. We expect our
international sales to continue to increase as a percentage of revenue in fiscal 2008.
Revenue was $216.2 million for the fourth quarter of fiscal 2007, representing a 5.5%
sequential quarterly increase. While we believe that we will be able to grow annual revenue from
the level achieved for fiscal 2007, the nature of our business continues to expose us to the
likelihood of quarterly fluctuation in revenue during fiscal 2008. A sizable portion of our revenue
comes from sales to a small number of telecommunications service providers for large communication
network builds. These projects are generally characterized by large and sporadic equipment orders
and contract terms that can result in the recognition or deferral of significant amounts of revenue
in a given quarter. The level of demand for our products, the timing and size of equipment orders,
our ability to deliver products to fulfill those orders, and the timing of product acceptance for
revenue recognition all contribute to and can cause fluctuations in our revenue on a quarterly
basis.
26
Improving and stabilizing gross margin was an area of significant focus for us during fiscal
2007. Gross margin for fiscal
2007 was 46.5%, up from 45.7% in fiscal 2006, and product gross margin was 51.4%, up from
47.5%. Gross margin for the fourth quarter of fiscal 2007 was 50.5%. Gross margin improvement during fiscal
2007 reflects the effect of favorable product and customer mix and the negative effect of a
reduced services gross margin. Our increased gross margin for
fiscal 2007 also reflects significant product cost reductions and improved manufacturing efficiencies,
as we increasingly utilize lower cost suppliers in Asia. Part of our strategy is to maintain the product gross margin
improvements made during fiscal 2007 by focusing on the development and sale of Ethernet-based,
software-intensive products that enable the flexible, cost-effective delivery of higher value
communications services. Our gross margin, however, continues to be susceptible to quarterly
fluctuation due to a number of factors, including: product and customer mix during the period, our
ability to drive further product cost reductions, the level of pricing pressure we encounter, the
effect of changes in our services gross margin, the introduction of new products or entry into new
markets, charges for excess and obsolete inventory and changes in warranty costs.
Operating expense increased from $289.2 million in fiscal 2006 to $313.6 in fiscal 2007, but
decreased as a percentage of revenue from 51.3% to 40.2%. Operating expense for the fourth quarter
of fiscal 2007 was $82.0 million, a slight increase from $81.6 million in the third quarter of
fiscal 2007. We expect operating expense to increase in absolute dollars during fiscal 2008 to
support growth of the business, research and development projects, and increased headcount for our
India development site and sales resources.
The results above drove significant improvements in income from operations and net income
during fiscal 2007. Income from operations increased from a loss of $31.4 million in fiscal 2006 to
income of $48.7 million in fiscal 2007. Net income increased from $0.6 million, or $0.01 per
diluted share, in fiscal 2006 to $82.8 million, or $0.87 per diluted share, in fiscal 2007. Net
income for the fourth quarter of fiscal 2007 was $30.4 million, or $0.30 per diluted share. This
compares with net income of $28.3 million, or $0.29 per diluted share, for the third quarter of
fiscal 2007. We continue to work to gain additional leverage from our operating model to drive
operating margin improvements. We expect interest income, which was a
significant component of our net income in fiscal 2007, to decrease
as a result of our repayment of the remaining principal balance of
$542.3 million on our 3.75% convertible notes during the first
quarter of fiscal 2008, and lower interest rates on investment
balances.
We generated $108.7 million in cash from operations during fiscal 2007 as compared to our use
of $79.4 million during fiscal 2006. Cash from operations during fiscal 2007 consisted of $170.7
million in cash from net income (adjusted for non-cash charges) and a $62.0 million net decrease in
cash resulting from changes in working capital. We generated $11.3 million in cash from operations
during the fourth quarter of fiscal 2007, consisting of $61.4 million in cash from net income
(adjusted for non-cash charges) and a $50.1 million net use of cash resulting from changes in
working capital. This compares with $64.1 million in cash from generated from operations during the
third quarter of fiscal 2007, consisting of $44.1 million in cash from net income (adjusted for
non-cash charges) and a $20.0 million net increase in cash resulting from changes in working
capital.
On June 11, 2007, we completed a $500.0 million public offering of 0.875% Convertible Senior
Notes due June 15, 2017. This offering resulted in net proceeds of approximately $445.8 million,
after deducting underwriting discounts, expenses and $42.5 million we used to purchase a call
spread option on our common stock. The call spread option is intended to mitigate our exposure to
potential dilution from the conversion of the notes. We expect to use the net proceeds of the
offering for general corporate purposes, which may include the repurchase, or repayment at
maturity, of our outstanding 3.75% convertible notes. The remaining principal balance on our
outstanding 3.75% convertible notes of $542.3 million becomes due and payable on February 1, 2008.
See Liquidity and Capital Resources and Notes 11 and 13 to our financial statements in Item 8 of
Part II of this report for a discussion of our convertible notes and call spread options.
We had $892.1 million in cash and cash equivalents and $856.1 million short-term and long-term
investments in marketable debt securities at October 31, 2007. Our investments in marketable debt
securities at October 31, 2007 reflect a $13.0 million
realized loss recognized during the fourth quarter of
2007 related to our investments in commercial paper issued by two structured investment vehicles
that entered receivership during the fourth quarter of fiscal 2007 and failed to make payment at maturity. Due to the mortgage-related assets that they hold, each of these entities has been
exposed to adverse market conditions that have affected the value of
their collateral and their ability to access short-term funding. At the time
of our investment in the third quarter of fiscal 2007, each investment had a rating of A1+ by
Standard and Poors and P-1 by Moodys, their highest ratings respectively. Giving effect to these
losses, our investment portfolio at October 31, 2007 included an estimated fair value of $33.9 million in commercial
paper issued by these two SIVs. Information and the markets relating to these investments remain
dynamic and there may be further declines in the value of these investments, the value of the
collateral held by these entities, and the liquidity of our investments.
To the extent we determine that a further decline in fair value is other-than-temporary, we may
recognize additional realized losses in future periods, up to the aggregate amount of these investments, which would have a negative effect on our net income.
See Critical Accounting Policies and Estimates Investments below for additional information
regarding this loss and our determination of the fair value of these investments at October 31, 2007.
As of October 31, 2007, headcount was 1,797, an increase from 1,485 at October 31, 2006 and an
increase from 1,770 at July 31, 2007.
27
Results of Operations
In this report we discuss our revenue in three major groupings as follows:
|
1. |
|
Converged Ethernet Infrastructure. This group incorporates our transport and switching
products and packet interworking products and related software previously reported in our optical
networking and data networking product groups. |
|
|
2. |
|
Ethernet Access. This group includes our CNX-5 Broadband DSL System and CNX-5Plus Modular
Broadband Loop Carrier and related software previously reported in our broadband access product
group. For the periods covered in this report, this group does not include CN 3000 Ethernet Access
Series, as we have yet to recognize revenue related to this recently announced product. |
|
|
3. |
|
Global Network Services. This group continues to include revenue associated with our service,
support and training activities. |
Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties, license fees, direct
technical support costs, cost of excess and obsolete inventory and overhead related to
manufacturing, technical support, and engineering, furnishing and installation (EF&I) operations.
Fiscal 2006 compared to Fiscal 2007
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold
and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
502,427 |
|
|
|
89.1 |
|
|
$ |
695,289 |
|
|
|
89.2 |
|
|
$ |
192,862 |
|
|
|
38.4 |
|
Services |
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,480 |
|
|
|
10.8 |
|
|
|
22,851 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
564,056 |
|
|
|
100.0 |
|
|
|
779,769 |
|
|
|
100.0 |
|
|
|
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
263,667 |
|
|
|
46.7 |
|
|
|
337,866 |
|
|
|
43.3 |
|
|
|
74,199 |
|
|
|
28.1 |
|
Services |
|
|
42,608 |
|
|
|
7.6 |
|
|
|
79,634 |
|
|
|
10.2 |
|
|
|
37,026 |
|
|
|
86.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
306,275 |
|
|
|
54.3 |
|
|
|
417,500 |
|
|
|
53.5 |
|
|
|
111,225 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
257,781 |
|
|
|
45.7 |
|
|
$ |
362,269 |
|
|
|
46.5 |
|
|
$ |
104,488 |
|
|
|
40.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product
revenue |
|
$ |
502,427 |
|
|
|
100.0 |
|
|
$ |
695,289 |
|
|
|
100.0 |
|
|
$ |
192,862 |
|
|
|
38.4 |
|
Product cost of
goods sold |
|
|
263,667 |
|
|
|
52.5 |
|
|
|
337,866 |
|
|
|
48.6 |
|
|
|
74,199 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross
profit |
|
$ |
238,760 |
|
|
|
47.5 |
|
|
$ |
357,423 |
|
|
|
51.4 |
|
|
$ |
118,663 |
|
|
|
49.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
28
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service
revenue |
|
$ |
61,629 |
|
|
|
100.0 |
|
|
$ |
84,480 |
|
|
|
100.0 |
|
|
$ |
22,851 |
|
|
|
37.1 |
|
Service cost of
goods sold |
|
|
42,608 |
|
|
|
69.1 |
|
|
|
79,634 |
|
|
|
94.3 |
|
|
|
37,026 |
|
|
|
86.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross
profit |
|
$ |
19,021 |
|
|
|
30.9 |
|
|
$ |
4,846 |
|
|
|
5.7 |
|
|
$ |
(14,175 |
) |
|
|
(74.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
The table below (in thousands, except percentage data) sets forth the changes in distribution
of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Converged Ethernet infrastructure |
|
$ |
420,567 |
|
|
|
74.6 |
|
|
$ |
645,159 |
|
|
|
82.8 |
|
|
$ |
224,592 |
|
|
|
53.4 |
|
Ethernet access |
|
|
81,860 |
|
|
|
14.5 |
|
|
|
50,129 |
|
|
|
6.4 |
|
|
|
(31,731 |
) |
|
|
(38.8 |
) |
Global network services |
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,481 |
|
|
|
10.8 |
|
|
|
22,852 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
Revenue from sales to customers outside of the United States is reflected as International in the geographic
distribution of revenue below. The table below (in thousands, except percentage data) sets forth
the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
423,687 |
|
|
|
75.1 |
|
|
$ |
553,582 |
|
|
|
71.0 |
|
|
$ |
129,895 |
|
|
|
30.7 |
|
International |
|
|
140,369 |
|
|
|
24.9 |
|
|
|
226,187 |
|
|
|
29.0 |
|
|
|
85,818 |
|
|
|
61.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
Certain customers each accounted for at least 10% of our revenue for the periods indicated (in
thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
Verizon |
|
$ |
70,225 |
|
|
|
12.4 |
|
|
|
n/a |
|
|
|
|
|
Sprint |
|
|
89,793 |
|
|
|
15.9 |
|
|
|
100,122 |
|
|
|
12.8 |
|
AT&T |
|
|
66,926 |
|
|
|
11.9 |
|
|
|
196,924 |
|
|
|
25.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
226,944 |
|
|
|
40.2 |
|
|
$ |
297,046 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased due to a $224.6 million increase in sales of our converged Ethernet
infrastructure products. We believe that our converged Ethernet infrastructure revenue has
benefitted from both increasing network capacity requirements and the transition to more efficient
and economical network architectures. Increased product revenue for fiscal 2007 primarily reflects
a $140.2 million increase in sales of core switching products, a $60.5 million increase in core
transport and a $59.4 million increase of our CN 4200 FlexSelect Advanced Service Platform. The
decrease in Ethernet access product revenue reflects a $36.8 million reduction in sales of our
CNX-5 Broadband DSL System, which was negatively affected by customer consolidation activity. |
29
|
|
|
Service revenue increased primarily due to increases of $17.1 million in deployment service
sales and $4.4 million in maintenance and support services, reflecting increased sales volume and
increased installation activity. |
|
|
|
|
United States revenue increased due to a $152.6 million increase in sales of our converged
Ethernet infrastructure products. This primarily reflects a $133.2 million increase in sales of
core switching products, and a $40.0 million increase in core transport. United States revenue was
also affected by a $31.9 million decrease of revenue from Ethernet access products. |
|
|
|
|
International revenue increased due to a $72.0 million increase in sales of our converged
Ethernet infrastructure products. This primarily reflects a $53.3 million increase in sales of our
CN 4200 FlexSelect Advanced Service Platform and a
$20.5 million increase in sales of core
transport products. International revenue also reflects an increase of $13.7 million in service
revenue, primarily related to deployment. |
Gross profit
|
|
|
Gross profit as a percentage of revenue increased primarily due to product gross margin
improvement offset by a significant reduction in services gross margin. |
|
|
|
|
Gross profit on products as a percentage of product revenue increased primarily due to
favorable product and customer mix, significant product cost reductions, improved manufacturing
efficiencies, and lower warranty expense. |
|
|
|
|
Gross profit on services as a percentage of services revenue decreased significantly as a
result of increased deployment overhead costs associated with the expansion of our internal
resources related to deployment activities for international network infrastructure projects. |
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in
operating expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
111,069 |
|
|
|
19.7 |
|
|
$ |
127,296 |
|
|
|
16.3 |
|
|
$ |
16,227 |
|
|
|
14.6 |
|
Selling and marketing |
|
|
104,434 |
|
|
|
18.5 |
|
|
|
118,015 |
|
|
|
15.1 |
|
|
|
13,581 |
|
|
|
13.0 |
|
General and administrative |
|
|
47,476 |
|
|
|
8.4 |
|
|
|
50,262 |
|
|
|
6.4 |
|
|
|
2,786 |
|
|
|
5.9 |
|
Amortization of intangible assets |
|
|
25,181 |
|
|
|
4.5 |
|
|
|
25,350 |
|
|
|
3.3 |
|
|
|
169 |
|
|
|
0.7 |
|
Restructuring costs |
|
|
15,671 |
|
|
|
2.8 |
|
|
|
(2,435 |
) |
|
|
(0.3 |
) |
|
|
(18,106 |
) |
|
|
(115.5 |
) |
Recovery of doubtful accounts, net |
|
|
(3,031 |
) |
|
|
(0.5 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
3,017 |
|
|
|
(99.5 |
) |
Gain on lease settlement |
|
|
(11,648 |
) |
|
|
(2.1 |
) |
|
|
(4,871 |
) |
|
|
(0.6 |
) |
|
|
6,777 |
|
|
|
(58.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
289,152 |
|
|
|
51.3 |
|
|
$ |
313,603 |
|
|
|
40.2 |
|
|
$ |
24,451 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
|
|
|
Research and development expense increased due to higher employee compensation cost of $10.9
million, primarily due to growth in headcount at our India development center. Other increases
included $4.8 million in prototype expense, $1.2 million in facilities and information systems
costs and $0.6 million in travel-related expenditures. This was partially offset by a decrease in
consulting expense of $1.8 million. |
|
|
|
|
Selling and marketing expense increased primarily due a $9.4 million increase in employee
compensation, which primarily reflects increased headcount in fiscal 2007. Other increases included
$1.7 million in travel expense, $1.1 million in consulting, and $0.8 million in tradeshow
activities. |
|
|
|
|
General and administrative expense increased due to an $8.6 million increase in employee
compensation, which reflects a $3.2 million increase stock compensation cost and increased
headcount. This increase was partially offset by a $7.1 million reduction in legal expense. Legal
expense for fiscal 2007 and fiscal 2006 included $2.3 million and $5.7 million, respectively, in
costs associated with settlement of patent litigation. |
|
|
|
|
Amortization of intangible assets costs increased slightly due to the purchase of certain
developed technology during the fourth quarter of fiscal 2007. |
|
|
|
|
Restructuring costs during fiscal 2007 primarily reflect adjustments related to the return to
use of previously restructured facilities. Restructuring costs during fiscal 2006 were primarily
related to an adjustment of $10.0 million due to changes in market conditions related to our former
facilities in San Jose, CA. During fiscal 2006, we also recorded charges totaling $6.3 million
related to the closure of our facilities in Kanata, Ontario, Shrewsbury, NJ and Beijing, China. |
30
|
|
|
Recovery of doubtful accounts, net during fiscal 2007 and fiscal 2006 was related to our
receipt of payment of amounts due from customers from whom payment was previously deemed doubtful
due to their financial condition. |
|
|
|
Gain on lease settlement for fiscal 2007 was related to the termination of lease obligations
for our former San Jose, CA facilities. During the fourth quarter of fiscal 2007, we paid $53.0
million in connection with the settlement of this lease obligation. This transaction resulted in a
gain on lease settlement of approximately $4.9 million by eliminating the remaining unfavorable
lease commitment balance of $34.9 million and reducing our restructuring liabilities by $23.5
million, offset by approximately $0.5 million of other expenses. Gain during fiscal 2006 was
related to the termination of the lease obligations for our former Freemont, CA and Cupertino, CA
facilities. |
Other items
The table below (in thousands, except percentage data) sets forth the
changes in other items for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2006 |
|
%* |
|
2007 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
50,245 |
|
|
|
8.9 |
|
|
$ |
76,483 |
|
|
|
9.8 |
|
|
$ |
26,238 |
|
|
|
52.2 |
|
Interest expense |
|
$ |
24,165 |
|
|
|
4.3 |
|
|
$ |
26,996 |
|
|
|
3.5 |
|
|
$ |
2,831 |
|
|
|
11.7 |
|
Loss, other-than-temporary, on
marketable debt securities |
|
$ |
|
|
|
|
|
|
|
$ |
13,013 |
|
|
|
1.7 |
|
|
$ |
13,013 |
|
|
|
100.0 |
|
Gain (loss) on equity investments, net |
|
$ |
215 |
|
|
|
|
|
|
$ |
592 |
|
|
|
0.1 |
|
|
$ |
377 |
|
|
|
175.3 |
|
Gain on extinguishment of debt |
|
$ |
7,052 |
|
|
|
1.3 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(7,052 |
) |
|
|
(100.0 |
) |
Provision for income taxes |
|
$ |
1,381 |
|
|
|
0.2 |
|
|
$ |
2,944 |
|
|
|
0.4 |
|
|
$ |
1,563 |
|
|
|
113.2 |
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
|
|
|
Interest and other income, net increased in part due to higher average cash and investment
balances resulting from the proceeds of our April 10, 2006 issuance of 0.25% convertible senior
notes and our June 11, 2007 issuance of 0.875% convertible senior notes, in part due to higher
interest rates. We expect interest income to decrease as a result of our repayment of the remaining
principal balance of $542.3 million on our 3.75% convertible notes, which becomes due on February
1, 2008, and lower interest rates on investment balances. |
|
|
|
|
Interest expense increased primarily due to interest associated with our April 10, 2006
issuance of 0.25% convertible senior notes and June 11, 2007 issuance of 0.875% convertible senior
notes. We expect interest expense to decrease as a result of our repayment of the remaining
principal balance of $542.3 million on our 3.75% convertible notes, which becomes due on February
1, 2008. |
|
|
|
|
Loss, other-than-temporary for fiscal 2007 was the result of a realized loss of $13.0 million
related to our marketable debt securities. During the fourth quarter of fiscal 2007, we determined
that declines in the fair value of our investments in certain commercial paper were
other-than-temporary. This commercial paper was issued by SIV Portfolio plc (formerly known as
Cheyne Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs) that entered
into receivership during the fourth quarter of fiscal 2007 and failed
to make payment at maturity. Due to the mortgage-related assets that
they hold, each of these entities has been exposed to adverse market
conditions that have affected the value of their collateral and their
ability to access short-term funding. See Critical
Accounting Policies and Estimates Investments below for additional information regarding this
loss and our determination of the fair value of these investments at October 31, 2007. |
|
|
|
|
Gain on extinguishment of debt for fiscal 2006 resulted from our repurchase of $106.5 million
of our outstanding 3.75% convertible notes in open market transactions for $98.4 million. We
recorded a gain on the extinguishment of debt in the amount of $7.1 million, which consists of the
$8.1 million gain from the repurchase of the notes, less $1.0 million of associated debt issuance
costs. |
|
|
|
|
Provision for income taxes was primarily attributable to foreign tax related to our foreign
operations. We will continue to maintain a valuation allowance against all net deferred tax assets
until sufficient evidence exists to support its reversal. See Critical Accounting Policies and
Estimates Deferred Tax Valuation Allowance below for information relating to this valuation
allowance and the conditions required for our release of the valuation allowance. |
31
Fiscal 2005 compared to Fiscal 2006
Revenue, cost of goods sold and gross profit
The table
below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold
and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
374,275 |
|
|
|
87.6 |
|
|
$ |
502,427 |
|
|
|
89.1 |
|
|
$ |
128,152 |
|
|
|
34.2 |
|
Services |
|
|
52,982 |
|
|
|
12.4 |
|
|
|
61,629 |
|
|
|
10.9 |
|
|
|
8,647 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
427,257 |
|
|
|
100.0 |
|
|
|
564,056 |
|
|
|
100.0 |
|
|
|
136,799 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
248,931 |
|
|
|
58.2 |
|
|
|
263,667 |
|
|
|
46.7 |
|
|
|
14,736 |
|
|
|
5.9 |
|
Services |
|
|
42,136 |
|
|
|
9.9 |
|
|
|
42,608 |
|
|
|
7.6 |
|
|
|
472 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
291,067 |
|
|
|
68.1 |
|
|
|
306,275 |
|
|
|
54.3 |
|
|
|
15,208 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
136,190 |
|
|
|
31.9 |
|
|
$ |
257,781 |
|
|
|
45.7 |
|
|
$ |
121,591 |
|
|
|
89.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
|
|
|
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
374,275 |
|
|
|
100.0 |
|
|
$ |
502,427 |
|
|
|
100.0 |
|
|
$ |
128,152 |
|
|
|
34.2 |
|
Product cost of goods sold |
|
|
248,931 |
|
|
|
66.5 |
|
|
|
263,667 |
|
|
|
52.5 |
|
|
|
14,736 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
125,344 |
|
|
|
33.5 |
|
|
$ |
238,760 |
|
|
|
47.5 |
|
|
$ |
113,416 |
|
|
|
90.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold
and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
52,982 |
|
|
|
100.0 |
|
|
$ |
61,629 |
|
|
|
100.0 |
|
|
$ |
8,647 |
|
|
|
16.3 |
|
Service cost of goods sold |
|
|
42,136 |
|
|
|
79.5 |
|
|
|
42,608 |
|
|
|
69.1 |
|
|
|
472 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
10,846 |
|
|
|
20.5 |
|
|
$ |
19,021 |
|
|
|
30.9 |
|
|
$ |
8,175 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
32
The table below (in thousands, except percentage data) sets forth the changes in distribution
of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Converged Ethernet infrastructure |
|
$ |
291,549 |
|
|
|
68.2 |
|
|
$ |
420,567 |
|
|
|
74.6 |
|
|
$ |
129,018 |
|
|
|
44.3 |
|
Ethernet access |
|
|
82,726 |
|
|
|
19.4 |
|
|
|
81,860 |
|
|
|
14.5 |
|
|
|
(866 |
) |
|
|
(1.0 |
) |
Global network services |
|
|
52,982 |
|
|
|
12.4 |
|
|
|
61,629 |
|
|
|
10.9 |
|
|
|
8,647 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
136,799 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. The table below (in thousands, except percentage
data) sets forth the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
340,774 |
|
|
|
79.8 |
|
|
$ |
423,687 |
|
|
|
75.1 |
|
|
$ |
82,913 |
|
|
|
24.3 |
|
International |
|
|
86,483 |
|
|
|
20.2 |
|
|
|
140,369 |
|
|
|
24.9 |
|
|
|
53,886 |
|
|
|
62.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
136,799 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
Certain customers each accounted for at least 10% of our revenue for the periods indicated (in
thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
Verizon |
|
$ |
43,673 |
|
|
|
10.2 |
|
|
$ |
70,225 |
|
|
|
12.4 |
|
BellSouth |
|
|
43,946 |
|
|
|
10.3 |
|
|
|
n/a |
|
|
|
|
|
SAIC |
|
|
46,058 |
|
|
|
10.8 |
|
|
|
n/a |
|
|
|
|
|
Sprint |
|
|
n/a |
|
|
|
|
|
|
|
89,793 |
|
|
|
15.9 |
|
AT&T |
|
|
n/a |
|
|
|
|
|
|
|
66,926 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
133,677 |
|
|
|
31.3 |
|
|
$ |
226,944 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased due to a $129.0 million increase in sales of our converged Ethernet
infrastructure products. This primarily reflects a $48.3 million increase in sales from our CN
4200 FlexSelect Advanced Services Platform introduced in the third quarter of fiscal 2005, a
$43.7 million increase in sales from our core transport products and a $35.0 million increase in
sales from our core switching products. |
|
|
|
|
Service revenue increased primarily due to a $4.6 million increase in sales of maintenance and
support services, a $2.2 million increase in sales of deployment services, and a $1.2 million
increase in sales of product training services. |
|
|
|
|
United States revenue increased due to a $79.3 million increase in sales of our converged
Ethernet infrastructure products. This increase primarily reflects a $38.1 million increase in
sales from our core transport products, a $30.7 million increase in sales from our core switching
products, and a $15.9 million increase from sales our CN 4200 FlexSelect Advanced Services
Platform. |
|
|
|
|
International revenue increased due to a $49.7 million increase in sales of our converged
Ethernet infrastructure products. This increase primarily reflects a $32.4 million increase in
sales from our CN 4200 FlexSelect Advanced Services Platform and a $17.3 million increase in
sales from other transport and switching products. |
33
Gross profit
|
|
|
Gross profit as a percentage of revenue increased largely due to increased sales volume, sales
of higher margin products and cost improvements resulting from our efforts to employ a global
approach to sourcing components and manufacturing our products. |
|
|
|
|
Gross profit on products as a percentage of product revenue increased primarily due to cost
reductions and higher margin product mix. |
|
|
|
|
Gross profit on services as a percentage of services revenue increased primarily due to
service rate stability in connection with our deployment services and reduced service overhead and
deployment costs. |
Operating expenses
The table below (in thousands, except percentage data) sets
forth the changes in operating expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
137,245 |
|
|
|
32.1 |
|
|
$ |
111,069 |
|
|
|
19.7 |
|
|
$ |
(26,176 |
) |
|
|
(19.1 |
) |
Selling and marketing |
|
|
115,022 |
|
|
|
26.9 |
|
|
|
104,434 |
|
|
|
18.5 |
|
|
|
(10,588 |
) |
|
|
(9.2 |
) |
General and administrative |
|
|
33,715 |
|
|
|
7.9 |
|
|
|
47,476 |
|
|
|
8.4 |
|
|
|
13,761 |
|
|
|
40.8 |
|
Amortization of intangible assets |
|
|
38,782 |
|
|
|
9.1 |
|
|
|
25,181 |
|
|
|
4.5 |
|
|
|
(13,601 |
) |
|
|
(35.1 |
) |
Restructuring costs |
|
|
18,018 |
|
|
|
4.2 |
|
|
|
15,671 |
|
|
|
2.8 |
|
|
|
(2,347 |
) |
|
|
(13.0 |
) |
Goodwill impairment |
|
|
176,600 |
|
|
|
41.3 |
|
|
|
|
|
|
|
|
|
|
|
(176,600 |
) |
|
|
(100.0 |
) |
Long-lived asset impairment |
|
|
45,862 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
(45,862 |
) |
|
|
(100.0 |
) |
Provision for (recovery of)
doubtful accounts, net |
|
|
2,602 |
|
|
|
0.6 |
|
|
|
(3,031 |
) |
|
|
(0.5 |
) |
|
|
(5,633 |
) |
|
|
(216.5 |
) |
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
(11,648 |
) |
|
|
(2.1 |
) |
|
|
(11,648 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
567,846 |
|
|
|
132.8 |
|
|
$ |
289,152 |
|
|
|
51.3 |
|
|
$ |
(278,694 |
) |
|
|
(49.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
|
|
|
Research and development expense decreased primarily due to reductions of $12.3 million in
employee compensation, $6.9 million in prototype expense and $6.3 million in depreciation expense.
