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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, 2006
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, $.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 $2,035,851,758, based on the closing price of the Common Stock on the NASDAQ Global
Select Market on April 28, 2006.
The number of shares of Registrants Common Stock outstanding as of December 15, 2006 was
84,939,780.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrants proxy
statement for its 2007 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.
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 delivery and transport of voice, video and data services. Our products are used in
communications networks operated by telecommunications service providers, cable operators,
governments and enterprises across the globe. We specialize in transitioning legacy communications
networks to converged, next-generation architectures, capable of efficiently delivering a broader
mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated service offerings, our optical, data and broadband access platforms create business and
operational value for our customers.
During the past several years, we have taken a number of significant steps to position Ciena
to take advantage of market opportunities we see arising from increased demand for a broader mix of
high-bandwidth services and new communications applications. Consumer demand for high-speed voice,
video and data services and enterprise demand for reliable and secure connectivity are driving
network transition to more efficient, simplified network infrastructures, better suited to handle
higher bandwidth, multiservice traffic. To pursue these opportunities, we have expanded our product
portfolio and enhanced product functionality through internal development, acquisition and
partnerships. We have sought to build upon our historical expertise in core optical networking by
adding complementary products in the metro and access portions of communications networks. This
strategy has enabled us to increase penetration of our historical telecommunications service
provider customers with additional products, and allowed us to broaden our addressable markets to
include customers in the cable, government and enterprise markets.
Financial Overview Fiscal 2006
We had revenue of $564.1 million for our fiscal year ended October 31, 2006, an increase of
32.0% from fiscal 2005 revenue of $427.3 million. 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. Information contained on our web site is not a
part of this annual report.
Industry Background
The markets for communications networking equipment have been subject to dynamic changes in
recent years, affecting the revenue and profitability of equipment providers like Ciena. Following
a period of expansive growth, the telecommunications market was significantly affected by a
tightening of capital markets that began in late 2000. Aggressive network builds by communications
service providers in anticipation of rapid traffic growth resulted in overcapacity. In response,
communications service providers curtailed network build-outs and dramatically reduced their
overall capital spending. As a result, Ciena experienced significant revenue declines from 2001 to
2003.
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At the same time, a number of competitive threats emerged dramatically affecting
communications service providers. Service providers faced new competitors, new technologies and
intense price competition. In North America, the entry of the regional bell operating companies
into the long-distance market led to deteriorating business models and uncertain futures for
traditional long-distance carriers. At the same time, wireless displacement of traditional voice
revenue and increased availability of broadband access from cable operators threatened the business
model of the regional bell operating companies. Similar trends were also occurring outside of the
United States, with increasing competition among traditional voice, wireless and satellite carriers
to provide similar or overlapping services.
As competition among communications service providers increased, the needs of some of their
largest customers were changing. Increased reliance on information technology combined with world
events, such as natural disasters and security issues, brought concerns of network reliability and
business continuity to the forefront. In addition, competition among communications networking
equipment providers and reduced demand for their products provided opportunities to purchase
communications equipment and services at reduced costs. As a result, many large enterprises and
government agencies decided to build their own, secure private networks, some on a global scale.
Industry Trends
While the industry dynamics and market forces described above have had a significant effect on
the competitive landscape and business prospects of our customers and our competitors alike,
overall traffic on service provider networks has continued to grow. Expanding consumer and
enterprise reliance upon voice, video and data communications has increased demand for network
bandwidth, absorbing previous excess capacity. In addition, communications service providers have
sought to augment or replace traditional revenue by offering a broader mix of new
revenue-generating services. As a result of improving conditions in the markets where we sell our
communications network equipment and our efforts to restructure our operations in recent years, we
were able to improve our financial performance and grow our revenue from $298.7 million in fiscal
2004, to $427.3 million in fiscal 2005 and $564.1 million in fiscal 2006. We believe the current
industry trends below are driving growth of our business and demand for our products:
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End user demand for a single service provider, capable of delivering multiple voice,
video and data services; |
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Network operators transition toward simplified, converged network infrastructures
capable of more efficiently and cost-effectively supporting a broader mix of
high-bandwidth traffic; |
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Growth in broadband applications and service bundles driving higher capacity
requirements and fueling bandwidth demand in legacy and existing network
infrastructures; and |
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Enterprises and governments building and operating their own communication networks. |
Consolidation
In addition to the trends highlighted above, our customer base has undergone a period of
increased consolidation, particularly among telecommunications service providers. In the United
States, SBC acquired AT&T in November 2005. In December 2006, the combined company, known as AT&T,
acquired BellSouth. In January 2006, Verizon acquired MCI. We have seen similar trends abroad with
increased consolidation activity in recent years involving international carriers. Mergers of large
carriers are likely to have a major impact in shaping the future of the telecommunications
industry. These mergers also have the effect of further reducing the number of potential
communications service provider customers seeking to purchase networking equipment from vendors,
thereby concentrating customer purchasing power.