The reduction in employee compensation was driven by headcount reductions. |
|
|
|
|
Selling and marketing expense decreased due to reductions of $7.3 million in depreciation
costs, $2.2 million in product introduction and marketing activities, $2.0 million in facility and
information systems expense, $1.7 million in temporary import costs and $0.8 million in travel.
These reductions were slightly offset by increases of $2.3 million in employee compensation.
Salaries, bonuses and commissions increased by $3.3 million during fiscal 2006, offset by a
reduction of $1.1 million in share-based
compensation expense. |
|
|
|
|
General and administrative expense increased due to an increase of $6.5 million in legal
expense, primarily related to our patent litigation with Nortel Networks, $5.9 million in employee
compensation and $1.5 million in audit fees partially offset by a decrease of $0.5 million in
directors and officers insurance expense. Included in the legal expenses were $5.7 million in
contingent fees paid to outside counsel and advisors connected with the settlement of the Nortel
litigation. The increase in employee compensation included an increase of $2.7 million in
share-based compensation expense. |
|
|
|
|
Amortization of intangible assets decreased due to the write-off of intangible assets recorded
in the fourth quarter of fiscal 2005. |
|
|
|
|
Restructuring costs incurred during fiscal 2006 were primarily related to a $10.0 million
charge associated with previously restructured unused facilities located in San Jose, CA, and $6.3
million in charges related to workforce reductions of approximately 155 employees and costs
associated with the closure of facilities located in Kanata, Canada; Shrewsbury, NJ and Beijing,
China. |
|
|
|
|
Provision for (recovery of) doubtful accounts, net for fiscal 2006 was related to the receipt
of amounts due from customers from whom payment was previously deemed doubtful due to the
customers financial condition. |
|
|
|
|
Gain on lease settlement for fiscal 2006 was related to the termination of our obligations
under the leases for our former Fremont, CA and Cupertino, CA facilities. |
34
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2005 |
|
%* |
|
2006 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
31,294 |
|
|
|
7.3 |
|
|
$ |
50,245 |
|
|
|
8.9 |
|
|
$ |
18,951 |
|
|
|
60.6 |
|
Interest expense |
|
$ |
28,413 |
|
|
|
6.7 |
|
|
$ |
24,165 |
|
|
|
4.3 |
|
|
$ |
(4,248 |
) |
|
|
(15.0 |
) |
Gain (loss) on equity investments, net |
|
$ |
(9,486 |
) |
|
|
(2.2 |
) |
|
$ |
215 |
|
|
|
|
|
|
$ |
9,701 |
|
|
|
(102.3 |
) |
Gain on extinguishment of debt |
|
$ |
3,882 |
|
|
|
0.9 |
|
|
$ |
7,052 |
|
|
|
1.3 |
|
|
$ |
3,170 |
|
|
|
81.7 |
|
Provision for income taxes |
|
$ |
1,320 |
|
|
|
0.3 |
|
|
$ |
1,381 |
|
|
|
0.2 |
|
|
$ |
61 |
|
|
|
4.6 |
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2005 to 2006 |
|
|
|
Interest and other income, net increased primarily due to higher interest rates. |
|
|
|
|
Interest expense decreased due to the repurchase of a portion of our outstanding 3.75%
convertible notes during fiscal 2005 and fiscal 2006. |
|
|
|
|
Loss on equity investments, net in fiscal 2005 was due to a decline in the value of our
investments in privately held technology companies that was determined to be other-than-temporary. |
|
|
|
|
Gain (loss) on extinguishment of debt for fiscal 2006 resulted from our repurchase of $106.5
million of our outstanding 3.75% convertible notes in open market transactions for $98.4 million.
We recorded a gain on the extinguishment of debt in the amount of $7.1 million, which consists of
the $8.1 million gain from the repurchase of the notes, less a write-off of $1.0 million of
associated debt issuance costs. |
|
|
|
|
Provision for income taxes for fiscal 2005 and fiscal 2006 was primarily attributable to
foreign tax related to Cienas foreign operations. We did not record a tax benefit for domestic
losses during fiscal 2005 or fiscal 2006. We will continue to maintain a valuation allowance
against certain deferred tax assets until sufficient evidence exists to support its reversal. See
Critical Accounting Policies and Estimates Deferred Tax Valuation Allowance below. |
Liquidity and Capital Resources
At October 31, 2007, our principal sources of liquidity were
cash and cash equivalents, short-term investments in marketable debt securities and cash from
operations. The following table summarizes our cash and cash equivalents and investments in
marketable debt securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Cash and cash equivalents |
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
$ |
671,897 |
|
Short-term investments in marketable debt securities |
|
|
628,393 |
|
|
|
822,185 |
|
|
|
193,792 |
|
Long-term investments in marketable debt securities |
|
|
351,407 |
|
|
|
33,946 |
|
|
|
(317,461 |
) |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments in marketable debt securities |
|
$ |
1,199,964 |
|
|
$ |
1,748,192 |
|
|
$ |
548,228 |
|
|
|
|
|
|
|
|
|
|
|
The increase in total cash and cash equivalents and investments in marketable debt securities
at October 31, 2007 was primarily related to the net proceeds of approximately $445.8 million from
our June 11, 2007 issuance of 0.875% convertible senior notes, our net income during fiscal 2007
and the effect of non-cash items described in Operating Activities below. Based on past
performance and current expectations, we believe that our cash and cash equivalents, investments in
marketable debt securities and cash generated from operations will satisfy our working capital
needs, capital expenditures and other liquidity requirements associated with our existing
operations through at least the next 12 months. In anticipation of paying off the $542.3 million
principal of our outstanding 3.75% convertible notes at maturity on February 1, 2008, we have
reallocated investments to increase our position in cash and cash equivalents and short-term
investments in marketable debt securities.
35
Included in long-term investments in marketable debt
securities at October 31, 2007 is approximately $33.9 million in investments in commercial paper
issued by two SIVs that entered into receivership during the fourth
quarter of fiscal 2007 and failed to make payment at maturity. We realized a
$13.0 million other-than-temporary loss related to this commercial paper in the fourth quarter of
fiscal 2007. Due to the mortgage-related assets that
they hold, each of these entities has been exposed to adverse market
conditions that have affected the value of their collateral and their
ability to access short-term funding. These investments are no longer
trading and have no
readily determinable market value. Information and the markets relating to these investments
remain dynamic, and there may be further declines in the value of
these investments, the value of the collateral held by these
entities and the liquidity of our investment. As a result, we may realize
further reductions in the fair value of these investments, additional losses or a complete loss of
these investments. See Critical Accounting Policies and Estimates Investments below for
additional information regarding this loss and our determination of
the fair value of these investments at
October 31, 2007.
The following sections review the significant activities that had an impact on
our cash during fiscal 2007.
Operating Activities
The following tables set forth (in thousands)
significant components of our $108.7 million of cash generated by operating activities for fiscal
2007:
Net income
|
|
|
|
|
|
|
Year ended |
|
|
|
October 31, |
|
|
|
2007 |
|
|
|
|
|
Net income |
|
$ |
82,788 |
|
|
|
|
|
Our net income for fiscal 2007 included the significant non-cash items summarized in the
following table (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
October 31, |
|
|
|
2007 |
|
Non-cash loss on equity investments and marketable securities |
|
$ |
13,013 |
|
Depreciation of equipment, furniture and fixtures; and amortization of leasehold improvements |
|
|
12,833 |
|
Share-based compensation costs |
|
|
19,572 |
|
Amortization of intangible assets |
|
|
29,220 |
|
Provision for inventory excess and obsolescence |
|
|
12,180 |
|
Provision for warranty |
|
|
12,743 |
|
|
|
|
|
Total significant non-cash charges |
|
$ |
99,561 |
|
|
|
|
|
Accounts Receivable, Net
Cash provided by accounts receivable, net decreased by $3.1 million
from the end of fiscal 2006 to the end of fiscal 2007. Our accounts receivable balance decreased
due to a proportionately higher volume of shipments made early in the fourth quarter of fiscal 2007 and higher sales to customers with shorter payment terms, primarily associated with our
domestic revenue. Our days sales outstanding (DSO) decreased from 68 days for fiscal 2006 to 48
days for fiscal 2007.
The following table sets forth (in thousands) changes to our accounts
receivable, net of allowance for doubtful accounts receivable, from the end of fiscal 2006 through
the end of fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Accounts receivable, net |
|
$ |
107,172 |
|
|
$ |
104,078 |
|
|
$ |
(3,094 |
) |
|
|
|
|
|
|
|
|
|
|
36
Inventory
Excluding the non-cash effect of a $12.2 million provision for excess and
obsolescence, cash consumed by inventory for fiscal 2007 was $8.7 million. Cienas inventory turns
increased from 2.5 for fiscal 2006 to 3.3 for fiscal 2007. The following table sets forth (in
thousands) changes to the components of our inventory from the end of fiscal 2006 through the end
of fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Raw materials |
|
$ |
29,627 |
|
|
$ |
28,611 |
|
|
$ |
(1,016 |
) |
Work-in-process |
|
|
9,156 |
|
|
|
4,123 |
|
|
|
(5,033 |
) |
Finished goods |
|
|
89,628 |
|
|
|
96,054 |
|
|
|
6,426 |
|
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
128,411 |
|
|
|
128,788 |
|
|
|
377 |
|
Provision for inventory excess and obsolescence |
|
|
(22,326 |
) |
|
|
(26,170 |
) |
|
|
(3,844 |
) |
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
106,085 |
|
|
$ |
102,618 |
|
|
$ |
(3,467 |
) |
|
|
|
|
|
|
|
|
|
|
Accounts payable
During fiscal 2007, we modified our standard vendor payment terms and payment
practices from net 30 days to net 45 days. This change contributed to an increase in our accounts
payable balance of $16.1 million. The following table sets forth (in thousands) changes in our
accounts payable from the end of fiscal 2006 through end of fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
39,277 |
|
|
$ |
55,389 |
|
|
$ |
16,112 |
|
|
|
|
|
|
|
|
|
|
|
Restructuring and unfavorable lease commitments
During fiscal 2007, we paid $24.0 million on
leases related to restructured facilities and $5.6 million on leases associated with unfavorable
lease commitments. Also, during the fourth quarter of fiscal 2007, we paid $53.0 million in
connection with the settlement of our lease obligation related to previously restructured
facilities in San Jose, CA. This transaction resulted in a gain on lease settlement of $4.9 million
by eliminating our remaining unfavorable lease commitment balance of $34.9 million and reducing our
restructuring liabilities by $23.5 million, offset by approximately $0.5 million of other expenses.
The following table reflects (in thousands) the balance of liabilities for our restructured
facilities and unfavorable lease commitments and the change in these balances from the end of
fiscal 2006 through the end of fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Restructuring liabilities |
|
$ |
8,914 |
|
|
$ |
1,026 |
|
|
$ |
(7,888 |
) |
Unfavorable lease commitments |
|
|
8,512 |
|
|
|
|
|
|
|
(8,512 |
) |
Long-term restructuring liabilities |
|
|
26,720 |
|
|
|
3,662 |
|
|
|
(23,058 |
) |
Long-term unfavorable lease commitments |
|
|
32,785 |
|
|
|
|
|
|
|
(32,785 |
) |
|
|
|
|
|
|
|
|
|
|
Total
restructuring liabilities and unfavorable lease commitments |
|
$ |
76,931 |
|
|
$ |
4,688 |
|
|
$ |
(72,243 |
) |
|
|
|
|
|
|
|
|
|
|
Interest Payable on Cienas Convertible Notes
Interest on Cienas outstanding 3.75%
convertible notes, due February 1, 2008, is payable on February 1 and August 1 of each year. Ciena
paid $20.3 million in interest on the 3.75% convertible notes during fiscal 2007.
Interest on
Cienas outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May 1 and
November 1 of each year, commencing on November 1, 2006. Ciena paid $1.2 million in interest on the
0.25% convertible notes during fiscal 2007.
Interest on Cienas outstanding 0.875% convertible
senior notes, due June 15, 2017, is payable on June 15 and December 15 of each year, commencing on December 15, 2007.
The indentures governing our outstanding convertible
notes do not contain any financial covenants. The indentures provide for customary events of
default, including payment defaults, breaches of covenants, failure to pay certain judgments and
certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is
continuing, the principal amount of the notes, plus accrued and unpaid interest, if any, may be
declared immediately due and payable. These amounts automatically become due and payable if an
event of default relating to certain events of bankruptcy, insolvency or reorganization occurs. For
additional information about our convertible notes, see Note 11 to our financial statements
included in Item 8 of Part II of this report.
37
The following table reflects (in thousands) the
balance of interest payable and the change in this balance from the end of fiscal 2006 through the
end of fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Accrued interest payable |
|
$ |
5,502 |
|
|
$ |
6,998 |
|
|
$ |
1,496 |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
During fiscal 2007, deferred revenue increased by $23.0 million. The increase
in product deferred revenue was primarily due to an increase in payments received in advance of
shipment, and also reflects payments received in advance of our ability to recognize revenue. The
increase in service deferred revenue is related to payment for service contracts that will be
recognized over the contract term. The following table reflects (in thousands) the balance of
deferred revenue and the change in this balance from the end of fiscal 2006 through the end of
fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2007 |
|
|
(decrease) |
|
Products |
|
$ |
4,276 |
|
|
$ |
13,208 |
|
|
$ |
8,932 |
|
Services |
|
|
36,400 |
|
|
|
50,432 |
|
|
|
14,032 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
40,676 |
|
|
$ |
63,640 |
|
|
$ |
22,964 |
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
On June 11, 2007, we completed a $500.0 million public offering of 0.875%
Convertible Senior Notes due June 15, 2017. This offering resulted in net proceeds of approximately
$445.8 million, after deducting underwriting discounts, expenses and $42.5 million we used to
purchase a call spread option on our common stock. The call spread option is intended to mitigate
our exposure to potential dilution from the conversion of the notes. We expect to use the net
proceeds of the offering for general corporate purposes, which may include the repurchase or
repayment at maturity of our outstanding 3.75% convertible notes. The remaining principal balance
on our outstanding 3.75% convertible notes of $542.3 million becomes due and payable on February 1,
2008. Cash provided by financing activities during fiscal 2007 also includes $36.8 million related
to the exercise of employee stock options and participation in our employee stock purchase plan.
Contractual Obligations
The following is a summary of our future minimum payments under
contractual obligations as of October 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
year |
|
|
year |
|
|
Thereafter |
|
Convertible notes (1) |
|
$ |
1,400,389 |
|
|
$ |
557,639 |
|
|
$ |
10,250 |
|
|
$ |
10,250 |
|
|
$ |
822,250 |
|
Operating leases (2) |
|
|
71,590 |
|
|
|
13,744 |
|
|
|
21,338 |
|
|
|
15,634 |
|
|
|
20,874 |
|
Purchase obligations (3) |
|
|
135,794 |
|
|
|
135,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,607,773 |
|
|
$ |
707,177 |
|
|
$ |
31,588 |
|
|
$ |
25,884 |
|
|
$ |
843,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$542.3 million in outstanding principal balance on our 3.75% convertible notes becomes due and payable on February 1, 2008. |
|
(2) |
|
The amount for operating leases above does not include insurance, taxes, maintenance and other costs required by the
applicable operating lease. These costs are variable and are not expected to have a material impact. |
|
(3) |
|
Purchase obligations relate to purchase order commitments to our contract manufacturers and component suppliers for
inventory. In certain instances, we are permitted to cancel, reschedule or adjust these orders. Consequently, only a portion
of the amount reported above relates to firm, non-cancelable and unconditional obligations. |
Some of our commercial commitments, including some of the future minimum payments set forth
above, are secured by standby letters of credit. The following is a summary of our commercial
commitments secured by standby letters of credit by commitment expiration date as of October 31,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to |
|
|
Three to |
|
|
|
|
|
|
Total |
|
|
year |
|
|
three years |
|
|
five years |
|
|
Thereafter |
|
Standby letters of credit |
|
$ |
21,916 |
|
|
$ |
3,392 |
|
|
$ |
18,359 |
|
|
$ |
165 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Off-Balance Sheet Arrangements
Ciena does not engage in any off-balance sheet financing arrangements. In particular, we do
not have any equity interests in so-called limited purpose entities, which include special purpose
entities (SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related
disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our estimates,
including those related to bad debts, inventories, investments, intangible assets, goodwill, income
taxes, warranty obligations, restructuring, and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances. Among other things, these estimates form the basis for judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. To the extent
that there are material differences between our estimates and actual results, our consolidated
financial statements will be affected.
We believe that the following critical accounting policies reflect those areas where
significant judgments and estimates are used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, (SAB 104) which states that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred
or services have been rendered; the price to the buyer is fixed or determinable; and collectibility
is reasonably assured. Customer purchase agreements and customer purchase orders are generally used
to determine the existence of an arrangement. Shipping documents and customer acceptance, when
applicable, are used to verify delivery. We assess whether the fee is fixed or determinable based
on the payment terms associated with the transaction and whether the sales price is subject to
refund or adjustment. We assess collectibility based primarily on the creditworthiness of the
customer as determined by credit checks and analysis, as well as the customers payment history. In
instances where final acceptance of the product, system, or solution is specified by the customer,
revenue is deferred until all acceptance criteria have been met. Revenue for maintenance services
is generally deferred and recognized ratably over the period during which the services are to be
performed.
Some of our communications networking equipment is integrated with software that is essential
to the functionality of the equipment. Accordingly, we account for revenue in accordance with
Statement of Position No. 97-2, Software Revenue Recognition, (SOP 97-2) and all related
interpretations. SOP 97-2 incorporates additional guidance unique to software arrangements
incorporated with general revenue recognition criteria, such as, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. In instances where final acceptance of the product is specified by the
customer, revenue is deferred until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or software
related elements, we apply the provisions of SOP 97-2 to determine the amount of the arrangement
fee to be allocated to those separate units of accounting. Multiple element arrangements that
include software are separated into more than one unit of accounting if the functionality of the
delivered element(s) is not dependent on the undelivered element(s), there is vendor-specific
objective evidence of the fair value of the undelivered element(s), and general revenue recognition
criteria related to the delivered element(s) have been met. The amount of product and service
revenue recognized is affected by our judgments as to whether an arrangement includes multiple
elements and, if so, whether vendor-specific objective evidence of fair value exists. Changes to
the elements in an arrangement and our ability to establish vendor-specific objective evidence for
those elements could affect the timing of revenue recognition. For all other deliverables, we apply
the provisions of Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple
Deliverables, (EITF 00-21). EITF 00-21 allows for separation of elements into more than one unit
of accounting if the delivered element(s) have value to the customer on a stand-alone basis,
objective and reliable evidence of fair value exists for the undelivered element(s), and delivery
of the undelivered element(s) is probable and substantially within our control. Revenue is
allocated to each unit of accounting based on the relative fair value of each accounting unit or
using the residual method if objective evidence of fair value does not exist for the delivered
element(s). The revenue recognition criteria described above is applied to each separate unit of
accounting. If these criteria are not met, revenue is deferred until the criteria are met or the
last element has been delivered.
39
Our total deferred revenue for products was $4.3 million and $13.2 million as of October 31,
2006 and 2007, respectively. Our service revenue is deferred and recognized ratably over the period
during which the services are to be performed. Our total deferred revenue for services was $36.4
million and $50.4 million as of October 31, 2006 and 2007, respectively.
Share-Based Compensation
On November 1, 2005, we adopted SFAS 123(R), Share-Based Payments, as interpreted by SAB
107, which requires the measurement and recognition of compensation expense for share-based awards
based on estimated fair values. SFAS 123(R) requires companies to estimate the fair value of
share-based awards on the date of grant. Share-based compensation expense recognized in our
consolidated statement of operations includes compensation expense for share-based awards granted
(i) prior to, but not yet vested as of October 31, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to October 31, 2005,
based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), as
interpreted by SAB 107.
We estimate the fair value of each option-based award on the date of grant using the
Black-Scholes option-pricing model. This option pricing model requires that we make several
estimates, including the options expected life and the price volatility of the underlying stock.
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. Because we consider our options to be plain vanilla,
we calculate the expected life using the simplified method as prescribed in SAB 107. Under SAB 107,
options are considered to be plain vanilla if they have the following basic characteristics:
granted at-the-money; exerciseability is conditioned upon service through the vesting date;
termination of service prior to vesting results in forfeiture; limited exercise period following
termination of service; and options are non-transferable and non-hedgeable. We consider the implied
volatility and historical volatility of our stock price in determining our expected volatility,
and, finding both to be equally reliable, have determined that a combination of both measures would
result in the best estimate of expected volatility. The estimated fair value of option-based
awards, net of estimated forfeitures, is recognized as stock-based compensation expense on a
straight-line basis over the requisite service period.
We estimate the fair value of our restricted stock unit awards based on the fair value of our
common stock on the date of grant. Our outstanding restricted stock unit awards are subject to
service-based vesting conditions and/or performance-based vesting conditions. The estimated fair
value of service-based awards, net of estimated forfeitures, is recognized as share-based expense
ratably over the vesting period on a straight-line basis. Awards with performance-based vesting
conditions require the achievement of certain company-based, financial or other performance
criteria or targets as a condition to the vesting, or acceleration of vesting, of such awards. The
estimated fair value of performance-based awards, net of estimated forfeitures, is recognized as
share-based expense over the performance period, using graded vesting, which considers each
performance period or tranche separately, and based upon our determination of whether it is
probable that the performance targets will be achieved. At each reporting period, we reassess the
probability of achieving the performance targets and the performance period required to meet those
targets. Determining whether the performance targets will be achieved involves judgment, and the
estimate of expense may be revised periodically based on the probability of achieving the
performance targets. Revisions are reflected in the period in which the estimate is changed. If any
performance goals are not met, no compensation cost is ultimately recognized and, to the extent
previously recognized, compensation cost is reversed.
No tax benefits were attributed to the share-based compensation expense because a full
valuation allowance was maintained for all net deferred tax assets.
Because share-based compensation expense is based on awards that are ultimately expected to
vest, the amount of expense takes into account estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Changes in these estimates and assumptions can
materially affect the measure of estimated fair value of our share-based compensation. See Note 15
to our financial statements in Item 8 of Part II of this report for information regarding our
treatment of share-based compensation.
Reserve for Inventory Obsolescence
We make estimates about future customer demand for our products when establishing the
appropriate reserve for excess and obsolete inventory. We write down inventory that has become
obsolete or unmarketable by an amount equal to the difference between the cost of inventory and the
estimated market value based on assumptions about future demand and market conditions. Inventory
write downs are a component of our product cost of goods sold. Upon recognition of the write down,
a new lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. We
recorded charges for excess and obsolete inventory of $12.2 million, $9.0 million, and $5.2 million
in fiscal 2007, 2006 and 2005 respectively. These charges were
primarily related to excess inventory due to a change in forecasted sales for certain of our
products. In an effort to limit our exposure to delivery delays and to satisfy customer needs we
purchase inventory based on forecasted sales across our product lines. In addition, part of our
research and development strategy is to promote the convergence of similar features and
functionalities across our product lines. Each of these practices exposes us to an increased risk
that our customers will not order those products for which we have forecasted sales, or will
purchase less than we have forecasted. Historically, we have experienced write downs due to changes
in strategic direction, discontinuance of a product and declines in market conditions. If actual
market conditions differ from those we have assumed, if there is a sudden and significant decrease
in demand for our products, or if there is a higher incidence of inventory obsolescence due to a
rapid change in technology, we may be required to take additional inventory write-downs and our
gross margin could be adversely affected.
40
Restructuring
As part of our restructuring costs, we provide for the estimated cost of the net lease expense
for facilities that are no longer being used. The provision is equal to the fair value of the
minimum future lease payments under our contracted lease obligations, offset by the fair value of
the estimated sublease payments that we may receive. As of October 31, 2007, our accrued
restructuring liability related to net lease expense and other related charges was $4.7 million.
The total minimum lease payments for these restructured facilities are $21.8 million. These lease
payments will be made over the remaining lives of our leases, which range from three months to
eleven years. If actual market conditions are different than those we have projected, we are
required to recognize additional restructuring costs or benefits associated with these facilities.
During fiscal 2006, we recognized net adjustments resulting in restructuring costs of $9.2 million,
which included a $10.0 million adjustment during the third quarter of fiscal 2006 relating to our
unused San Jose, CA facilities. During the fourth quarter of fiscal 2007, we paid $53 million in
connection with the settlement of our lease obligation related to previously restructured
facilities in San Jose, CA. This transaction resulted in a gain on lease settlement of $4.9 million
by eliminating our remaining unfavorable lease commitment balance of $34.9 million and reducing our
restructuring liabilities by $23.5 million, offset by approximately $0.5 million of other expenses.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts receivable is based on managements assessment, on a
specific identification basis, of the collectibility of customer accounts. We perform ongoing
credit evaluations of our customers and generally have not required collateral or other forms of
security from customers. In determining the appropriate balance for our allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectability. In doing so, management considers creditworthiness, payment history,
account activity and communication with such customer. If a customers financial condition
changes, or if actual defaults are higher than our historical experience, we may be required to
take a charge for an allowance for doubtful accounts receivable which could have an adverse impact
on our results of operations.
Goodwill
As of October 31, 2007, our consolidated balance sheet included $232.0 million in goodwill.
This amount primarily represents the remaining excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. In accordance with SFAS 142, we test
our goodwill for impairment on an annual basis, which we have determined to be the last business
day of fiscal September each year, and between annual tests if an event occurs or circumstances
change that would, more likely than not, reduce the fair value of the reporting unit below its
carrying value. There was no impairment of goodwill in fiscal 2007 or 2006. During the fourth
quarter of 2005, we incurred a goodwill impairment charge of approximately $176.6 million. If
actual industry or market conditions change or our forecasts change at the time of our annual
assessment or in periods prior to our annual assessment, we may be required to record additional
goodwill impairment charges. Such charges would have the effect of decreasing our earnings or
increasing our losses in such period.
Intangible Assets
As of October 31, 2007, our consolidated balance sheet included $67.1 million in other
intangible assets, net. We account for the impairment or disposal of long-lived assets such as
equipment, furniture, fixtures, and other intangible assets in accordance with the provisions of
SFAS 144. In accordance with SFAS 144, we test each intangible asset for impairment whenever events
or changes in circumstances indicate that the assets carrying amount may not be recoverable.
Valuation of our intangible assets requires us to make assumptions about future sales prices and
sales volumes for our products that involve new technologies and uncertainties around customer
acceptance of new products. If actual market conditions differ or our forecasts change, we may be
required to record additional impairment charges in future periods. Such charges would have the
effect of decreasing our earnings or increasing our losses in such period.
Investments
We have an investment portfolio comprised of marketable debt securities including short-term
commercial paper, certificates of deposit, corporate bonds, asset-backed obligations and U.S.
government obligations. The value of these securities is subject to market volatility for the
period we hold these investments and until their sale or maturity. We
recognize realized losses when
declines in the fair value of our investments, below their cost basis, are judged to be
other-than-temporary. In determining whether a decline in fair value is other-than-temporary, we
consider various factors including market price (when available), investment ratings, the financial
condition and near-term prospects of the investee, the length of time and the extent to which the
fair value has been less than our cost basis, and our intent and ability to hold the investment
until maturity or for a period of time sufficient to allow for any anticipated recovery in market
value. We make significant judgments in considering these factors. If it is judged that a decline
in fair value is other-than-temporary, the investment is valued at the current fair value and a
realized loss equal to the decline is reflected in net income, which could materially adversely
affect our operating results.
41
During
the fourth quarter of fiscal 2007, we determined that declines in the
estimated fair value of our
investments in certain commercial paper were other-than-temporary. This commercial paper was issued
by SIV Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured
investment vehicles (SIVs) that entered into receivership during the
fourth quarter of fiscal 2007 and failed to make payment at
maturity. Due to the mortgage-related assets that they hold, each of
these entities has been exposed to adverse market conditions that
have affected the value of their collateral and their ability to access short-term funding. We purchased these investments in the third quarter of fiscal 2007 and, at
the time of purchase, each investment had a rating of A1+ by Standard and Poors and P-1 by
Moodys, their highest ratings respectively. These investments are no longer trading and have no readily determinable market value. We have reviewed current investment ratings, valuation estimates of the underlying collateral, company specific news and events, and
general economic conditions in considering the fair value of these investments. In estimating fair
value, we used a valuation approach based on a liquidation of assets held by each SIV and their
subsequent distribution of cash. We utilized assessments of the underlying
collateral from multiple indicators of value, which were then discounted to reflect the expected timing of disposition and market risks. Based on this assessment of fair
value, as of October 31, 2007, we recognized realized losses of $13.0 million related to these investments.
Giving effect to these losses, our investment portfolio at October
31, 2007 included an estimated fair value of $33.9
million in commercial paper issued by these entities. See Note 4 to the financial statements
included as Item 8 of Part II of this report. Information and the markets relating to these
investments remain dynamic and there may be further declines in the value of these investments, the
value of the collateral held by these entities, and the liquidity of our
investments. To the extent we determine that a further decline in fair value is
other-than-temporary, we may recognize additional realized losses in future periods up to the aggregate
amount of these investments. We are not aware of any other of our marketable debt securities that
have experienced a similar decline in fair value. Our investments are subject to general credit, liquidity, market and
interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have
affected various sectors of the financial markets and caused credit and liquidity issues.
As of October 31, 2007 our marketable debt investments had unrealized losses of $0.1 million.
These gross unrealized losses were primarily due to changes in interest rates. Management has
determined that the gross unrealized losses on our marketable debt investments at October 31, 2007,
are temporary in nature because we have the ability and intent to hold these investments until a
recovery of fair value, which may be maturity.
As of October 31, 2007, our minority investments in privately held technology companies,
reported in other assets, were $6.7 million. These investments are generally carried at cost
because we own less than 20% of the voting equity and do not have the ability to exercise
significant influence over any of these companies. These investments are inherently high risk. The
markets for technologies or products manufactured by these companies are usually early stage at the
time of our investment and such markets may never materialize or become significant. We could lose
our entire investment in some or all of these companies. We monitor these investments for
impairment and make appropriate reductions in carrying values when necessary. If market conditions,
the expected financial performance, or the competitive position of the companies in which we invest
deteriorate, we may be required to record a charge in future periods
due to impairment in their
value.
Deferred Tax Valuation Allowance
As of October 31, 2007, we have recorded a valuation allowance fully offsetting gross deferred
tax assets of $1.2 billion. We calculated the valuation allowance in accordance with the provisions
of SFAS 109, Accounting for Income Taxes, which requires an assessment of both positive and
negative evidence regarding the realizability of these deferred tax assets, when measuring the need
for a valuation allowance. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. In determining net deferred tax assets and
valuation allowances, management is required to make judgments and estimates related to projections
of profitability, the timing and extent of the utilization of net operating loss carryforwards,
applicable tax rates, transfer pricing methodologies and tax planning strategies. The valuation allowance is reviewed quarterly and is maintained until sufficient positive
evidence exists to support the reversal. Because evidence such as our operating results during the
most recent three-year period is afforded more weight than forecasted results for future periods,
our cumulative loss during this three-year period represents sufficient negative evidence regarding
the need for a full valuation allowance under SFAS 109. We will release this valuation
allowance when management determines that it is more likely than not that our deferred tax assets
will be realized. If we are able to sustain a meaningful level of profitability in future periods,
and forecast sufficient earnings for periods thereafter, we may be required to release a
significant portion of the valuation allowance. Any future release of valuation allowance will be
recorded as a tax benefit increasing net income, an adjustment to acquisition intangibles, or an
adjustment to paid-in capital. Because we expect our recorded tax rate to increase in subsequent
periods following a release of the valuation allowance, our net income would be affected in periods
following the release. Any valuation allowance release will not affect the amount of cash paid for
income taxes
42
Warranty
Our liability for product warranties, included in other accrued liabilities, was $33.6 million
as of October 31, 2007. Our products are generally covered by a warranty for periods ranging from
one to five years. We accrue for warranty costs as part of our cost of goods sold based on
associated material costs, technical support labor costs, and associated overhead. Material cost is
estimated based primarily upon historical trends in the volume of product returns within the
warranty period and the cost to repair or replace the equipment. Technical support labor cost is
estimated based primarily upon historical trends and the cost to support the customer cases within
the warranty period. The provision for product warranties was $12.7 million, $14.5 million, and
$9.7 million in fiscal 2007, 2006 and 2005 respectively. The provision for warranty claims may
fluctuate on a quarterly basis depending upon the mix of products and customers in that period. If
actual product failure rates, material replacement costs, service or labor costs differ from our
estimates, revisions to the estimated warranty provision would be required. An increase in warranty
claims or the related costs associated with satisfying these warranty obligations could increase
our cost of sales and negatively affect our gross margin.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. We consider the
likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss, in determining loss contingencies. A loss is accrued when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether any accruals should be adjusted
and whether new accruals are required.
Effects of Recent Accounting Pronouncements
See Note 1 to our financial statements included in Item 8 of Part II of this report for
information relating to our discussion of the effects of recent accounting pronouncements.
43
Unaudited Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results
represented by certain items in our statements of operations for each of the eight quarters in the
period ended October 31, 2007. This information is unaudited, but in our opinion reflects all
adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair
statement of such information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
105,941 |
|
|
$ |
117,208 |
|
|
$ |
137,809 |
|
|
$ |
141,469 |
|
|
$ |
146,282 |
|
|
$ |
173,212 |
|
|
$ |
182,143 |
|
|
$ |
193,652 |
|
Services |
|
|
14,489 |
|
|
|
13,967 |
|
|
|
14,690 |
|
|
|
18,483 |
|
|
|
18,819 |
|
|
|
20,315 |
|
|
|
22,808 |
|
|
|
22,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
120,430 |
|
|
|
131,175 |
|
|
|
152,499 |
|
|
|
159,952 |
|
|
|
165,101 |
|
|
|
193,527 |
|
|
|
204,951 |
|
|
|
216,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
60,399 |
|
|
|
58,957 |
|
|
|
70,356 |
|
|
|
73,955 |
|
|
|
74,979 |
|
|
|
91,319 |
|
|
|
84,383 |
|
|
|
87,185 |
|
Services |
|
|
9,576 |
|
|
|
9,312 |
|
|
|
10,479 |
|
|
|
13,241 |
|
|
|
16,494 |
|
|
|
20,378 |
|
|
|
22,903 |
|
|
|
19,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
69,975 |
|
|
|
68,269 |
|
|
|
80,835 |
|
|
|
87,196 |
|
|
|
91,473 |
|
|
|
111,697 |
|
|
|
107,286 |
|
|
|
107,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
50,455 |
|
|
|
62,906 |
|
|
|
71,664 |
|
|
|
72,756 |
|
|
|
73,628 |
|
|
|
81,830 |
|
|
|
97,665 |
|
|
|
109,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
29,462 |
|
|
|
28,856 |
|
|
|
26,190 |
|
|
|
26,561 |
|
|
|
29,853 |
|
|
|
31,642 |
|
|
|
31,671 |
|
|
|
34,130 |
|
Selling and marketing |
|
|
26,572 |
|
|
|
26,657 |
|
|
|
24,903 |
|
|
|
26,302 |
|
|
|
24,875 |
|
|
|
30,182 |
|
|
|
30,303 |
|
|
|
32,655 |
|
General and administrative |
|
|
9,896 |
|
|
|
11,246 |
|
|
|
16,217 |
|
|
|
10,117 |
|
|
|
10,301 |
|
|
|
11,707 |
|
|
|
14,564 |
|
|
|
13,690 |
|
Amortization of intangible assets |
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,296 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,465 |
|
Restructuring costs |
|
|
2,015 |
|
|
|
3,014 |
|
|
|
11,008 |
|
|
|
(366 |
) |
|
|
(466 |
) |
|
|
(734 |
) |
|
|
(1,196 |
) |
|
|
(39 |
) |
Long lived asset impairment |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on lease settlement |
|
|
(6,020 |
) |
|
|
(5,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,871 |
) |
Recovery of (provision for) doubtful accounts, net |
|
|
(2,604 |
) |
|
|
(247 |
) |
|
|
(139 |
) |
|
|
(41 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
65,613 |
|
|
|
70,190 |
|
|
|
84,474 |
|
|
|
68,875 |
|
|
|
70,848 |
|
|
|
79,092 |
|
|
|
81,637 |
|
|
|
82,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(15,158 |
) |
|
|
(7,284 |
) |
|
|
(12,810 |
) |
|
|
3,881 |
|
|
|
2,780 |
|
|
|
2,738 |
|
|
|
16,028 |
|
|
|
27,120 |
|
Interest and other income, net |
|
|
9,262 |
|
|
|
11,197 |
|
|
|
14,045 |
|
|
|
15,741 |
|
|
|
14,845 |
|
|
|
16,897 |
|
|
|
19,464 |
|
|
|
25,277 |
|
Interest expense |
|
|
(6,053 |
) |
|
|
(5,815 |
) |
|
|
(6,148 |
) |
|
|
(6,149 |
) |
|
|
(6,148 |
) |
|
|
(6,148 |
) |
|
|
(6,931 |
) |
|
|
(7,769 |
) |
Gain (loss) on equity investments, net |
|
|
(733 |
) |
|
|
|
|
|
|
948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
592 |
|
|
|
|
|
Loss, other than termporary, on marketable debt
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
Gain on extinguishment of debt |
|
|
6,690 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(5,992 |
) |
|
|
(1,540 |
) |
|
|
(3,965 |
) |
|
|
13,473 |
|
|
|
11,477 |
|
|
|
13,487 |
|
|
|
29,153 |
|
|
|
31,615 |
|
Provision for income tax |
|
|
299 |
|
|
|
370 |
|
|
|
320 |
|
|
|
392 |
|
|
|
421 |
|
|
|
477 |
|
|
|
841 |
|
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,291 |
) |
|
$ |
(1,910 |
) |
|
$ |
(4,285 |
) |
|
$ |
13,081 |
|
|
$ |
11,056 |
|
|
$ |
13,010 |
|
|
$ |
28,312 |
|
|
$ |
30,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.15 |
|
|
$ |
0.33 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential
common share |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
$ |
0.14 |
|
|
$ |
0.29 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
82,967 |
|
|
|
83,518 |
|
|
|
84,197 |
|
|
|
84,657 |
|
|
|
84,953 |
|
|
|
85,198 |
|
|
|
85,651 |
|
|
|
86,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
82,967 |
|
|
|
83,518 |
|
|
|
84,197 |
|
|
|
93,146 |
|
|
|
93,259 |
|
|
|
93,737 |
|
|
|
101,568 |
|
|
|
108,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates and foreign currency
exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain a short-term and long-term investment portfolio. See
Note 4 to the financial statements in Item 8 of Part II of this report for information relating to
the fair value of these investments. These available-for-sale securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market interest rates were
to increase immediately and uniformly by 10% from levels at October 31, 2007, the fair value of the
portfolio would decline by approximately $24.1 million.