We have also seen consolidation among our competitors. 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 Marconi Corporation plcs telecommunications business.
These mergers may adversely affect our competitive position by causing our competitors to grow
larger, thereby increasing their resources.
Strategy
Growing demand for a broader offering of higher bandwidth services, and the desire among
service providers to provide these services through cost-effective and efficient networks are
driving the shift from legacy networks that support distinct voice, video or data services, to
converged, multiservice communications networks. While the belief that disparate communications
networks will converge into simplified, multiservice infrastructures is widely shared, there are
differing views regarding how this convergence will be achieved. Some envision that the converged
network will be based on a
completely new network infrastructure. We believe, however, that the transition to a
converged, all-service network will be
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an evolutionary process, one in which service providers will
seek to maximize the value of their existing network investment.
In response to these market dynamics, we introduced the FlexSelect Architecture, our
standards-based, service-oriented network architecture that facilitates our customers transition
to next-generation networks. Our FlexSelect Architecture combines programmable hardware with
service-oriented management functionality, automating delivery and management of a broad mix of
services including SONET/SDH, Ethernet, storage and video. The products and features we have
introduced under our FlexSelect Architecture enable enhanced network flexibility, adaptability and
management. This allows the delivery of a broader mix of services and the addition of new services
through networks that are more cost-effective to deploy, scale and manage. Our FlexSelect
Architecture enables the transition of legacy network infrastructures to an on-demand,
service-selectable network that enables cost-effective delivery of services, while preserving the
value of customer investment in legacy and existing architectures.
We are pursuing the following strategic initiatives, relationships and investments to
implement the network vision behind our FlexSelect Architecture and capitalize on our customers
transition to higher capacity, converged network infrastructures:
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Establish technology leadership in the transition from legacy network infrastructures to
Ethernet-based infrastructures. Through our research and development investments, we seek
to enable our customers to transition their traditional circuit-switched networks to
support a broader mix of higher bandwidth services, while maximizing the value of their
existing network investment. Through these investments, we seek to provide customers a
cost-effective means to support new applications and deliver service bundles over a single
network infrastructure. Our current research and development initiatives include: |
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Adding advanced Ethernet capabilities across our product portfolio; |
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Enabling broadband and Ethernet access through various means, including
copper and fiber access lines; and |
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Implementing our FlexSelect Architecture by focusing on cross-product
integration and driving a common set of features and network management
functionality across our portfolio. |
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Expand our market opportunity. Through expansion of our geographic reach and our
addressable markets, we seek to grow and diversify our customer base. Through this
expansion we seek to further penetrate customer segments beyond telecommunication service
providers; including cable, government, and enterprise. Our current sales and marketing
initiatives include: |
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Increasing our use of channel partners to expand our geographic reach and
penetrate additional market segments; |
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Increasing market awareness and acceptance of our Ethernet products and technologies; |
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Leveraging our incumbency to sell our expanded product portfolio to current customers; and |
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Pursuing technology partnerships to offer products that complement our existing product portfolio. |
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In addition to the strategic initiatives above, we are also taking steps to improve the
efficiency of our operations: |
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Improve our cost base and promote operational
efficiencies. Through our efforts to
consolidate our use of component suppliers and contract manufacturers, and align our
resources with market opportunities, we were able to improve gross margin and reduce
operating expense during fiscal 2006. We also undertook initiatives to improve our
operating efficiency, particularly in research and development. We seek to drive further
operational efficiencies and improve our cost base. Our current operational initiatives
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Achieving further product cost reductions by emphasizing global sourcing
of components and manufacturing resources; |
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Maximizing effectiveness of our research and development resources
through the restructuring of our development resources along technology sets, rather
than product or location; |
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Continuing to grow our development facility in India; and |
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Streamlining internal processes and structures to drive increased
productivity and cost savings from our existing infrastructure. |
Customers and Markets
Our customer base and the markets in which we sell our equipment, software and services have
expanded in recent years
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as new markets for communications networking equipment have emerged and
our product portfolio has grown. The networking equipment needs of our customers vary; often
depending upon their size, location, the make up of their end users and the applications that they
support. During fiscal 2006, Sprint, Verizon and AT&T, each represented more than 10% of our total
revenue and 40.2% in the aggregate. Revenue from customers within the United States was
approximately 75.1% of total revenue in fiscal 2006 and 79.8% in fiscal 2005. Information regarding
10% customers over our last three fiscal years can be found in Note 19 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, our
historical customer base and largest contributor to revenue, are under increasing competitive
pressure, primarily from non-traditional competitors that offer overlapping or similar services.