Foreign Currency Exchange Risk. As a global concern, we face exposure to adverse movements in
foreign currency exchange rates. Because our sales are primarily denominated in U.S. dollars, the
impact of foreign currency fluctuations on sales has not been material. Our primary exposures are
related to non-U.S. dollar denominated operating expense in Canada, Europe, India and China. During
fiscal 2007, approximately 77% of our operating expense was U.S. dollar denominated. As of October
31, 2007, our assets and liabilities related to non-dollar denominated currencies were primarily
related to intercompany payables and receivables. We do not expect an increase or decrease of 10%
in the foreign exchange rate would have a material impact on our financial position. To date, we
have not significantly hedged against foreign currency fluctuations. Should exposure to
fluctuations in foreign currency become more significant, however, we may pursue hedging
alternatives.
Item 8. Financial Statements and Supplementary Data
The following is an index to the consolidated financial statements:
|
|
|
|
|
|
|
Page |
|
|
Number |
Report of Independent Registered Public Accounting Firm |
|
|
46 |
|
Consolidated Balance Sheets |
|
|
47 |
|
Consolidated Statements of Operations |
|
|
48 |
|
Consolidated Statements of Changes in Stockholders Equity |
|
|
49 |
|
Consolidated Statements of Cash Flows |
|
|
50 |
|
Notes to Consolidated Financial Statements |
|
|
51 |
|
45
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of Ciena Corporation:
In our opinion, the accompanying consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Ciena Corporation and its
subsidiaries at October 31, 2007 and 2006, and the results of their operations and
their cash flows for each of the three years in the period ended October 31, 2007 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial
reporting as of October 31, 2007, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Report of Management on Internal
Control Over Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in fiscal year 2006.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
December 27, 2007
46
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
220,164 |
|
|
$ |
892,061 |
|
Short-term investments |
|
|
628,393 |
|
|
|
822,185 |
|
Accounts receivable, net |
|
|
107,172 |
|
|
|
104,078 |
|
Inventories |
|
|
106,085 |
|
|
|
102,618 |
|
Prepaid expenses and other |
|
|
36,372 |
|
|
|
47,817 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,098,186 |
|
|
|
1,968,759 |
|
Long-term investments |
|
|
351,407 |
|
|
|
33,946 |
|
Equipment, furniture and fixtures, net |
|
|
29,427 |
|
|
|
46,671 |
|
Goodwill |
|
|
232,015 |
|
|
|
232,015 |
|
Other intangible assets, net |
|
|
91,274 |
|
|
|
67,144 |
|
Other long-term assets |
|
|
37,404 |
|
|
|
67,738 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
39,277 |
|
|
$ |
55,389 |
|
Accrued liabilities |
|
|
79,282 |
|
|
|
90,922 |
|
Restructuring liabilities |
|
|
8,914 |
|
|
|
1,026 |
|
Unfavorable lease commitments |
|
|
8,512 |
|
|
|
|
|
Income taxes payable |
|
|
5,981 |
|
|
|
7,768 |
|
Deferred revenue |
|
|
19,637 |
|
|
|
33,025 |
|
Convertible notes payable |
|
|
|
|
|
|
542,262 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
161,603 |
|
|
|
730,392 |
|
Long-term deferred revenue |
|
|
21,039 |
|
|
|
30,615 |
|
Long-term restructuring liabilities |
|
|
26,720 |
|
|
|
3,662 |
|
Long-term unfavorable lease commitments |
|
|
32,785 |
|
|
|
|
|
Other long-term obligations |
|
|
1,678 |
|
|
|
1,450 |
|
Convertible notes payable |
|
|
842,262 |
|
|
|
800,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,086,087 |
|
|
|
1,566,119 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock par value $0.01; 20,000,000
shares authorized; zero shares issued and
outstanding |
|
|
|
|
|
|
|
|
Common stock par value $0.01; 140,000,000
shares authorized; 84,891,656 and 86,752,069
shares issued and outstanding |
|
|
849 |
|
|
|
868 |
|
Additional paid-in capital |
|
|
5,505,853 |
|
|
|
5,519,741 |
|
Changes in unrealized gains on investments, net |
|
|
(496 |
) |
|
|
350 |
|
Translation adjustment |
|
|
(580 |
) |
|
|
(1,593 |
) |
Accumulated deficit |
|
|
(4,752,000 |
) |
|
|
(4,669,212 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
753,626 |
|
|
|
850,154 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
47
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
374,275 |
|
|
$ |
502,427 |
|
|
$ |
695,289 |
|
Services |
|
|
52,982 |
|
|
|
61,629 |
|
|
|
84,480 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
427,257 |
|
|
|
564,056 |
|
|
|
779,769 |
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
248,931 |
|
|
|
263,667 |
|
|
|
337,866 |
|
Services |
|
|
42,136 |
|
|
|
42,608 |
|
|
|
79,634 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
291,067 |
|
|
|
306,275 |
|
|
|
417,500 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
136,190 |
|
|
|
257,781 |
|
|
|
362,269 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
137,245 |
|
|
|
111,069 |
|
|
|
127,296 |
|
Selling and marketing |
|
|
115,022 |
|
|
|
104,434 |
|
|
|
118,015 |
|
General and administrative |
|
|
33,715 |
|
|
|
47,476 |
|
|
|
50,262 |
|
Amortization of intangible assets |
|
|
38,782 |
|
|
|
25,181 |
|
|
|
25,350 |
|
Restructuring costs |
|
|
18,018 |
|
|
|
15,671 |
|
|
|
(2,435 |
) |
Goodwill impairment |
|
|
176,600 |
|
|
|
|
|
|
|
|
|
Long-lived asset impairment |
|
|
45,862 |
|
|
|
|
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
(11,648 |
) |
|
|
(4,871 |
) |
Provision for (recovery of) doubtful accounts |
|
|
2,602 |
|
|
|
(3,031 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
567,846 |
|
|
|
289,152 |
|
|
|
313,603 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
|
|
48,666 |
|
Interest and other income (expense), net |
|
|
31,294 |
|
|
|
50,245 |
|
|
|
76,483 |
|
Interest expense |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
Loss, other than temporary, on marketable debt investments |
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
Gain on extinguishment of debt |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
Gain (loss) on equity investments, net |
|
|
(9,486 |
) |
|
|
215 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(434,379 |
) |
|
|
1,976 |
|
|
|
85,732 |
|
Provision for income taxes |
|
|
1,320 |
|
|
|
1,381 |
|
|
|
2,944 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common
share |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
82,170 |
|
|
|
83,840 |
|
|
|
85,525 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
82,170 |
|
|
|
85,011 |
|
|
|
99,604 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable Notes |
|
|
Accumulated Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Additional Paid- |
|
|
Deferred Stock |
|
|
From |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
in-Capital |
|
|
Compensation |
|
|
Stockholders |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance at October 31, 2004 |
|
|
81,665,237 |
|
|
|
817 |
|
|
|
5,487,075 |
|
|
|
(13,761 |
) |
|
|
(48 |
) |
|
|
(2,765 |
) |
|
|
(4,316,896 |
) |
|
|
1,154,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(435,699 |
) |
|
|
(435,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,185 |
) |
|
|
|
|
|
|
(2,185 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218 |
) |
|
|
|
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(438,102 |
) |
Exercise of stock options, net |
|
|
1,240,612 |
|
|
|
12 |
|
|
|
9,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,558 |
|
Unearned stock compensation |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,441 |
|
Forfeiture of unearned stock compensation |
|
|
|
|
|
|
|
|
|
|
(2,044 |
) |
|
|
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of receivables from stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2005 |
|
|
82,905,849 |
|
|
|
829 |
|
|
|
5,494,587 |
|
|
|
(2,286 |
) |
|
|
|
|
|
|
(5,168 |
) |
|
|
(4,752,595 |
) |
|
|
735,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
595 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,177 |
|
|
|
|
|
|
|
4,177 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687 |
|
Exercise of stock options, net |
|
|
1,985,807 |
|
|
|
20 |
|
|
|
27,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,987 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
14,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal of opening deferred stock compensation
balance upon adoption of SFAS 123(R) |
|
|
|
|
|
|
|
|
|
|
(2,286 |
) |
|
|
2,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(28,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006 |
|
|
84,891,656 |
|
|
|
849 |
|
|
|
5,505,853 |
|
|
|
|
|
|
|
|
|
|
|
(1,076 |
) |
|
|
(4,752,000 |
) |
|
|
753,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,788 |
|
|
|
82,788 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846 |
|
|
|
|
|
|
|
846 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,621 |
|
Exercise of stock options, net |
|
|
1,847,455 |
|
|
|
19 |
|
|
|
36,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,835 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
19,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,572 |
|
Exercise of warrant |
|
|
12,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
|
86,752,069 |
|
|
$ |
868 |
|
|
$ |
5,519,741 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,243 |
) |
|
$ |
(4,669,212 |
) |
|
$ |
850,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
49
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
Adjustments to reconcile net income (loss) to net cash provided by
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishment of debt |
|
|
(3,882 |
) |
|
|
(7,052 |
) |
|
|
|
|
Amortization of premium (discount) on marketable securities |
|
|
13,636 |
|
|
|
(823 |
) |
|
|
(14,191 |
) |
Non-cash loss from equity investments and marketable securities |
|
|
9,486 |
|
|
|
733 |
|
|
|
13,013 |
|
Non-cash impairment of long-lived assets |
|
|
45,862 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization of leasehold improvements |
|
|
33,377 |
|
|
|
16,401 |
|
|
|
12,833 |
|
Goodwill impairment |
|
|
176,600 |
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
9,441 |
|
|
|
14,042 |
|
|
|
19,572 |
|
Amortization of intangibles |
|
|
42,651 |
|
|
|
29,050 |
|
|
|
29,220 |
|
Provision for doubtful accounts |
|
|
2,602 |
|
|
|
|
|
|
|
|
|
Provision for inventory excess and obsolescence |
|
|
5,232 |
|
|
|
9,012 |
|
|
|
12,180 |
|
Provision for warranty and other contractual obligations |
|
|
9,738 |
|
|
|
14,522 |
|
|
|
12,743 |
|
Other |
|
|
3,218 |
|
|
|
2,028 |
|
|
|
2,544 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(29,510 |
) |
|
|
(34,386 |
) |
|
|
3,094 |
|
Inventories |
|
|
(6,951 |
) |
|
|
(65,764 |
) |
|
|
(8,713 |
) |
Prepaid expenses and other |
|
|
7,420 |
|
|
|
4,056 |
|
|
|
(20,568 |
) |
Accounts payable and accruals |
|
|
(19,633 |
) |
|
|
(59,161 |
) |
|
|
(60,524 |
) |
Income taxes payable |
|
|
2,431 |
|
|
|
196 |
|
|
|
1,787 |
|
Deferred revenue and other obligations |
|
|
5,942 |
|
|
|
(2,842 |
) |
|
|
22,964 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(128,039 |
) |
|
|
(79,393 |
) |
|
|
108,742 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for equipment, furniture, fixtures and intellectual property |
|
|
(11,315 |
) |
|
|
(17,760 |
) |
|
|
(32,105 |
) |
Proceeds from sale of equipment, furniture and fixtures |
|
|
278 |
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
1,986 |
|
|
|
4,552 |
|
|
|
(13,277 |
) |
Purchase of available for sale securities |
|
|
(578,846) |
|
|
|
(1,090,409 |
) |
|
|
(864,012 |
) |
Proceeds from maturities of available for sale securities |
|
|
910,505 |
|
|
|
851,084 |
|
|
|
989,705 |
|
Minority equity investments, net |
|
|
4,882 |
|
|
|
948 |
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
327,490 |
|
|
|
(251,585 |
) |
|
|
80,130 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable |
|
|
|
|
|
|
300,000 |
|
|
|
500,000 |
|
Repurchase of 3.75% convertible notes payable |
|
|
(36,913 |
) |
|
|
(98,410 |
) |
|
|
|
|
Debt issuance costs |
|
|
|
|
|
|
(7,990 |
) |
|
|
(11,750 |
) |
Purchase of call spread option |
|
|
|
|
|
|
(28,457 |
) |
|
|
(42,500 |
) |
Proceeds from issuance of common stock and warrants |
|
|
9,558 |
|
|
|
27,987 |
|
|
|
36,835 |
|
Repayment of notes receivable from stockholders |
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(27,307 |
) |
|
|
193,130 |
|
|
|
482,585 |
|
|
|
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
440 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
172,144 |
|
|
|
(137,848 |
) |
|
|
671,897 |
|
Cash and cash equivalents at beginning of period |
|
|
185,868 |
|
|
|
358,012 |
|
|
|
220,164 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
25,817 |
|
|
$ |
21,685 |
|
|
$ |
21,504 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
977 |
|
|
$ |
969 |
|
|
$ |
1,157 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment in accounts payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,062 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
50
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CIENA CORPORATION AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Ciena Corporation is a supplier of communications networking equipment, software and services
that support the transport, switching, aggregation and management of voice, video and data traffic.
Ciena products are used, individually or as part of an integrated solution, in communications
network infrastructures operated by telecommunications service providers, cable operators,
governments and enterprises around the globe. Cienas products facilitate the cost-effective
delivery of enterprise and consumer-oriented communication services. Through its FlexSelect
Architecture, Ciena specializes in transitioning legacy communications networks to converged,
next-generation architectures, better able to handle increased traffic and to deliver more
efficiently a broader mix of high-bandwidth communications services.
Ciena was incorporated in Delaware in November 1992, and completed its initial public offering
on February 7, 1997. Cienas principal executive offices are located at 1201Winterson Road,
Linthicum, Maryland 21090.
Principles of Consolidation
Ciena has 12 wholly owned U.S. and international subsidiaries, which have been consolidated in
the accompanying financial statements.
The accompanying consolidated financial statements include the accounts of Ciena and its
wholly owned subsidiaries. All material inter-company accounts and transactions have been
eliminated in consolidation.
Fiscal Year
Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of
October in each year (October 29, 2005, October 28, 2006 and November 3, 2007 for the periods
reported). For purposes of financial statement presentation, each fiscal year is described as
having ended on October 31. Fiscal 2005 and fiscal 2006 consisted of 52 weeks and fiscal 2007
consisted of 53 weeks.
During fiscal 2007, Ciena identified certain immaterial adjustments and recorded expenses of
$0.7 million related to its provision for warranty and $0.3 million related to service costs, each
of which related to fiscal 2006. Also, during fiscal 2007, Ciena identified immaterial operating
expense totaling $0.5 million incurred in fiscal 2007 that was inadvertently recorded in
fiscal 2006. Cienas revenue for the fiscal 2007 is understated by $0.8 million due to an
equivalent overstatement of revenue during fiscal 2006. Ciena believes that these adjustments are
not material to its results for fiscal 2006 or fiscal 2007, or any interim period therein.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and judgments that affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Estimates are used for bad debts, valuation of inventories and investments,
recoverability of intangible assets and goodwill, income taxes, warranty obligations, restructuring
liabilities and contingencies and litigation. Ciena bases its estimates on historical experience
and also on assumptions that it believes are reasonable. Actual results may differ materially from
managements estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. Restricted cash collateralizing letters of credits are
included in other current assets and other long-term assets depending upon the duration of the
restriction.
Investments
Cienas investments represent investments in marketable debt securities that are classified as
available-for-sale and are reported at fair value, with unrealized gains and losses recorded in
accumulated other comprehensive income. Realized gains
or losses and declines in value determined to be other-than-temporary, if any, on
available-for-sale securities, are reported in other income or expense as incurred.
51
Inventories
Inventories are stated at the lower of cost or market, with cost computed using standard cost, which approximate actual cost on a first-in,
first-out basis. Ciena records a provision for excess and obsolete inventory when an impairment has
been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are
computed using the straight-line method over useful lives of two years to five years for equipment,
furniture and fixtures and the shorter of useful life or lease term for leasehold improvements.
Impairments of equipment, furniture and fixtures are determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Internal use software and web site development costs are capitalized in accordance with
Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Emerging Issues Task Force (EITF) Issue No. 00-2, Accounting for
Web Site Development Costs. Qualifying costs incurred during the application development stage,
which consist primarily of outside services and purchased software license costs, are capitalized
and amortized straight-line over the estimated useful life of the asset.
Goodwill and Other Intangible Assets
Ciena has recorded goodwill and purchased intangible assets as a result of several
acquisitions. Ciena accounts for goodwill in accordance with SFAS 142 Goodwill and Other
Intangible Assets, which requires Ciena to test each reporting units goodwill for impairment on
an annual basis, which Ciena has determined to be the last business day of fiscal September each
year. Ciena operates its business and tests its goodwill for impairment as a single reporting unit.
Testing is required between annual tests if events occur or circumstances change that would, more
likely than not, reduce the fair value of the reporting unit below its carrying value.
Purchased intangible assets are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the respective assets, generally
three to seven years. Impairments of other intangibles assets are determined in accordance SFAS
144.
Minority Equity Investments
Ciena has certain minority equity investments in privately held technology companies that are
classified as other assets. These investments are carried at cost because Ciena owns less than 20%
of the voting equity and does not have the ability to exercise significant influence over these
companies. These investments are inherently high risk as the markets for technologies or products
manufactured by these companies are usually early stage at the time of the investment by Ciena and
such markets may never be significant. Ciena could lose its entire investment in some or all of
these companies. Ciena monitors these investments for impairment and makes appropriate reductions
in carrying values when necessary.
Unfavorable Lease Commitments
Ciena has recorded unfavorable lease commitments as a result of several acquisitions. Ciena
accounts for unfavorable lease commitments in accordance with SFAS 141 Business Combinations. The
value of the unfavorable lease commitments are based upon the present value of the assumed lease
obligations based upon rental rates and interest rates at the time of the acquisition. During the
fourth quarter of fiscal 2007, Ciena settled a lease obligation relating to previously restructured
facilities in San Jose, CA, thereby eliminating its remaining unfavorable lease commitment balance.
Concentrations
Substantially all of Cienas cash and cash equivalents, short-term and long-term investments
in marketable debt securities, are maintained at two major U.S. financial institutions. The
majority of Cienas cash equivalents consist of money market funds and overnight repurchase
agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and, therefore, management believes that they
bear minimal risk.
Historically, a large percentage of Cienas revenue has been the result of sales to a small
number of communications service providers. Consolidation among Cienas customers has increased
this concentration. Consequently, Cienas accounts receivable can be concentrated among these
customers. See Notes 5 and 18 below.
52
Additionally, Cienas access to certain raw materials is dependent upon sole and limited
source suppliers. The inability of any supplier to fulfill Cienas supply requirements could affect
future results. Ciena relies on a small number of contract manufacturers to perform the majority of
the manufacturing for its products. If Ciena cannot effectively manage these manufacturers and
forecast future demand, or if they fail to deliver products or components on time, Cienas business
may suffer.
Revenue Recognition
Ciena recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, (SAB 104) which states that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred
or services have been rendered; the price to the buyer is fixed or determinable; and collectibility
is reasonably assured. Customer purchase agreements and customer purchase orders are generally used
to determine the existence of an arrangement. Shipping documents and customer acceptance, when
applicable, are used to verify delivery. Ciena assesses whether the fee is fixed or determinable
based on the payment terms associated with the transaction and whether the sales price is subject
to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of
the customer as determined by credit checks and analysis, as well as the customers payment
history. In instances where final acceptance of the product, system, or solution is specified by
the customer, revenue is deferred until all acceptance criteria have been met. Revenue for
maintenance services is generally deferred and recognized ratably over the period during which the
services are to be performed.
Some of Cienas communications networking equipment is integrated with software that is
essential to the functionality of the equipment. Accordingly, Ciena accounts for revenue in
accordance with Statement of Position No. 97-2, Software Revenue Recognition, (SOP 97-2) and all
related interpretations. SOP 97-2 incorporates additional guidance unique to software arrangements
incorporated with general revenue recognition criteria, such as, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. In instances where final acceptance of the product is specified by the
customer, revenue is deferred until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or software
related elements, Ciena applies the provisions of SOP 97-2 to determine the amount of the
arrangement fee to be allocated to those separate units of accounting. Multiple element
arrangements that include software are separated into more than one unit of accounting if the
functionality of the delivered element(s) is not dependent on the undelivered element(s), there is
vendor-specific objective evidence of the fair value of the undelivered element(s), and general
revenue recognition criteria related to the delivered element(s) have been met. The amount of
product and service revenue recognized is affected by our judgments as to whether an arrangement
includes multiple elements and, if so, whether vendor-specific objective evidence of fair value
exists. Changes to the elements in an arrangement and our ability to establish vendor-specific
objective evidence for those elements could affect the timing of revenue recognition. For all other
deliverables, Ciena applies the provisions of Emerging Issues Task Force (EITF) No. 00-21, Revenue
Arrangements with Multiple Deliverables, (EITF 00-21). EITF 00-21 allows for separation of
elements into more than one unit of accounting if the delivered element(s) have value to the
customer on a stand-alone basis, objective and reliable evidence of fair value exists for the
undelivered element(s), and delivery of the undelivered element(s) is
probable and substantially within
Cienas control. Revenue is allocated to each unit of accounting based on the relative fair value
of each accounting unit or using the residual method if objective evidence of fair value does not
exist for the delivered element(s). The revenue recognition criteria described above is applied to
each separate unit of accounting. If these criteria are not met, revenue is deferred until the
criteria are met or the last element has been delivered.
Cienas total deferred revenue for products was $4.3 million and $13.2 million as of October
31, 2006 and 2007, respectively. Our service revenue is deferred and recognized ratably over the
period during which the services are to be performed. Our total deferred revenue for services was
$36.4 million and $50.4 million as of October 31, 2006 and 2007, respectively.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty upon the recognition of
the related revenue. Estimated warranty costs include material costs, technical support labor costs
and associated overhead. The warranty liability is included in costs of goods sold and determined
based upon actual warranty cost experience, estimates of component failure rates and
managements industry experience. Cienas sales contracts do not permit the right of return of
product by the customer after the product has been accepted.
53
Accounts Receivable Trade, Net
Cienas allowance for doubtful accounts receivable is based on its assessment, on a specific
identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit
evaluations of its customers and generally has not required collateral or other forms of security
from its customers. In determining the appropriate balance for Cienas allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectability. In doing so, management considers creditworthiness, payment history,
account activity and communication with such customer. If a customers financial condition
changes, Ciena may be required to take a charge for an allowance for doubtful accounts receivable.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense
incurred in research and development include employee compensation, prototype, consulting,
depreciation, facility costs and information technologies.
Advertising Costs
Ciena expenses all advertising costs as incurred.
Legal Costs
Ciena
expenses legal costs associated with litigation defense as incurred.
Share-Based Compensation Expense
On November 1, 2005, Ciena adopted SFAS 123(R), as interpreted by SAB 107, which requires the
measurement and recognition of compensation expense for share-based awards based on estimated fair
values. SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date
of grant.
Ciena estimates the fair value of each option-based award on the date of grant using the
Black-Scholes option-pricing model. This model is affected by Cienas stock price as well as
estimates regarding a number of subjective variables. These subjective variables include, but are
not limited to Cienas expected stock price volatility over the term of the awards, and projected
employee stock option exercise behaviors. Ciena estimates the fair value of each share-based award
on the fair value of the underlying common stock on the date of grant. In each case, Ciena only
recognizes expense to its consolidated statement of operations for those options or shares that are
expected ultimately to vest. Ciena uses two attribution methods to record expense, the
straight-line method for grants with only service-based vesting or the graded-vesting method, which
considers each performance period or tranche separately, for all other awards.
No tax benefits were attributed to the share-based compensation expense because a full
valuation allowance was maintained for all net deferred tax assets.
Income Taxes
Ciena accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes.
SFAS 109 describes an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences attributable to differences between
the carrying amounts of assets and liabilities for financial reporting purposes and their
respective tax bases, and for operating loss and tax credit carry forwards. In estimating future
tax consequences, SFAS 109 generally considers all expected future events other than the enactment
of changes in tax laws or rates. Valuation allowances are provided, if, based upon the weight of
the available evidence, it is more likely than not that some or all of the deferred tax assets will
not be realized.
Ciena has not provided U.S. deferred income taxes on the cumulative unremitted earnings of its
non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings
outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes.
These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions
and are required to fund foreign operations, capital expenditures, and any expansion requirements.
Loss Contingencies
Ciena is subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. Ciena considers the
likelihood of loss or the incurrence of a liability, as well as Cienas ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is
accrued when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Ciena regularly evaluates current information available to it to determine
whether any accruals should be adjusted and whether new accruals are required.
54
Fair Value of Financial Instruments
The carrying amounts of Cienas financial instruments, which include short-term and long-term
investments in marketable debt securities, accounts receivable, accounts payable, and other accrued
expenses, approximate their fair values due to their short maturities.
Foreign Currency Translation
Some of Cienas foreign branch offices and subsidiaries use the U.S. dollar as their
functional currency, because Ciena, as the U.S. parent entity, exclusively funds the operations of
these branch offices and subsidiaries with U.S. dollars. For those subsidiaries using the local
currency as their functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and the statement of operations is translated at a monthly
average rate. Resulting translation adjustments are recorded directly to a separate component of
stockholders equity. Where the U.S. dollar is the functional currency, re-measurement adjustments
are recorded in other income. The net gain (loss) on foreign currency re-measurement and exchange
rate changes is immaterial for separate financial statement presentation.
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income (Loss) per Dilutive
Potential Common Share
Ciena calculates earnings per share (EPS) in accordance with the SFAS 128, Earnings per
Share. This statement requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with a complex capital structure and requires a reconciliation of the
numerator and denominator used for the basic and diluted EPS computations.
Software Development Costs
SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain software development costs incurred subsequent to
the date technological feasibility is established and prior to the date the product is generally
available for sale. The capitalized cost is then amortized straight-line over the estimated product
life. Ciena defines technological feasibility as being attained at the time a working model is
completed. To date, the period between achieving technological feasibility and the general
availability of such software has been short, and software development costs qualifying for
capitalization have been insignificant. Accordingly, Ciena has not capitalized any software
development costs.
Segment Reporting
SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes
annual and interim reporting standards for operating segments of a company. It also requires
entity-wide disclosures about the products and services an entity provides, the material countries
in which it holds assets and reports revenue, and its major customers. Ciena reports its financial
results as a single business segment.
Newly Issued Accounting Standards
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108
provides interpretative guidance on the process of quantifying financial statement misstatements
and is effective for fiscal years ending after November 15, 2006. The adoption of this statement in
fiscal 2007 did not have a material impact on Cienas financial condition, results of operations or
cash flows.
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS 155, Accounting
for Certain Hybrid Financial Instruments which amends SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for
certain derivatives embedded in other financial instruments by allowing them to be accounted for as
a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155
also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective
for all financial instruments acquired, issued or subject to a remeasurement event occurring in
fiscal years beginning after September 15, 2006. The adoption of this statement in fiscal 2007 did
not have a material impact on Cienas financial condition, results of operations or cash flows.
55
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections which
supersedes APB Opinion No. 20, Accounting Changes and SFAS 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 also carries forward, without change, the
guidance contained in APB 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. SFAS 154 requires retrospective
application to prior periods financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. The correction of an error in previously issued financial statements is not a change in
accounting principle. However, the reporting of an error correction involves adjustments to
previously issued financial statements similar to those generally applicable to reporting an
accounting change retroactively. Therefore, the reporting of a correction of an error by restating
previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The adoption of this statement in fiscal 2007 did not have a material impact on Cienas
financial condition, results of operations or cash flows.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. Ciena is
currently evaluating the impact the adoption of this statement could have on its financial
condition, results of operations and cash flows.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The interpretation applies
to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal
years beginning after December 15, 2006. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts reported after
adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. Ciena is currently evaluating the impact of the adoption of FIN 48 on
its consolidated financial statements, and anticipates any adjustment to retained earnings will not
be material.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS No. 159
permits an entity to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. Ciena is currently evaluating the
impact the adoption of this statement could have on its financial condition, results of operations
and cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51. SFAS No. 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial
statements. Its intention is to eliminate the diversity in practice regarding the accounting for
transactions between an entity and noncontrolling interests. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. Ciena is currently evaluating the impact the adoption of this
statement could have on its financial condition, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS No. 141,
Business Combinations. The revision is intended to simplify existing guidance and converge
rulemaking under U.S. generally accepted accounting principles (GAAP) with international accounting
rules. This statement applies prospectively to business combinations where the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15,
2008, and may affect the release of our valuation allowance against prior acquisition intangibles.
An entity may not apply it before that date. The new standard also converges financial reporting
under U.S. GAAP with international accounting rules. Ciena is currently evaluating the impact the
adoption of this statement could have on its financial condition, results of operations and cash
flows.
(2) RESTRUCTURING COSTS
Ciena has previously taken actions to align its workforce, facilities and operating costs with
perceived market and business opportunities. Ciena historically has committed to a restructuring
plan and has incurred the associated liability
concurrently in accordance with the provisions of SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. The following table displays the activity and balances of the
restructuring liability accounts for the fiscal years indicated (in thousands):
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
Workforce |
|
|
of excess |
|
|
|
|
|
|
reduction |
|
|
facilities |
|
|
Total |
|
Balance at October 31, 2004 |
|
|
1,446 |
|
|
|
79,937 |
|
|
|
81,383 |
|
Additional liability recorded |
|
|
5,770 |
(a) |
|
|
884 |
(a) |
|
|
6,654 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
11,364 |
(a) |
|
|
11,364 |
|
Cash payments |
|
|
(6,946 |
) |
|
|
(22,678 |
) |
|
|
(29,624 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2005 |
|
|
270 |
|
|
|
69,507 |
|
|
|
69,777 |
|
Additional liability recorded |
|
|
4,652 |
(b) |
|
|
1,782 |
(b) |
|
|
6,434 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
9,237 |
(b) |
|
|
9,237 |
|
Lease settlements |
|
|
|
|
|
|
(11,648) |
(b) |
|
|
(11,648 |
) |
Cash payments |
|
|
(4,922 |
) |
|
|
(33,244 |
) |
|
|
(38,166 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006 |
|
|
|
|
|
|
35,634 |
|
|
|
35,634 |
|
Additional liability recorded |
|
|
72 |
(c) |
|
|
1 |
(c) |
|
|
73 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
(2,508) |
(c) |
|
|
(2,508 |
) |
Lease settlements |
|
|
|
|
|
|
(4,871) |
(c) |
|
|
(4,871 |
) |
Cash payments |
|
|
(72 |
) |
|
|
(23,568 |
) |
|
|
(23,640 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
$ |
|
|
|
$ |
4,688 |
|
|
$ |
4,688 |
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities |
|
$ |
|
|
|
$ |
1,026 |
|
|
$ |
1,026 |
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring liabilities |
|
$ |
|
|
|
$ |
3,662 |
|
|
$ |
3,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of fiscal 2005, Ciena recorded a restructuring charge of
approximately $1.0 million related to a workforce reduction of 21 employees and a charge of
approximately $0.3 million related to certain other costs associated with the closure of
its San Jose, CA facility on September 30, 2004. This restructuring charge also reflects a
reversed charge of $0.1 million related to an adjustment to estimates associated with costs
for previously restructured facilities. |
|
|
|
During the second quarter of fiscal 2005, Ciena recorded a restructuring charge of
approximately $2.1 million related to a workforce reduction of 53 employees and a charge of
approximately $7.6 million related to an adjustment to estimates associated with costs for
previously restructured facilities. |
|
|
|
During the third quarter of fiscal 2005, Ciena recorded a restructuring charge of
approximately $2.3 million related to a workforce reduction of 96 employees and recorded a
charge of approximately $0.1 million related to the closure of one of its Kanata, Canada
facilities. This restructuring charge also reflects approximately $1.9 million related to an
adjustment to estimates associated with costs for previously restructured facilities. |
|
|
|
During the fourth quarter of fiscal 2005, Ciena recorded a restructuring charge of
approximately $0.4 million related to a workforce reduction of 7 employees and recorded a
charge of approximately $0.4 million related to the closure of Cienas Durham, NC
facilities. This restructuring charge also reflects approximately $2.0 million related to an
adjustment to estimates associated with costs for previously restructured facilities. |
|
(b) |
|
During the first quarter of fiscal 2006, Ciena recorded a charge of $0.7 million
related to the closure of one of its facilities located in Kanata, Canada and a charge of
$1.5 million related to a workforce reduction of 62 employees. During the first quarter of
fiscal 2006, Ciena recorded a credit adjustment of $0.2 million related to costs associated
with previously restructured facilities. During the first quarter of fiscal 2006, Ciena
recorded a gain of $6.0 million related to the buy-out of the lease of its former Fremont,
CA facility, which Ciena had previously restructured. |
|
|
|
During the second quarter of fiscal 2006, Ciena recorded a charge of $0.7 million related to
the closure of its Shrewsbury, NJ facility and a charge of $2.5 million related to a
workforce reduction of 86 employees. During the second quarter of fiscal 2006, Ciena
recorded a credit adjustment of $0.2 million related to costs associated with previously
restructured facilities. During the second quarter of fiscal 2006, Ciena recorded a gain of
$5.6 million related to the buy-out of the lease of its former Cupertino, CA facility, which
Ciena had previously restructured. |
|
|
|
During the third quarter of fiscal 2006, Ciena recorded a charge of $0.5 million related to
a workforce reduction of 7 employees and additional employee costs related to the closure of
its Shrewsbury, NJ facility in the second quarter of fiscal 2006. During the third quarter
of fiscal 2006, primarily due to changes in market conditions, Ciena recorded an adjustment
of $10.1 million related to costs associated with previously restructured facilities, $10.0
million of which was related to its former facilities located in San Jose, CA. Ciena also
recorded a charge of $0.4 million related to the closure of its facility located in Beijing,
China during the third quarter of fiscal 2006. |
|
|
|
During the fourth quarter of fiscal 2006, Ciena recorded a charge of $0.1 million related to
other costs associated with a previous workforce reduction and a credit of $0.5 million
related to the settlement of a previously recorded facility liability. |
|
(c) |
|
During the first quarter of fiscal 2007, Ciena recorded a charge of $0.1 million
related to other costs associated with a previous workforce reduction and an adjustment of
$0.5 million related to costs associated with previously restructured facilities. |
|
|
|
During the second quarter of fiscal 2007, Ciena recorded an adjustment of $0.8 million
related to its return to use of a facility that had been previously restructured. |
|
|
|
During the third quarter of fiscal 2007, Ciena recorded an adjustment of $1.2 million
primarily related to its return to use of a facility that had been previously restructured. |
|
|
|
During the fourth quarter of fiscal 2007, Ciena recorded a gain on lease settlement of $4.9
million related to the termination of lease obligations for our former San Jose, CA
facilities. We paid $53.0 million in connection with the settlement of this lease
obligation. This transaction eliminated Cienas remaining unfavorable lease commitment
balance of $34.9 million and reduced Cienas restructuring liabilities by $23.5 million,
offset by approximately $0.5 million of other expenses. |
57
(3) GOODWILL AND LONG-LIVED ASSET IMPAIRMENTS
Goodwill Impairment
SFAS 142 Goodwill and Other Intangible Assets, requires Ciena to test each reporting units
goodwill for impairment on an annual basis, which Ciena has determined to be the last business day
of fiscal September each year. Testing is required between annual tests if events occur or
circumstances change that would, more likely than not, reduce the fair value of the reporting unit
below its carrying value. For fiscal 2007, fiscal 2006 and fiscal 2005, Ciena determined that its
operating segments and reporting units were the same. For fiscal 2005, the fair value of Cienas
goodwill was tested for impairment on a segment level. For fiscal 2006 and fiscal 2007, the fair
value of Cienas goodwill was tested for impairment on an enterprise level due to the elimination
of Cienas former business units in the third quarter of fiscal 2006. The table below sets forth
changes in carrying amount of goodwill during the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
Total |
|
Balance as October 31, 2004 |
|
|
408,615 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
(176,600 |
) |
|
|
|
|
Balance as October 31, 2005 |
|
|
232,015 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2006 |
|
|
232,015 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2007 |
|
$ |
232,015 |
|
|
|
|
|
Goodwill Assessment Fiscal 2005
Ciena performed an assessment of the fair value of its reporting units and its intangible
assets as of September 24, 2005. Ciena compared the fair value of each of its reporting units at
that time to each reporting units carrying value including goodwill. In conjunction with Cienas
assessment, it became apparent that developments in the market for broadband loop carrier products,
particularly outside of the United States, would require Ciena to make a substantial commitment of
research and development resources in order to compete successfully in this market with Cienas CN
1000 Next-Generation Broadband Access platform. Given the uncertainties associated with this
international market and the magnitude of the investment required, Ciena determined it would not be
cost-effective to make such investment and suspended research and development for this product.
This decision significantly reduced Cienas forecasted long-term revenue for its former Broadband
Access Group (BBG) reporting unit. As a result, the carrying value of BBG, including goodwill,
exceeded the fair value of BBG as of September 24, 2005. The fair value of the BBG reporting unit
was determined using the average of the valuations calculated using market multiples and discounted
cash flows. Because of the forecasted decline in long-term revenue for BBG, no control premium was
added to the valuation results for the BBG reporting unit.
Because BBGs carrying value, including goodwill, exceeded the fair value of the reporting
unit as a whole, Ciena assessed the fair value of BBGs individual assets, including identified
intangible assets and liabilities, in order to derive an implied fair value for BBGs goodwill.
Ciena determined the estimated fair value of the identifiable intangible assets of the unit using
discounted cash flows. Ciena used cash flow periods ranging from one to ten years, depending on the
nature of the asset, and assumed that revenue for the BBG reporting unit would decline to zero over
ten years. Ciena used discount rates of 10% to 14%, based on the specific risks and circumstances
associated with the identified intangible assets and Cienas weighted average cost of capital. The
assumptions supporting the estimated discounted cash flows for identified intangible assets,
including the cash flow periods, discount rates and forecasted future revenue, reflect managements
estimates. Ciena determined that the implied fair value of goodwill assigned to BBG was zero.
Because the carrying amount of the goodwill assigned to BBG was greater than the implied fair
value, Ciena recorded an impairment loss of $176.6 million in fiscal 2005.
Goodwill Assessment Fiscal 2006 and Fiscal 2007
Ciena performed an assessment of the fair value of its single reporting unit and its
intangible assets as of September 23, 2006 and September 29, 2007. Ciena compared its fair value on
each assessment date to its carrying value, including goodwill, and determined that the carrying
value, including goodwill, did not exceed fair value. Because the carrying amount
was less than its fair value, no impairment loss was recorded. The fair value of Ciena was
determined using the average market price of Cienas common stock over a 10-day period before and
after each assessment date, with a control premium added to the valuation results.
Long-Lived Asset Impairment Equipment, Furniture and Fixtures
During fiscal 2005, Ciena recorded impairment losses of $0.2 million related to excess
equipment, furniture and fixtures that were classified as held for sale as a result of Cienas
restructuring activities. Ciena did not record an impairment of equipment, furniture and fixtures
during fiscal 2006 or fiscal 2007.
58
Long-Lived Asset Impairment Other Intangible Assets
Ciena performs assessments of the carrying value of its other intangible assets pursuant to
SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and requires companies to test each intangible asset for impairment, whenever
events or changes in circumstances indicate that the assets carrying amount may not be
recoverable.
During fiscal 2005, Ciena recorded a charge of $45.7 million related to the impairment of BBG
developed technology and customer relationships acquired from Catena Networks in May 2004. This
charge was based on the amount by which the carrying amount of the intangible assets exceeded their
estimated fair value. Fair value was determined based on discounted estimated future cash flows
derived from the intangible assets. Ciena used a cash flow period of five years and assumed that
revenue related to these intangible assets would decline to zero over five years. The discount rate
used was 15%. The assumptions supporting the estimated future cash flows, including the discount
rate reflect managements best estimates. The discount rate was based upon Cienas weighted average
cost of capital as adjusted for the risks associated with its operations. Ciena did not record an
impairment of intangible assets during fiscal 2006 or fiscal 2007.
(4) MARKETABLE DEBT SECURITIES
As of the dates indicated, short-term and long-term investments in marketable debt securities
are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Estimated Fair Value |
|
Corporate bonds |
|
$ |
258,904 |
|
|
$ |
252 |
|
|
$ |
42 |
|
|
$ |
259,114 |
|
Asset backed obligations |
|
|
121,274 |
|
|
|
136 |
|
|
|
44 |
|
|
|
121,366 |
|
Commercial paper |
|
|
198,407 |
|
|
|
|
|
|
|
|
|
|
|
198,407 |
|
US government obligations |
|
|
31,186 |
|
|
|
55 |
|
|
|
|
|
|
|
31,241 |
|
Certificate of deposit |
|
|
246,003 |
|
|
|
|
|
|
|
|
|
|
|
246,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855,774 |
|
|
$ |
443 |
|
|
$ |
86 |
|
|
$ |
856,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
821,828 |
|
|
|
443 |
|
|
|
86 |
|
|
|
822,185 |
|
Included in long-term investments |
|
|
33,946 |
|
|
|
|
|
|
|
|
|
|
|
33,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855,774 |
|
|
$ |
443 |
|
|
$ |
86 |
|
|
$ |
856,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2006 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Estimated Fair Value |
|
Corporate bonds |
|
$ |
468,152 |
|
|
$ |
437 |
|
|
$ |
525 |
|
|
$ |
468,064 |
|
Asset backed obligations |
|
|
195,728 |
|
|
|
142 |
|
|
|
305 |
|
|
|
195,565 |
|
Commercial paper |
|
|
152,768 |
|
|
|
|
|
|
|
|
|
|
|
152,768 |
|
US government obligations |
|
|
163,643 |
|
|
|
84 |
|
|
|
324 |
|
|
|
163,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
980,291 |
|
|
$ |
663 |
|
|
$ |
1,154 |
|
|
$ |
979,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
629,269 |
|
|
|
66 |
|
|
|
942 |
|
|
|
628,393 |
|
Included in long-term investments |
|
|
351,022 |
|
|
|
597 |
|
|
|
212 |
|
|
|
351,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
980,291 |
|
|
$ |
663 |
|
|
$ |
1,154 |
|
|
$ |
979,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of commercial paper at October 31, 2007 includes investments in SIV
Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment
vehicles (SIVs) that entered into receivership during the fourth
quarter of fiscal 2007 and failed to make payment at maturity. Due to the mortgage-related assets that they hold, each of
these entities has been exposed to adverse market conditions that have affected the value of collateral and their ability to access short-term funding. Ciena purchased these investments in the third quarter of fiscal 2007 and, at the
time of purchase, each investment had a rating of A1+ by Standard and Poors and P-1 by Moodys,
their highest ratings respectively. These investments are no longer trading and have no readily determinable market value. Ciena reviewed current investment ratings, valuation estimates
of the underlying collateral, company specific news and events, and general economic
conditions in considering the fair value of these investments. In estimating fair value, Ciena used
a valuation approach based on a liquidation of assets held by each SIV and their subsequent
distribution of cash. Ciena utilized assessments of the underlying collateral from multiple indicators of value, which were then discounted to reflect the expected timing of disposition and market risks. Based on this assessment of fair value, as of
October 31, 2007, Ciena recognized realized losses of $13.0 million related to these investments. Giving
effect to these losses, our investment portfolio at October 31, 2007 included an estimated fair value of $33.9 million
in commercial paper issued by these entities. Information and the markets relating to these
investments remain dynamic, and there may be further declines in the value of these investments,
the value of the collateral held by these entities, and the liquidity of
our investments. To the extent Ciena determines that a further decline in fair value is
other-than-temporary, Ciena may recognize additional realized losses in future periods up to the
aggregate amount of these investments.
59
Gross unrealized losses related to marketable debt investments were primarily due to changes
in interest rates. Cienas management has determined that the gross unrealized losses
at October 31, 2007 are temporary in nature because Ciena has the
ability and intent to hold these investments until a recovery of fair value, which may be maturity.
As of the dates indicated, gross unrealized losses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007 |
|
|
|
Unrealized Losses Less |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
|
|
|
|
Than 12 Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
41 |
|
|
$ |
50,152 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
42 |
|
|
$ |
53,151 |
|
Asset backed obligations |
|
|
7 |
|
|
|
6,140 |
|
|
|
37 |
|
|
|
22,923 |
|
|
|
44 |
|
|
|
29,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48 |
|
|
$ |
56,292 |
|
|
$ |
38 |
|
|
$ |
25,922 |
|
|
$ |
86 |
|
|
$ |
82,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2006 |
|
|
|
Unrealized Losses Less |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
Than 12 Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
400 |
|
|
$ |
196,947 |
|
|
$ |
125 |
|
|
$ |
26,687 |
|
|
$ |
525 |
|
|
$ |
223,634 |
|
Asset backed obligations |
|
|
153 |
|
|
|
92,869 |
|
|
|
152 |
|
|
|
34,828 |
|
|
|
305 |
|
|
|
127,697 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government obligations |
|
|
112 |
|
|
|
38,692 |
|
|
|
212 |
|
|
|
40,839 |
|
|
|
324 |
|
|
|
79,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
665 |
|
|
$ |
328,508 |
|
|
$ |
489 |
|
|
$ |
102,354 |
|
|
$ |
1,154 |
|
|
$ |
430,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes maturities of debt investments at October 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Less than one year |
|
$ |
701,322 |
|
|
$ |
701,588 |
|
Due in 1-2 years |
|
|
99,754 |
|
|
|
99,789 |
|
Due in 2-5 years |
|
|
54,698 |
|
|
|
54,754 |
|
|
|
|
|
|
|
|
|
|
$ |
855,774 |
|
|
$ |
856,131 |
|
|
|
|
|
|
|
|
(5) ACCOUNTS RECEIVABLE
As of October 31, 2007, one customer accounted for 40.1% of net trade accounts receivable. As
of October 31, 2006, two customers accounted for 25.4% and 21.8% of net trade accounts receivable,
respectively. Cienas allowance for doubtful accounts as of each of October 31, 2007 and October
31, 2006 was $0.1 million.
During fiscal 2006, Ciena recorded a recovery of doubtful accounts in the amount of $3.0
million as a result of the receipt of amounts due from customers from whom payment was previously
deemed doubtful due to their financial condition. In addition, during fiscal 2006, $0.1 million of
uncollectible accounts were written off against the allowance.
During fiscal 2005, Ciena recorded a provision for doubtful accounts of $2.6 million relating
to one customer from which payment was doubtful due to a change in its financial condition.
60
The following table summarizes the activity in Cienas allowance for doubtful accounts for
the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
Provisions |
|
|
|
|
|
Balance at end of |
October 31, |
|
of period |
|
(Recovery) |
|
Deductions |
|
period |
2005 |
|
$ |
961 |
|
|
$ |
2,602 |
|
|
$ |
272 |
|
|
$ |
3,291 |
|
2006 |
|
$ |
3,291 |
|
|
$ |
(3,031 |
) |
|
$ |
114 |
|
|
$ |
146 |
|
2007 |
|
$ |
146 |
|
|
$ |
(14 |
) |
|
$ |
|
|
|
$ |
132 |
|
(6) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Raw materials |
|
$ |
29,627 |
|
|
$ |
28,611 |
|
Work-in-process |
|
|
9,156 |
|
|
|
4,123 |
|
Finished goods |
|
|
89,628 |
|
|
|
96,054 |
|
|
|
|
|
|
|
|
|
|
|
128,411 |
|
|
|
128,788 |
|
Provision for excess and obsolescence |
|
|
(22,326 |
) |
|
|
(26,170 |
) |
|
|
|
|
|
|
|
|
|
$ |
106,085 |
|
|
$ |
102,618 |
|
|
|
|
|
|
|
|
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value based on assumptions
about future demand and market conditions. During fiscal 2005, fiscal 2006 and fiscal 2007, Ciena
recorded provisions for inventory reserves of $5.2 million, $9.0 million and $12.2 million,
respectively, primarily related to increases in excess inventory due to changes in forecasted
sales for certain products. Deductions from the reserve for excess and obsolete inventory
generally relate to disposal activities.
The following table summarizes the activity in Cienas reserve for excess and obsolete
inventory for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Year ended |
|
beginning of |
|
|
|
|
|
|
|
|
|
Balance at |
October 31, |
|
period |
|
Provisions |
|
Deductions |
|
end of period |
2005 |
|
$ |
21,933 |
|
|
$ |
5,232 |
|
|
$ |
4,570 |
|
|
$ |
22,595 |
|
2006 |
|
$ |
22,595 |
|
|
$ |
9,012 |
|
|
$ |
9,281 |
|
|
$ |
22,326 |
|
2007 |
|
$ |
22,326 |
|
|
$ |
12,180 |
|
|
$ |
8,336 |
|
|
$ |
26,170 |
|
(7) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Interest receivable |
|
$ |
8,547 |
|
|
$ |
4,981 |
|
Prepaid VAT and other taxes |
|
|
9,467 |
|
|
|
18,092 |
|
Deferred deployment expense |
|
|
1,948 |
|
|
|
6,237 |
|
Prepaid expenses |
|
|
6,497 |
|
|
|
10,724 |
|
Restricted cash |
|
|
6,990 |
|
|
|
3,994 |
|
Other non-trade receivables |
|
|
2,923 |
|
|
|
3,789 |
|
|
|
|
|
|
|
|
|
|
$ |
36,372 |
|
|
$ |
47,817 |
|
|
|
|
|
|
|
|
61
(8) EQUIPMENT, FURNITURE AND FIXTURES
As of the dates indicated, equipment, furniture and fixtures are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Equipment, furniture and fixtures |
|
$ |
253,953 |
|
|
$ |
269,534 |
|
Leasehold improvements |
|
|
36,203 |
|
|
|
37,249 |
|
|
|
|
|
|
|
|
|
|
|
290,156 |
|
|
|
306,783 |
|
Accumulated depreciation and amortization |
|
|
(260,729 |
) |
|
|
(260,112 |
) |
|
|
|
|
|
|
|
|
|
$ |
29,427 |
|
|
$ |
46,671 |
|
|
|
|
|
|
|
|
(9) OTHER INTANGIBLE ASSETS
As of the dates indicated, other intangible assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
|
|
|
|
Developed technology |
|
$ |
139,983 |
|
|
$ |
(87,577 |
) |
|
$ |
52,406 |
|
|
$ |
145,073 |
|
|
$ |
(104,822 |
) |
|
$ |
40,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses |
|
|
47,370 |
|
|
|
(25,463 |
) |
|
|
21,907 |
|
|
|
47,370 |
|
|
|
(31,708 |
) |
|
|
15,662 |
|
Customer
relationships,
covenants not to
compete, outstanding
purchase orders and
contracts |
|
|
45,981 |
|
|
|
(29,020 |
) |
|
|
16,961 |
|
|
|
45,981 |
|
|
|
(34,750 |
) |
|
|
11,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
233,334 |
|
|
|
|
|
|
$ |
91,274 |
|
|
$ |
238,424 |
|
|
|
|
|
|
$ |
67,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal 2007, Ciena purchased certain developed technology of $5.1
million.
The aggregate amortization expense of other intangible assets in fiscal 2007, fiscal 2006 and
fiscal 2005 was $29.2 million, $29.1 million, and $42.7 million, respectively. Expected future
amortization of other intangible assets for the fiscal years indicated is as follows (in
thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2008 |
|
|
28,858 |
|
2009 |
|
|
20,272 |
|
2010 |
|
|
15,518 |
|
2011 |
|
|
1,648 |
|
2012 |
|
|
848 |
|
|
|
|
|
|
|
$ |
67,144 |
|
|
|
|
|
(10) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Maintenance spares inventory, net |
|
$ |
14,724 |
|
|
$ |
20,816 |
|
Deferred debt issuance costs |
|
|
10,306 |
|
|
|
18,059 |
|
Investments in privately held companies |
|
|
6,489 |
|
|
|
6,671 |
|
Restricted cash |
|
|
3,227 |
|
|
|
19,499 |
|
Other |
|
|
2,658 |
|
|
|
2,693 |
|
|
|
|
|
|
|
|
|
|
$ |
37,404 |
|
|
$ |
67,738 |
|
|
|
|
|
|
|
|
Deferred debt issuance costs are amortized using the straight line method which approximates
the effect of the effective interest rate method on the maturity of the related debt. Amortization
of debt issuance cost, which is included in interest expense, was $4.0 million, $3.1 million, and
$3.0 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
62
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Warranty |
|
$ |
31,751 |
|
|
$ |
33,580 |
|
Accrued compensation, payroll related tax and benefits |
|
|
24,102 |
|
|
|
32,053 |
|
Accrued interest payable |
|
|
5,502 |
|
|
|
6,998 |
|
Other |
|
|
17,927 |
|
|
|
18,291 |
|
|
|
|
|
|
|
|
|
|
$ |
79,282 |
|
|
$ |
90,922 |
|
|
|
|
|
|
|
|
The following table summarizes the activity in Cienas accrued warranty for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end of |
October 31, |
|
of period |
|
Provisions |
|
Settlements |
|
period |
2005 |
|
$ |
30,189 |
|
|
$ |
9,738 |
|
|
$ |
(12,883 |
) |
|
$ |
27,044 |
|
2006 |
|
$ |
27,044 |
|
|
$ |
14,522 |
|
|
$ |
(9,815 |
) |
|
$ |
31,751 |
|
2007 |
|
$ |
31,751 |
|
|
$ |
12,743 |
|
|
$ |
(10,914 |
) |
|
$ |
33,580 |
|
As of the dates indicated, deferred revenue are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Products |
|
$ |
4,276 |
|
|
$ |
13,208 |
|
Services |
|
|
36,400 |
|
|
|
50,432 |
|
|
|
|
|
|
|
|
|
|
|
40,676 |
|
|
|
63,640 |
|
Less current portion |
|
|
(19,637 |
) |
|
|
(33,025 |
) |
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
21,039 |
|
|
$ |
30,615 |
|
|
|
|
|
|
|
|
(11) CONVERTIBLE NOTES PAYABLE
Ciena 3.75% Convertible Notes, due February 1, 2008
On February 9, 2001, Ciena completed a public offering of 3.75% Convertible Notes, due
February 1, 2008, in an aggregate principal amount of $690.0 million. Interest is payable on
February 1 and August 1 of each year. The notes may be converted into shares of Cienas common
stock at any time before their maturity or their prior redemption or repurchase by Ciena. The
conversion rate is 1.3687 shares per each $1,000 principal amount of notes, subject to adjustment
in certain circumstances. Prior to maturity, Ciena has the option to redeem all or a portion of the
notes that have not been previously converted at 100.536% of the principal amount.
During fiscal 2006, Ciena repurchased $106.5 million of the outstanding 3.75% convertible
notes for $98.4 million in open market transactions. Ciena recorded a gain on the extinguishment of
debt in the amount of $7.1 million, which consists of the $8.1 million gain from the repurchase of
the notes, less a write-off of $1.0 million of associated debt issuance costs.
During fiscal 2005, Ciena repurchased $41.2 million of the outstanding 3.75% convertible notes
for $36.9 million in open market transactions. Ciena recorded a gain on the extinguishment of debt
in the amount of $3.9 million, which consists of the $4.3 million gain from the repurchase of the
notes, less a write-off of $0.4 million of associated debt issuance costs.
As of the end of fiscal 2007 and fiscal 2006, the fair value of the outstanding $542.3 million
in aggregate principal amount of 3.75% convertible notes was $534.2 million and $525.3 million,
respectively. Fair value is based on the quoted market price for the notes on the dates above.
0.25% Convertible Senior Notes due May 1, 2013
On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May
1, 2013, in aggregate principal amount of $300.0 million. Interest is payable on May 1 and November
1 of each year. The notes are senior unsecured obligations of Ciena and rank equally with all of
Cienas other existing and future senior unsecured debt.
63
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of $39.5255 per share. The notes may not be redeemed
by Ciena prior to May 5, 2009. At any time on or after May 5, 2009, if the closing sale price of
Cienas common stock for at least 20 trading days in any 30 consecutive trading day period ending
on the date one day prior to the date of the notice of redemption exceeds 130% of the conversion
price, Ciena may redeem the notes in whole or in part, at a redemption price in cash equal to the
principal amount to be redeemed, plus accrued and unpaid interest.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from the
conversion of the notes. See Note 13 below for a description of this call spread option.
As of the end of fiscal 2007 and fiscal 2006, the fair value of the $300.0 million in
aggregate principal amount of 0.25% convertible senior notes outstanding was $387.5 million and
$251.3 million, respectively. Fair value is based on the quoted market price for the notes on the
dates above.
0.875% Convertible Senior Notes due Jun 15, 2017
On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due
June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and
December 15 of each year, beginning on December 15, 2007. The notes are senior unsecured
obligations of Ciena and rank equally with all of Cienas other existing and future senior
unsecured debt.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not
redeemable by Ciena prior to maturity.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from
conversion of the notes. See Note 13 below for a description of this call spread option.
As of the end of fiscal 2007, the fair value of the outstanding $500.0 million in aggregate
principal amount of 0.875% convertible senior notes was $675.9 million, based on the quoted market
price for the notes.
(12) EARNING (LOSS) PER SHARE CALCULATION
The following table (in thousands except per share amounts) is a reconciliation of the
numerator and denominator of the basic net income (loss) per common share (Basic EPS) and the
diluted net income (loss) per dilutive potential common share (Diluted EPS). Basic EPS is
computed using the weighted average number of common shares outstanding. Diluted EPS is computed
using the weighted average number of (i) common shares outstanding, (ii) shares issuable upon
vesting of restricted stock units, (iii) shares issuable upon exercise of outstanding stock
options, employee stock purchase plan options and warrants using the treasury stock method; and
(iv) shares underlying the 0.25% and 0.875% convertible senior notes. Diluted EPS for fiscal 2007
reflects only a portion of the shares underlying the 0.875% convertible notes because they were
issued on June 11, 2007.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
Numerator |
|
2005 |
|
|
2006 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
Add: Interest expense for 0.25% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
1,882 |
|
Add: Interest expense for 0.875% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used to calculate Diluted EPS |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
86,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
Denominator |
|
2005 |
|
2006 |
|
2007 |
Basic weighted average shares outstanding |
|
|
82,170 |
|
|
|
83,840 |
|
|
|
85,525 |
|
Add: Shares underlying outstanding stock options,
employees stock purchase plan options, warrants and
restricted stock units |
|
|
|
|
|
|
1,171 |
|
|
|
1,352 |
|
Add: Shares underlying 0.25% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
7,590 |
|
Add: Shares underlying 0.875% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
5,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares outstanding |
|
|
82,170 |
|
|
|
85,011 |
|
|
|
99,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
EPS |
|
2005 |
|
|
2006 |
|
|
2007 |
|
Basic EPS |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
Explanation of Shares Excluded due to Anti-Dilutive Effect
For fiscal 2005, the weighted average number of shares underlying stock options, restricted
stock units, warrants and Cienas 3.75% convertible notes are considered anti-dilutive because
Ciena incurred net losses.
For fiscal 2006, the weighted average number of shares underlying outstanding stock options,
employee stock purchase plan options, restricted stock units and warrants in the table below are
considered anti-dilutive because the exercise price of these awards is greater than the average per
share closing price on the NASDAQ Stock Market during this period. In addition, the weighted
average number of shares issuable upon conversion of Cienas 0.25% convertible senior notes and
3.75% convertible notes are considered anti-dilutive pursuant to SFAS 128 because the related
interest expense on a per common share if converted basis exceeds Basic EPS for the period.
For fiscal 2007, the weighted average number of shares underlying outstanding stock options,
employee stock purchase plan options, restricted stock units, and warrants in the table below are
considered anti-dilutive because the exercise price of these equity awards is greater than the
average per share closing price on the NASDAQ Stock Market during this period. In addition, the
weighted average number of shares issuable upon conversion of Cienas 3.75% convertible notes, are
considered anti-dilutive pursuant to SFAS 128 because the related interest expense on a per common
share if converted basis exceeds Basic EPS for the period.
The following table summarizes the shares excluded from the calculation of the denominator for
Basic and Diluted EPS due to their anti-dilutive effect for the fiscal years indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from EPS Denominator |
|
Year Ended October 31, |
due to anti-dilutive effect |
|
2005 |
|
2006 |
|
2007 |
Shares underlying stock options,
restricted stock units and warrants |
|
|
8,374 |
|
|
|
4,178 |
|
|
|
3,041 |
|
0.25% Convertible senior notes |
|
|
|
|
|
|
4,203 |
|
|
|
|
|
3.75% Convertible notes |
|
|
928 |
|
|
|
756 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluded due to anti-dilutive
effect |
|
|
9,302 |
|
|
|
9,137 |
|
|
|
3,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
(13) STOCKHOLDERS EQUITY
Call Spread Option
Ciena holds two call spread options on its common stock relating to the shares issuable upon
conversion of two issues of its convertible notes. These call spread options are designed to
mitigate exposure to potential dilution from the conversion of the notes. Ciena purchased a call
spread option relating to the 0.25% Convertible Senior Notes due May 1, 2013 for $28.5 million
during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the
0.875% Convertible Senior Notes due June 15, 2017 for $42.5 million during the third quarter of
fiscal 2007. In each case, the call spread options were purchased at the time of the notes offering
from an affiliate of the underwriter. The cost of each call spread option was recorded as a
reduction in additional paid in capital.
Each call spread option is exercisable, upon maturity of the relevant issue of convertible
notes, for such number of shares of Ciena common stock issuable upon conversion of that series of
notes in full. Each call spread option has a lower strike price equal to the conversion price for
the notes and a higher strike price that serves to cap the amount of dilution protection
provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net
share basis. The value of the consideration of a net share settlement will be equal to the value
upon a net cash settlement and can range from $0, if the market price per share of Ciena common
stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million (in
the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the
June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or
above the higher strike price. If the market price on the date of exercise is between the lower
strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive
the full number of shares underlying the call spread option by paying the aggregate option exercise
price, which is equal to the original principal outstanding on that series of notes. Should there
be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena
will depend upon the existing overall market conditions, and on Cienas stock price, the volatility
of Cienas stock and the remaining term of the call spread option. The number of shares subject to
the call spread options and the lower and higher strike prices are subject to customary
adjustments.
(14) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
|
|
|
|
23 |
|
|
|
309 |
|
Foreign |
|
|
1,320 |
|
|
|
1,358 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
1,320 |
|
|
|
1,381 |
|
|
|
2,944 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
1,320 |
|
|
$ |
1,381 |
|
|
$ |
2,944 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
United States |
|
$ |
(438,956 |
) |
|
$ |
(2,549 |
) |
|
$ |
77,150 |
|
International |
|
|
4,577 |
|
|
|
4,525 |
|
|
|
8,582 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(434,379 |
) |
|
$ |
1,976 |
|
|
$ |
85,732 |
|
|
|
|
|
|
|
|
|
|
|
66
The tax provision reconciles to the amount computed by multiplying income or loss before
income taxes by the U.S. federal statutory rate of 35% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2005 |
|
2006 |
|
2007 |
Provision at statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
State taxes |
|
|
|
|
|
|
1.14 |
% |
|
|
0.36 |
% |
Foreign taxes |
|
|
0.06 |
% |
|
|
14.04 |
% |
|
|
0.11 |
% |
Research and development credit |
|
|
0.65 |
% |
|
|
(55.94 |
%) |
|
|
(2.47 |
%) |
Non-deductible goodwill and other |
|
|
(15.04 |
%) |
|
|
16.15 |
% |
|
|
0.99 |
% |
Valuation allowance |
|
|
(20.97 |
%) |
|
|
59.48 |
% |
|
|
(30.55 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.30 |
%) |
|
|
69.87 |
% |
|
|
3.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accrued liabilities |
|
$ |
50,088 |
|
|
$ |
22,815 |
|
Depreciation and amortization |
|
|
118,122 |
|
|
|
156,918 |
|
NOL and credit carry forward |
|
|
994,906 |
|
|
|
959,704 |
|
Other |
|
|
26,406 |
|
|
|
40,686 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
1,189,522 |
|
|
|
1,180,123 |
|
Valuation allowance |
|
|
(1,189,522 |
) |
|
|
(1,180,123 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
During fiscal 2002, Ciena established a valuation allowance against its deferred tax assets.
Ciena intends to maintain a valuation allowance until sufficient positive evidence exists to
support its reversal. The following table summarizes the activity in Cienas valuation allowance
against its gross deferred tax assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
October 31, |
|
of period |
|
Additions |
|
Deductions |
|
of period |
2005 |
|
$ |
1,077,906 |
|
|
$ |
95,360 |
|
|
$ |
|
|
|
$ |
1,173,266 |
|
2006 |
|
$ |
1,173,266 |
|
|
$ |
16,256 |
|
|
$ |
|
|
|
$ |
1,189,522 |
|
2007 |
|
$ |
1,189,522 |
|
|
$ |
|
|
|
$ |
9,399 |
|
|
$ |
1,180,123 |
|
As of October 31, 2007, Ciena had a $2.39 billion net operating loss carry forward and an
$84.0 million income tax credit carry forward which begin to expire in fiscal year 2018 and 2012,
respectively. Cienas ability to use net operating losses and credit carry forwards are subject to
limitations pursuant to the ownership change rules of the Internal Revenue Code Section 382.
The income tax provision does not reflect the tax savings resulting from deductions associated
with Cienas equity compensation and convertible debt. The tax benefit of approximately $74.7
million will be credited to paid-in capital when realized. For
deductions associated with Cienas equity compensation, credits
to paid-in capital will be recorded when those tax benefits are used
to reduce taxes payable.
Approximately $48.4 million of the valuation allowance as of October 31, 2007 was attributable
to deferred tax assets associated with the acquisitions of ONI, WaveSmith, Akara, Catena and IPI.
(15) SHARE-BASED COMPENSATION EXPENSE
On November 1, 2005, Ciena adopted SFAS 123(R), which requires the measurement and recognition
of compensation expense for share-based awards based on estimated fair values. Prior to the
adoption of SFAS 123(R), Ciena accounted for share-based awards to employees and directors using
the intrinsic value method in accordance with APB 25, as interpreted by FIN 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, as
allowed under SFAS 123, Accounting for Stock-Based Compensation. For fiscal 2005 the disclosure
below includes the pro forma effect of share-based compensation expense on net loss and net loss
per share in accordance with SFAS 123.
During fiscal 2005, the Board of Directors determined that all future grants of stock options,
restricted stock units, or other forms of equity-based compensation will solely be issued under the
Ciena Corporation 2000 Equity Incentive Plan (the 2000 Plan) and the 2003 Employee Stock Purchase
Plan (the ESPP).
67
Ciena Corporation 2000 Equity Incentive Plan
The 2000 Plan is a shareholder-approved plan that was assumed by Ciena as a result of its
merger with ONI. It authorizes the issuance of stock options, restricted stock, restricted stock
units and stock bonuses to employees, officers, directors, consultants, independent contractors and
advisors. The Compensation Committee of the Board of Directors has broad discretion to establish
the terms and conditions for equity awards, including number of shares, vesting conditions and any
required service or other performance criteria. The maximum term of any award under the 2000 Plan
is ten years. The exercise price of options may not be less than 85% of the fair market value of
the stock at the date of grant, or 100% of the fair market value for qualified options.
Under the terms of the 2000 Plan, the number of shares authorized for issuance will increase
by 5.0% of the number of Ciena shares issued and outstanding on January 1 of each year, unless the
Compensation Committee reduces the amount of the increase in any year. No additional shares were
added to the Plan as a result of this provision in 2005, 2006 or 2007. In addition to the evergreen
provision, any shares subject to outstanding awards under the ONI 1997 Stock Plan, ONI 1998 Equity
Incentive Plan, or ONI 1999 Equity Incentive Plan that are forfeited or cancelled shall become
available for issuance under the 2000 Plan. As of October 31, 2007, there were 3.9 million shares
authorized and available for issuance under the 2000 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting
restrictions and vest incrementally over a four-year period, with awards subject to 12 months of
accelerated vesting upon a change in control. The following table is a summary of Cienas stock
option activity for the fiscal years indicated (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Options Outstanding |
|
Exercise Price |
Balance as of October 31, 2004 |
|
|
9,079 |
|
|
|
48.23 |
|
Granted |
|
|
2,041 |
|
|
|
17.78 |
|
Exercised |
|
|
(599 |
) |
|
|
15.75 |
|
Canceled |
|
|
(1,871 |
) |
|
|
45.15 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2005 |
|
|
8,650 |
|
|
|
44.80 |
|
Granted |
|
|
579 |
|
|
|
21.95 |
|
Exercised |
|
|
(1,304 |
) |
|
|
16.71 |
|
Canceled |
|
|
(815 |
) |
|
|
41.18 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
7,110 |
|
|
|
48.52 |
|
Granted |
|
|
695 |
|
|
|
32.47 |
|
Exercised |
|
|
(1,507 |
) |
|
|
23.04 |
|
Canceled |
|
|
(427 |
) |
|
|
41.52 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
5,871 |
|
|
$ |
53.67 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal 2007 and fiscal 2006 was $21.6
million and $18.2 million, respectively. The weighted average fair value of each stock option granted by Ciena in fiscal 2007 and 2006 was $32.47 and $21.95, respectively.
The following table summarizes information with respect to stock options outstanding at
October 31, 2007, based on Cienas closing stock price of $46.88 per share on November 2, 2007
(shares and intrinsic value in thousands):
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2007 |
|
|
Vested Options at October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
Range of |
|
|
|
|
Number |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
Number |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
Exercise |
|
|
|
|
of |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
of |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
Price |
|
|
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
$ |
0.01 |
|
|
|
|
|
|
$ |
16.52 |
|
|
|
|
|
643 |
|
|
|
7.29 |
|
|
$ |
14.65 |
|
|
$ |
20,730 |
|
|
|
302 |
|
|
|
6.77 |
|
|
$ |
12.84 |
|
|
$ |
10,279 |
|
$ |
16.53 |
|
|
|
|
|
|
$ |
17.43 |
|
|
|
|
|
605 |
|
|
|
7.56 |
|
|
|
17.21 |
|
|
|
17,954 |
|
|
|
281 |
|
|
|
7.38 |
|
|
|
17.13 |
|
|
|
8,369 |
|
$ |
17.44 |
|
|
|
|
|
|
$ |
22.96 |
|
|
|
|
|
488 |
|
|
|
6.77 |
|
|
|
21.86 |
|
|
|
12,208 |
|
|
|
457 |
|
|
|
6.65 |
|
|
|
21.90 |
|
|
|
11,404 |
|
$ |
22.97 |
|
|
|
|
|
|
$ |
31.36 |
|
|
|
|
|
822 |
|
|
|
8.01 |
|
|
|
27.78 |
|
|
|
15,701 |
|
|
|
374 |
|
|
|
6.65 |
|
|
|
27.60 |
|
|
|
7,205 |
|
$ |
31.37 |
|
|
|
|
|
|
$ |
31.71 |
|
|
|
|
|
708 |
|
|
|
5.15 |
|
|
|
31.70 |
|
|
|
10,737 |
|
|
|
689 |
|
|
|
5.06 |
|
|
|
31.71 |
|
|
|
10,451 |
|
$ |
31.72 |
|
|
|
|
|
|
$ |
46.97 |
|
|
|
|
|
818 |
|
|
|
6.83 |
|
|
|
41.52 |
|
|
|
4,385 |
|
|
|
577 |
|
|
|
5.60 |
|
|
|
41.19 |
|
|
|
3,286 |
|
$ |
46.98 |
|
|
|
|
|
|
$ |
83.13 |
|
|
|
|
|
762 |
|
|
|
4.41 |
|
|
|
60.58 |
|
|
|
|
|
|
|
762 |
|
|
|
4.41 |
|
|
|
60.58 |
|
|
|
|
|
$ |
83.14 |
|
|
|
|
|
|
$ |
1,046.50 |
|
|
|
|
|
1,025 |
|
|
|
3.23 |
|
|
|
155.25 |
|
|
|
|
|
|
|
1,025 |
|
|
|
3.23 |
|
|
|
155.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
1,046.50 |
|
|
|
|
|
5,871 |
|
|
|
5.97 |
|
|
$ |
53.67 |
|
|
$ |
81,715 |
|
|
|
4,467 |
|
|
|
5.16 |
|
|
$ |
62.68 |
|
|
$ |
50,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions for Option-Based Awards under SFAS 123(R)
The fair value of service-based options is recognized as stock-based compensation expense on a
straight-line basis over the requisite service period. The fair value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
2006 |
|
2007 |
Expected volatility |
|
|
61.5 |
% |
|
|
55.8 |
% |
Risk-free interest rate |
|
|
4.3%-5.1 |
% |
|
|
4.2%-5.1 |
% |
Expected life (years) |
|
|
5.5-6.1 |
|
|
|
6.0-6.4 |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Consistent with SFAS 123(R) and SAB 107, Ciena considered the implied volatility and
historical volatility of its stock price in determining its expected volatility, and, finding both
to be equally reliable, determined that a combination of both would result in the best estimate of
expected volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for
the term of Cienas employee stock options.
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. Because Ciena considers its options to be plain
vanilla, it calculated the expected term using the simplified method as prescribed in SAB 107.
Under SAB 107, options are considered to be plain vanilla if they have the following basic
characteristics: granted at-the-money; exercisability is conditioned upon service through the
vesting date; termination of service prior to vesting results in forfeiture; limited exercise
period following termination of service; options are non-transferable and non-hedgeable.
The dividend yield assumption is based on Cienas history and expectation of dividend payouts.
Because share-based compensation expense is recognized only for those awards that are
ultimately expected to vest, the amount of share-based compensation expense recognized reflects a
reduction for estimated forfeitures. We estimate forfeitures at the time of grant and revise those
estimates in subsequent periods based upon new or changed information. We rely upon historical
experience in establishing forfeiture rates. If actual forfeitures differ from current estimates,
total unrecognized share-based compensation expense will be adjusted for future changes in
estimated forfeitures.
69
Assumptions for Option-Based Awards under SFAS 123
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted average assumptions:
|
|
|
|
|
|
|
Year ended October 31, |
|
|
2005 |
Expected volatility |
|
|
58%-67 |
% |
Risk-free interest rate |
|
|
3.65%-4.26 |
% |
Expected life (years) |
|
|
3.9-5.5 |
|
Expected dividend yield |
|
|
0.0 |
% |
Ciena considered the implied volatility and historical volatility of its stock price in
determining its expected volatility. The risk-free interest rate was based upon assumption of
interest rates appropriate for the term of Cienas employee stock options. The dividend yield
assumption was based on Cienas history and expectation of dividend payouts. Forfeitures were
accounted for as they occurred.
Restricted Stock Units
A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena
common stock as the unit vests. Cienas outstanding restricted stock unit awards are subject to
service-based vesting conditions and or performance-based vesting conditions. Awards subject to
service-based conditions typically vest in increments over a four-year period. Awards with
performance-based vesting conditions require the achievement of certain company-based, financial or
other performance criteria or targets as a condition to the vesting, or acceleration of vesting, of
such awards.
The aggregate intrinsic value of Cienas restricted stock units is based on Cienas closing
stock price on the last trading day of each fiscal year. For fiscal 2007, Cienas closing stock
price at year end was $46.88 per share. The following table is a summary of Cienas restricted
stock unit activity for the fiscal years indicated (shares and fair value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant Date |
|
Aggregate |
|
|
Restricted Stock |
|
Fair Value |
|
Intrinsic |
|
|
Units Outstanding |
|
Per Share |
|
Value |
Balance as of October 31, 2004 |
|
|
22 |
|
|
$ |
45.85 |
|
|
$ |
373 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2005 |
|
|
18 |
|
|
$ |
47.32 |
|
|
$ |
301 |
|
Granted |
|
|
261 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
162 |
|
|
$ |
22.99 |
|
|
$ |
3,829 |
|
Granted |
|
|
1,216 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
1,135 |
|
|
$ |
27.94 |
|
|
$ |
53,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock units that vested and were converted into common
stock during fiscal 2007, fiscal 2006 and fiscal 2005 was $6.5 million, $2.6 million and $0.0
million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena in fiscal 2007 and 2006 was $28.36 and $19.47, respectively.
Assumptions for Restricted Stock Unit Awards under SFAS 123(R) and SFAS 123
The fair value of each restricted stock unit award is estimated using the intrinsic value
method which is based on the closing price on the date of grant. Share-based expense for
service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably
over the vesting period on a straight-line basis.
Share-based expense for performance-based restricted stock unit awards, net of estimated
forfeitures, is recognized ratably over the performance period based upon Cienas determination of
whether it is probable that the performance targets will be achieved. At each reporting period,
Ciena reassesses the probability of achieving the performance targets and the performance period
required to meet those targets. The estimation of whether the performance targets will be achieved
involves judgment, and the estimate of expense is revised periodically based on the probability of
achieving the performance targets. Revisions are reflected in the period in which the estimate is
changed. If any performance goals are not met, no compensation cost is ultimately recognized and,
to the extent previously recognized, compensation cost is reversed.
70
The weighted average fair value of each restricted stock unit granted during fiscal 2007 and
fiscal 2006 was $28.36 and $19.47, respectively. No restricted stock unit awards were made during
fiscal 2005.
2003 Employee Stock Purchase Plan
In March 2003, Ciena shareholders approved the ESPP, which has a ten-year term and originally
authorized the issuance of 2.9 million shares. At the 2005 annual meeting, Ciena shareholders
approved an amendment increasing the number of shares available to 3.6 million and adopting an
evergreen provision that on December 31 of each year provides for an increase in the number of
shares available by up to 0.6 million shares, provided that the total number of shares available
shall not exceed 3.6 million. Pursuant to the evergreen provision, the maximum number of shares
that may be added to the ESPP during the remainder of its ten-year term is 3.4 million.
Under the ESPP, eligible employees may enroll in an offer period during certain open
enrollment periods. New offer periods begin March 16 and September 16 of each year.
Prior to the offer period commencing September 15, 2006, (i) each offer period consisted of
four six-month purchase periods during which employee payroll deductions were accumulated and used
to purchase shares of common stock; and (ii) the purchase price of the shares was 15% less than the
fair market value on either the first day of an offer period or the last day of a purchase period,
whichever was lower. In addition, if the fair market value on the purchase date was less than the
fair market value on the first day of an offer period, then participants automatically commenced a
new offer period.
On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to
shorten the offer period under the ESPP to six months. As a result of this change, the offer period
and any purchase period will be the same six-month period. Under the amended ESPP, the applicable
purchase price equals 95% of the fair market value of Ciena common stock on the last day of each
purchase period. Employees enrolled with offer periods commenced prior to September 15, 2006, will
be permitted to complete the remaining purchase periods in their current offer period. These
amendments were intended to enable the ESPP to be considered a non-compensatory plan under FAS
123(R) for future offering periods.
The following table is a summary of ESPP activity for the fiscal years indicated (shares and
fair value in thousands):
|
|
|
|
|
|
|
|
|
|
|
ESPP shares available for |
|
Intrinisic value at |
|
|
issuance |
|
exercise date |
Balance as of October 31, 2004 |
|
|
2,252 |
|
|
|
|
|
Issued March 15, 2005 |
|
|
(366 |
) |
|
$ |
741 |
|
Plan Amendment |
|
|
1,685 |
|
|
|
|
|
Issued September 15, 2005 |
|
|
(307 |
) |
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2005 |
|
|
3,264 |
|
|
|
|
|
Evergreen provision |
|
|
307 |
|
|
|
|
|
Issued March 15, 2006 |
|
|
(335 |
) |
|
|
8,662 |
|
Issued September 15, 2006 |
|
|
(260 |
) |
|
|
4,610 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
2,976 |
|
|
|
|
|
Evergreen provision |
|
|
571 |
|
|
|
|
|
Issued March 15, 2007 |
|
|
(119 |
) |
|
|
1,137 |
|
Issued September 14, 2007 |
|
|
(45 |
) |
|
$ |
581 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
3,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amendments to the ESPP for offer periods on or after September 15, 2006 were intended to
enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future offering
periods. For offer periods that commenced prior to September 15, 2006, however, fair value is
determined as of the grant date, using the graded vesting approach. Under the graded vesting
approach, the 24-month ESPP offer period, which consists of four six-month purchase periods, is
treated for valuation purpose as four separate option tranches with individual lives of six, 12, 18
and 24 months, each commencing on the initial grant date. Each tranche is expensed straight-line
over its individual life.
71
Share-Based Compensation Recognized under APB 25 for Fiscal 2005 and SFAS 123(R) for Fiscal 2006
and Fiscal 2007
The following table summarizes share-based compensation expense for the fiscal years indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Product costs |
|
$ |
|
|
|
$ |
1,075 |
|
|
$ |
1,257 |
|
Service costs |
|
|
|
|
|
|
810 |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of sales |
|
|
|
|
|
|
1,885 |
|
|
|
2,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,404 |
|
|
|
5,057 |
|
|
|
3,649 |
|
Sales and marketing |
|
|
4,404 |
|
|
|
3,415 |
|
|
|
6,724 |
|
General and administrative |
|
|
633 |
|
|
|
3,385 |
|
|
|
6,440 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense |
|
|
9,441 |
|
|
|
11,857 |
|
|
|
16,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense capitalized in inventory, net |
|
|
|
|
|
|
299 |
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
9,441 |
|
|
$ |
14,041 |
|
|
$ |
19,572 |
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2007, total unrecognized compensation expense was: (i) $15.3 million, which
relates to unvested stock options and is expected to be recognized over a weighted-average period
of 1.7 years; (ii) $23.6 million, which relates to restricted stock units and is expected to be
recognized over a weighted-average period of 1.8 years; and (iii) $0.1 million, which relates to
the ESPP and is expected to be recognized over a weighted-average period of 0.4 years.
Pro Forma Share-Based Compensation under SFAS 123 for Fiscal 2005
For fiscal 2005, recognizing share-based compensation expense in accordance with SFAS 123
would have affected Cienas net loss and net loss per share by the pro forma amounts indicated
below (in thousands, except per share data):
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2005 |
|
Net loss applicable to common stockholders as reported |
|
$ |
(435,699 |
) |
|
|
|
|
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax
effects |
|
|
61,623 |
|
|
|
|
|
|
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects |
|
|
9,441 |
|
|
|
|
|
Net loss applicable to common stockholders pro forma |
|
$ |
(487,881 |
) |
|
|
|
|
Basic and diluted net loss per share as reported |
|
$ |
(5.30 |
) |
|
|
|
|
Basic and diluted net loss per share pro forma |
|
$ |
(5.94 |
) |
|
|
|
|
(16) OTHER EMPLOYEE BENEFIT PLANS
Employee 401(k) Plan
Ciena has a 401(k) defined contribution profit sharing plan. The plan covers all U.S. based
employees who are not part of an excluded group. Participants may contribute up to 60% of pre-tax
compensation, subject to certain limitations. Effective January 1, 2007, the plan includes an
employer matching contribution equal to 50% of the first 6% an employee contributes each pay
period. For fiscal 2006 and fiscal 2005, the employer matching contribution was equal to 50% of the
first 3% an employee contributed each pay period. Ciena may also make discretionary annual profit
sharing contributions up to the IRS regulated limit. Ciena has made no profit sharing contributions
to date. During fiscal 2007, fiscal 2006, and fiscal 2005, Ciena made matching contributions of
approximately $2.3 million, $1.2 million and $1.3 million, respectively.
72
(17) COMMITMENTS AND CONTINGENCIES
Foreign Tax Contingencies
Ciena has received assessment notices from the Mexican tax authorities asserting deficiencies
in payments between 2001 and 2005 related primarily to income taxes and import taxes and duties.
Ciena has filed judicial petitions appealing these assessments. As of October 31, 2007 and October
31, 2006, Ciena had accrued liabilities of $0.9 million and $0.7 million, respectively, related to
these contingencies, which are reported as a component of other current accrued liabilities. As of
October 31, 2007, Ciena estimates that it could be exposed to possible losses of up to $5.8 million
for which it has not accrued liabilities. Ciena has not accrued these liabilities because it does
not deem such losses probable. Ciena continues to evaluate the likelihood of probable and
reasonably possible losses, if any, related to these assessments. As a result, future increases or
decreases to accrued liabilities may be necessary and will be recorded in the period when such
amounts are probable and estimable.
Operating Lease Commitments
Ciena has certain minimum obligations under non-cancelable operating leases expiring on
various dates through 2019 for equipment and facilities. Future annual minimum rental commitments
under non-cancelable operating leases at October 31, 2007 are as follows (in thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2008 |
|
|
13,744 |
|
2009 |
|
|
11,564 |
|
2010 |
|
|
9,774 |
|
2011 |
|
|
8,692 |
|
2012 |
|
|
6,942 |
|
Thereafter |
|
|
20,874 |
|
|
|
|
|
Total |
|
$ |
71,590 |
|
|
|
|
|
Rental expense for fiscal 2007, fiscal 2006, and fiscal 2005 was approximately $10.6 million,
$9.2 million and $11.6 million, respectively. In addition, Ciena paid approximately $29.9 million,
$45.3 million and $33.0 million during fiscal 2007, fiscal 2006 and fiscal 2005, respectively,
related to rent costs for restructured facilities and unfavorable lease commitments, which were
offset against Cienas restructuring liabilities and unfavorable lease obligations. The amount for
operating lease commitments above does not include insurance, taxes, maintenance and other costs
required by the applicable operating lease. These costs are variable and are not expected to have a
material impact.
Purchase Commitments with Contract Manufacturers and Suppliers
As of October 31, 2007, Ciena has purchase commitments of $135.8 million. Purchase commitments
relate to purchase order obligations to our contract manufacturers and component suppliers for
inventory. In certain instances, we are permitted to cancel, reschedule or adjust these orders.
Consequently, only a portion of the amount reported as purchase commitments relates to firm,
non-cancelable and unconditional obligations.
Litigation
On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United
States District Court for the Central District of California against Ciena and several other
defendants, alleging that optical fiber amplifiers incorporated into certain of those parties
products infringe U.S. Patent No. 4,859,016 (the 016 Patent). The complaint seeks injunctive
relief, royalties and damages. On October 10, 2003, the court stayed the case pending final
resolution of matters before the U.S. Patent and Trademark Office (the PTO), including a request
for and disposition of a reexamination of the 016 Patent. On October 16, 2003, and November 2,
2004, the PTO granted reexaminations of the 016 Patent, resulting in a continuation of the stay of
the case. On September 11, 2006, the PTO issued a Notice of Intent to Issue a Reexamination
Certificate and Statement of Reasons for Patentability/Confirmation, stating its intent to confirm
certain claims of the 016 Patent. On June 22, 2007, the district court issued an order lifting the
stay of the case. The parties are currently engaged in discovery. Separately, on July 2, 2007,
defendant JDS Uniphase filed with the PTO a request for ex parte reexamination of the 016 Patent
and a request that the district court reinstate the stay of the case on the basis of its
reexamination request. On November 20, 2007, the PTO granted the request for reexamination in part,
including only claim 12 of the 016 Patent in the scope of its reexamination. On November 28, 2007,
based on the PTOs rationale in granting reexamination,
defendant JDS Uniphase filed with the PTO another request for ex parte reexamination of claim
11 of the 016 Patent. The court has not ruled on the motion to
reinstate the stay. On December 11, 2007, the district court
continued the final pretrial conference to June 16, 2008. The case
has not yet been scheduled for trial.
Ciena is not
able to predict the ultimate outcome of this matter at this time or to reasonably estimate the
amount or range of the potential loss, if any, that might result from an adverse resolution of this
matter. Ciena believes that it has valid defenses to the lawsuit and intends to defend it
vigorously.
73
As a result of our merger with ONI Systems Corp. in June 2002, Ciena became a defendant in a
securities class action lawsuit. Beginning in August 2001, a number of substantially identical
class action complaints alleging violations of the federal securities laws were filed in the United
States District Court for the Southern District of New York. These complaints name ONI, Hugh C.
Martin, ONIs former chairman, president and chief executive officer; Chris A. Davis, ONIs former
executive vice president, chief financial officer and administrative officer; and certain
underwriters of ONIs initial public offering as defendants. The complaints were consolidated into
a single action, and a consolidated amended complaint was filed on April 24, 2002. The amended
complaint alleges, among other things, that the underwriter defendants violated the securities laws
by failing to disclose alleged compensation arrangements (such as undisclosed commissions or stock
stabilization practices) in the initial public offerings registration statement and by engaging in
manipulative practices to artificially inflate the price of ONIs common stock after the initial
public offering. The amended complaint also alleges that ONI and the named former officers violated
the securities laws on the basis of an alleged failure to disclose the underwriters alleged
compensation arrangements and manipulative practices. No specific amount of damages has been
claimed. Similar complaints have been filed against more than 300 other issuers that have had
initial public offerings since 1998, and all of these actions have been included in a single
coordinated proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without
prejudice pursuant to a tolling agreement. In July 2004, following mediated settlement
negotiations, the plaintiffs, the issuer defendants (including Ciena), and their insurers entered
into a settlement agreement, whereby the plaintiffs cases against the issuers would be dismissed,
the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants
of at least $1 billion, and the issuer defendants would agree to assign or surrender to the
plaintiffs certain claims the issuers may have against the underwriters. The settlement agreement
did not require Ciena to pay any amount toward the settlement or to make any other payments. In
October 2004, the district court certified a class with respect to the Section 10(b) claims in six
focus cases selected out of all of the consolidated cases, which cases did not include Ciena, and
which decision was appealed by the underwriter defendants to the U.S. Court of Appeals for the
Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs
and issuer defendants for preliminary approval of the settlement agreement, subject to certain
modifications to the proposed bar order, and on August 31, 2005, the district court issued a
preliminary order approving the revised stipulated settlement agreement. On December 5, 2006, the
U.S. Court of Appeals for the Second Circuit vacated the district courts grant of class
certification in the six focus cases. On April 6, 2007, the Second Circuit denied plaintiffs
petition for rehearing. In light of the Second Circuits decision, the parties agreed that the
settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed
by the plaintiffs and the issuer defendants terminating the proposed settlement. On August 14,
2007, the plaintiffs filed second amended complaints against the defendants in the six focus cases,
as well as a set of amended master allegations against the other issuer defendants, including
changes to the definition of the purported class of investors. On September 27, 2007, the
plaintiffs filed a motion for class certification based on their amended complaints and
allegations. On November 12, 2007, the defendants in the six focus cases moved to dismiss the
second amended complaints. Due to the inherent uncertainties of litigation, Ciena cannot accurately
predict the ultimate outcome of the matter at this time.
In addition to the matters described above, Ciena is subject to various legal proceedings,
claims and litigation arising in the ordinary course of its business. Ciena does not expect that
the ultimate costs to resolve these matters will have a material effect on its results of
operations, financial position or cash flows.
(18) ENTITY WIDE DISCLOSURES
The following table reflects Cienas geographic distribution of revenue based on the location of the purchaser. Revenue attributable
to geographic regions outside of the United States is reflected as International revenue, with any
country accounting for greater than 10% of total revenue in the period specifically identified. For
the periods below, Cienas geographic distribution of revenue was as follows (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
United States |
|
$ |
340,774 |
|
|
|
79.8 |
|
|
$ |
423,687 |
|
|
|
75.1 |
|
|
$ |
553,582 |
|
|
|
71.0 |
|
United Kingdom |
|
|
n/a |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
100,681 |
|
|
|
12.9 |
|
International |
|
|
86,483 |
|
|
|
20.2 |
|
|
|
140,369 |
|
|
|
24.9 |
|
|
|
125,506 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
n/a Denotes less than 10% for period |
74
The following table reflects Cienas geographic distribution of equipment, furniture and
fixtures. Equipment, furniture and fixtures attributable to geographic regions outside of the
United States are reflected as International, with any country attributable for greater than 10% of
total equipment, furniture and fixtures specifically identified. For the periods below, Cienas
geographic distribution of equipment, furniture and fixtures was as follows (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
United States |
|
$ |
21,934 |
|
|
|
74.5 |
|
|
$ |
38,391 |
|
|
|
82.3 |
|
International |
|
|
7,493 |
|
|
|
25.5 |
|
|
|
8,280 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,427 |
|
|
|
100.0 |
|
|
$ |
46,671 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total equipment, furniture and fixtures |
For the periods below, Cienas distribution of revenue was as follows (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
Converged Ethernet infrastructure |
|
$ |
291,549 |
|
|
|
68.2 |
|
|
$ |
420,567 |
|
|
|
74.6 |
|
|
$ |
645,159 |
|
|
|
82.8 |
|
Ethernet access |
|
|
82,726 |
|
|
|
19.4 |
|
|
|
81,860 |
|
|
|
14.5 |
|
|
|
50,129 |
|
|
|
6.4 |
|
Global network services |
|
|
52,982 |
|
|
|
12.4 |
|
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,481 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
For the periods below, customers accounting for at least 10% of Cienas revenue were as
follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
Verizon |
|
$ |
43,673 |
|
|
|
10.2 |
|
|
$ |
70,225 |
|
|
|
12.4 |
|
|
|
n/a |
|
|
|
|
|
Sprint |
|
|
n/a |
|
|
|
|
|
|
|
89,793 |
|
|
|
15.9 |
|
|
|
100,122 |
|
|
|
12.8 |
|
AT&T |
|
|
n/a |
|
|
|
|
|
|
|
66,926 |
|
|
|
11.9 |
|
|
|
196,924 |
|
|
|
25.3 |
|
BellSouth |
|
|
43,946 |
|
|
|
10.3 |
|
|
|
n/a |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
SAIC |
|
|
46,058 |
|
|
|
10.8 |
|
|
|
n/a |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
133,677 |
|
|
|
31.3 |
|
|
$ |
226,944 |
|
|
|
40.2 |
|
|
$ |
297,046 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
75
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, Ciena carried out an evaluation under the
supervision and with the participation of Cienas management, including Cienas Chief Executive
Officer and Chief Financial Officer, of Cienas disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon
this evaluation, Cienas Chief Executive Officer and Chief Financial Officer concluded that Cienas
disclosure controls and procedures were effective as of the end of the period covered by this
report.
Changes in Internal Control over Financial Reporting
There was no change in Cienas internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the most
recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, Cienas internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of Ciena Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934).
The internal control over financial reporting at Ciena Corporation was designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial reporting includes those
policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of Ciena Corporation; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America; |
|
|
|
|
provide reasonable assurance that receipts and expenditures of Ciena Corporation are
being made only in accordance with authorization of management and directors of Ciena
Corporation; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on the
consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.
Management of Ciena Corporation assessed the effectiveness of the companys internal control
over financial reporting as of October 31, 2007. Management based this assessment on criteria for
effective internal control over financial reporting described in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management determined that, as of October 31, 2007, Ciena Corporation maintained
effective internal control over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and
reported on the consolidated financial statements of Ciena Corporation included in this annual
report, has also audited the effectiveness of Ciena Corporations internal control over financial
reporting as of October 31, 2007 as stated in its report
appearing under Item 8 of part II of this annual report.
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/s/ Gary B. Smith
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/s/ Joseph R. Chinnici |
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Joseph R. Chinnici
|
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President and Chief Executive Officer
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Senior Vice President and Chief Financial Officer |
|
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December 27, 2007
|
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December 27, 2007 |
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76
Item 9B. Other Information
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Pursuant to General Instruction G(3) of Form 10-K, information relating to Cienas directors
and executive officers is set forth in Part I of this annual report under the caption Item 1.
BusinessDirectors and Executive Officers.
Additional information concerning our Audit Committee and regarding compliance with Section
16(a) of the Exchange Act responsive to this item is incorporated herein by reference to Cienas
definitive proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with
the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.
As part of our system of corporate governance, our board of directors has adopted a code of
ethics that is specifically applicable to our chief executive officer and senior financial
officers. This Code of Ethics for Senior Financial Officers, as well as our Code of Business
Conduct and Ethics, applicable to all directors, officers and employees, are available on the
corporate governance page of our web site at http://www.ciena.com. We intend to satisfy any
disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of the Code of Ethics for Senior Financial Officers, by posting such information on our
web site at the address above.
Item 11. Executive Compensation
Information responsive to this item is incorporated herein by reference to Cienas definitive
proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with the SEC
within 120 days after the end of the fiscal year covered by this Form 10-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information responsive to this item is incorporated herein by reference to Cienas definitive
proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with the SEC
within 120 days after the end of the fiscal year covered by this Form 10-K.
Item 13.
Certain Relationships and Related Transactions, and Director
Independence
Information responsive to this item is incorporated herein by reference to Cienas definitive
proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with the SEC
within 120 days after the end of the fiscal year covered by this Form 10-K.
Item 14.
Principal Accountant Fees and Services
Information responsive to this item is incorporated herein by reference to Cienas definitive
proxy statement with respect to our 2008 Annual Meeting of Shareholders to be filed with the SEC
within 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a)
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1. |
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The information required by this item is included in Item 8 of Part II of this annual
report. |
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2. |
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The information required by this item is included in Item 8 of Part II of this annual
report. |
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3. |
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Exhibits: See Index to Exhibits. The Exhibits listed in the accompanying Index
to Exhibits are filed or incorporated by reference as part of this annual report. |
(b) |
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Exhibits. See Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this annual report. |
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(c) |
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Not applicable. |
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Linthicum, County of Anne Arundel, State of Maryland, on
the 27th day of December 2007.
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Ciena Corporation
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By: |
/s/ Gary B. Smith
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Gary B. Smith |
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President, Chief Executive Officer
and Director |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
date indicated.
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Signatures |
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Title |
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Date |
/s/ Patrick H. Nettles, Ph.D.
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Executive Chairman of the
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December 27, 2007 |
Patrick H. Nettles, Ph.D.
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Board of Directors |
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President, Chief Executive Officer
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December 27, 2007 |
Gary B. Smith
(Principal Executive Officer)
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and Director |
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Sr. Vice President, Finance and
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December 27, 2007 |
Joseph R. Chinnici
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Chief Financial Officer |
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(Principal Financial Officer) |
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Vice President, Controller
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December 27, 2007 |
Andrew C. Petrik
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and Treasurer |
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(Principal Accounting Officer) |
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/s/ Stephen P. Bradley, Ph.D.
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Director
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December 27, 2007 |
Stephen P. Bradley, Ph.D. |
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Director
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December 27, 2007 |
Harvey B. Cash |
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Director
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December 27, 2007 |
Bruce L. Claflin |
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Director
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December 27, 2007 |
Lawton W. Fitt |
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Director
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December 27, 2007 |
Judith M. OBrien |
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Director
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December 27, 2007 |
Michael J. Rowny |
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Director
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December 27, 2007 |
Gerald H. Taylor |
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78
INDEX TO EXHIBITS
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Incorporated by Reference |
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Filed |
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Form and |
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Here- |
Exhibit |
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Registration or |
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with |
Number |
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Exhibit Description |
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Commission No. |
|
Exhibit |
|
Filing Date |
|
(X) |
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3.1
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Third Restated Certificate of Incorporation
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S-1 (333-17729)
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3.2 |
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12/12/1996 |
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3.2
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Amended and Restated By-Laws of Ciena Corporation
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10-Q (000-21969)
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3.1 |
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8/31/2007 |
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3.3
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Certificate of Amendment to Third Restated
Certificate of Incorporation dated December 9, 1996
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S-1 (333-17729)
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3.1 |
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12/12/1996 |
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3.4
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Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock dated
January 12, 1998
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8-K (000-21969)
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4.2 |
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12/29/1997 |
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3.5
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Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 13, 1998
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10-Q (000-21969)
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3.5 |
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5/18/2000 |
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3.6
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Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 16, 2000
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10-Q (000-21969)
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3.6 |
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5/18/2000 |
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3.7
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Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 13, 2001
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10-Q (000-21969)
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3.7 |
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5/17/2001 |
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3.8
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Certificate of Ownership and Merger (amending Third
Restated Certificate of Incorporation) dated October
29, 2004
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8-K (000-21969)
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3.1 |
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10/29/2004 |
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3.9
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Certificate of Amendment to Third Restated
Certificate of Incorporation dated September 22, 2006
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8-K (000-21969)
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3.1 |
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9/25/2006 |
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4.1
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Specimen Stock Certificate
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X |
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4.2
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Rights Agreement dated December 29, 1997
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8-K (000-21969)
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4.2 |
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12/29/1997 |
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4.3
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Amendment to Rights Agreement dated June 2, 1998
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8-K (000-21969)
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4.3 |
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6/3/1998 |
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4.4
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Amendment No. 2 to Rights Agreement dated September
13, 1998
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8-K (000-21969)
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99.2 |
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9/14/1998 |
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4.5
|
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Amendment No. 3 to Rights Agreement dated October 19,
1998
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|
8-K (000-21969)
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99.1 |
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10/19/1998 |
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4.6
|
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Amendment No. 4 to Rights Agreement dated June 2, 2005
|
|
8-K (000-21969)
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4.1 |
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6/3/2005 |
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4.7
|
|
Indenture dated February 9, 2001 between Ciena
Corporation and First Union National Bank for 3.75%
convertible notes, due February 1, 2008
|
|
10-Q (000-21969)
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4.6 |
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2/15/2001 |
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4.8
|
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Indenture dated as of April 10, 2006 between Ciena
Corporation and The Bank of New York, as trustee, for
0.25% convertible senior notes due May 1, 2013,
including the Form of Global Note attached as Exhibit
A thereto
|
|
8-K (000-21969)
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4.7 |
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4/10/2006 |
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4.9
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Indenture dated June 11, 2007 between Ciena
Corporation and The Bank of New York, as trustee, for
0.875% Convertible Senior Notes due 2017, including
the Form of Global Note attached as Exhibit A thereto
|
|
8-K (000-21969)
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4.7 |
|
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6/12/2007 |
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10.1
|
|
Lightera 1998 Stock Option Plan and Form of Stock
Option Agreement**
|
|
10-Q (000-21969)
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10.19 |
|
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5/21/1999 |
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10.2
|
|
Omnia Communications, Inc. 1997 Stock Plan and Form
of Agreements**
|
|
10-Q (000-21969)
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10.20 |
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8/19/1999 |
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10.3
|
|
1999 Non-Officer Stock Option Plan and Form of Stock
Option Agreement**
|
|
10-K (000-21969)
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10.22 |
|
|
12/10/1999 |
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|
10.4
|
|
Amendment No. 1 to 1999 Non-Officer Stock Option
Plan**
|
|
10-K (000-21969)
|
|
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10.25 |
|
|
12/3/2001 |
|
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10.5
|
|
Cyras Systems, Inc. 1998 Stock Plan as amended and
Form of Stock Option Agreement**
|
|
10-Q (000-21969)
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|
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10.24 |
|
|
5/17/2001 |
|
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10.6
|
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ONI 1997 Stock Plan**
|
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S-1*
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10.2 |
|
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3/10/2000 |
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10.7
|
|
ONI 1998 Equity Incentive Plan**
|
|
S-1*
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|
|
10.3 |
|
|
3/10/2000 |
|
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10.8
|
|
ONI 1999 Equity Incentive Plan**
|
|
S-1*
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|
|
10.4 |
|
|
3/10/2000 |
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10.9
|
|
WaveSmith Networks, Inc. 2000 Stock Option and
Incentive Plan**
|
|
10-Q (000-21969)
|
|
|
10.36 |
|
|
8/21/2003 |
|
|
79
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|
|
|
|
|
Incorporated by Reference |
|
|
|
Filed |
|
|
|
|
Form and |
|
|
|
|
|
|
|
Here- |
Exhibit |
|
|
|
Registration or |
|
|
|
|
|
|
|
with |
Number |
|
Exhibit Description |
|
Commission No. |
|
Exhibit |
|
Filing Date |
|
(X) |
10.10
|
|
Catena Networks, Inc. 1998 Equity Incentive Plan, as
amended**
|
|
10-Q (000-21969)
|
|
|
10.38 |
|
|
5/20/2004 |
|
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10.11
|
|
Internet Photonics, Inc. Amended and Restated 2000
Corporate Stock Option Plan**
|
|
10-Q (000-21969)
|
|
|
10.39 |
|
|
5/20/2004 |
|
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|
|
10.12
|
|
Ciena Corporation 2000 Equity Incentive Plan (Amended
and Restated ONI Systems Corp. 2000 Equity Incentive
Plan) **
|
|
10-K (000-21969)
|
|
|
10.37 |
|
|
12/11/2003 |
|
|
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|
|
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|
|
10.13
|
|
Form of Stock Option Award Agreement for executive
officers under Ciena Corporation 2000 Equity
Incentive Plan**
|
|
8-K (000-21969)
|
|
|
10.1 |
|
|
11/04/2005 |
|
|
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|
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|
|
10.14
|
|
Form of Restricted Stock Unit Agreement for executive
officers under Ciena Corporation 2000 Equity
Incentive Plan**
|
|
8-K (000-21969)
|
|
|
10.2 |
|
|
11/04/2005 |
|
|
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|
|
|
|
|
10.15
|
|
Form of Performance Stock Unit Award Agreement for
executive officers under Ciena Corporation 2000
Equity Incentive Plan**
|
|
8-K (000-21969)
|
|
|
10.3 |
|
|
11/04/2005 |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Form of Stock Option Award Agreement for directors
under Ciena Corporation 2000 Equity Incentive Plan**
|
|
8-K (000-21969)
|
|
|
10.4 |
|
|
11/04/2005 |
|
|
|
|
|
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|
|
|
|
|
|
|
|
10.17
|
|
Form of Restricted Stock Unit Award Agreement for
directors under Ciena Corporation 2000 Equity
Incentive Plan**
|
|
8-K (000-21969)
|
|
|
10.5 |
|
|
11/04/2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Amended and Restated 2003 Employee Stock Purchase
Plan (as amended on May 30, 2006)**
|
|
10-Q (000-21969)
|
|
|
10.1 |
|
|
8/31/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
1996 Outside Directors Stock Option Plan**
|
|
S-1 (333-17729)
|
|
|
10.4 |
|
|
12/12/1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Forms of 1996 Outside Directors Stock Option
Agreement**
|
|
S-1 (333-17729)
|
|
|
10.5 |
|
|
12/12/1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Third Amended and Restated 1994 Stock Option Plan**
|
|
S-8 (333-72474)
|
|
|
99.1 |
|
|
10/30/2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Form of Indemnification Agreement with Directors and
Executive Officers**
|
|
10-Q (000-21969)
|
|
|
10.1 |
|
|
3/3/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Amended and Restated Change in Control Severance
Agreement between Ciena Corporation and Gary B.
Smith**
|
|
10-Q (000-21969)
|
|
|
10.1 |
|
|
3/2/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Amendment 1 to Amended and Restated Change In Control
Severance Agreement between Ciena Corporation and
Gary B. Smith**
|
|
10-Q (000-21969)
|
|
|
10.2 |
|
|
8/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Amended and Restated Change in Control Severance
Agreement between Ciena and Executive Officers**
|
|
10-Q (000-21969)
|
|
|
10.2 |
|
|
3/2/2007 |
|
|
|
|
|
|
|
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10.26
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Amendment 1 to Amended and Restated Change in Control
Severance Agreement between Ciena Corporation and
Executive Officers **
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10-Q (000-21969)
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10.3 |
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8/31/2007 |
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10.27
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Ciena Corporation Directors Restricted Stock Deferral
Plan**
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10-Q (000-21969)
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10.1 |
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8/31/2007 |
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10.28
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Ciena Corporation Incentive Bonus Plan, as amended
October 2007**
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X |
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10.29
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Separation Agreement dated April 5, 2007 between
Ciena Corporation and Joseph R. Chinnici**
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10-Q (000-21969)
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10.1 |
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6/1/2007 |
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14.1
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Ciena Corporation Code of Ethics for Senior Financial
Officers***
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21.1
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Subsidiaries of registrant
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X |
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23.1
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Consent of Independent Registered Public Accounting
Firm
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X |
80
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Incorporated by Reference |
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Filed |
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Form and |
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Here- |
Exhibit |
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Registration or |
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with |
Number |
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Exhibit Description |
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Commission No. |
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Exhibit |
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Filing Date |
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(X) |
31.1
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Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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X |
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31.2
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Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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X |
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32.1
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Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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X |
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32.2
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Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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X |
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* |
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ONI Systems Corp. Form S-1 (333-32104) |
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** |
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Represents management contract or compensatory plan or arrangement |
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*** |
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Cienas Code of Ethics for Senior Financial Officers is available on the corporate governance
page of our web site at http://www.ciena.com |
81