Our products, software and services enable telecommunications service providers to transition their
legacy or existing network infrastructures to deliver a broader mix of higher bandwidth consumer
and enterprise services. 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 line networks and applications for enterprise users, including demand for
inter-site connectivity, storage and Ethernet services.
Cable Operators/ Multiservice Operators (MSOs)
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
our cable operator customers to integrate voice, video and data applications over a converged
infrastructure. This enables our customers to grow bandwidth capacity and lower the operational
expense of supporting disparate networks. By enabling this network convergence, cable operators can
expand their end user offerings to include high-value service bundles. Our products support key
cable applications including broadcast 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 end
users in the healthcare, financial and retail industries. We offer equipment, software and services
focused on key enterprise applications including data center connectivity, wide area network
consolidation, and storage extension for business continuance and disaster recovery. Our products
enable inter-site connectivity between data centers, sales offices, manufacturing plants, and
research and development centers, using an owned or leased private fiber network, or a
carrier-provided service. Our products also enable our enterprise customers to prevent unexpected
system downtime and ensure the safety, security and availability of their data.
Government
Our government customers include federal and state agencies in the U.S. and international
government bodies. Our customers also include domestic and international research and education
institutions. 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 take on the challenge of building their own, secure
private networks.
Product Portfolio
Our product portfolio includes a range of communications networking equipment that is located
from the core of communications networks to the edge, where end users gain access to voice, video
and data communications. Our products include:
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Optical Networking Products |
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Broadband Networking Products |
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Data Networking Products |
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Network and Services Management Software |
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Optical Networking Products
Our optical networking product portfolio includes metro transport and switching products, core
transport and switching products and multiservice optical access products.
Metro Transport & Switching. Our metro transport and switching products enable service
providers to increase the efficiency of their metropolitan communications networks, allowing
them to service more customers, more cost effectively. Our products accomplish this by more
efficiently using fiber optic networks and enabling communications networks to increase fiber
optic capacity. Our metro transport and switching products also enable service providers to
transition and converge their metropolitan communications infrastructures to support multiple
service traffic types on a cost-effective basis. Our metro transport and switching products
include:
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CN 4200 FlexSelect Advanced Services Platform Family |
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ONLINE Metro Multiservice DWDM Platform |
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CN 3600 Intelligent Optical Multiservice Switch |
Core Transport and Switching. New high-bandwidth service bundles at the network edge are
creating increased demand on the core networks maintained by telecommunications service
providers, cable operators, government agencies and enterprises. Our core transport products
scale optical bandwidth and increase capacity to cost-effectively support high-bandwidth
applications and traffic. Our core transport and switching products enable our customers to
transition and converge their existing network infrastructures and deploy multiservice networks
that can support emerging data and video services. By converging disparate service networks to a
multiservice network, our core transport and switching products enable service providers to
reduce network capital costs and operational costs through equipment reductions, process
automation and network simplification. These products include:
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CoreStream® Agility Optical Transport System |
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CoreDirector® Multiservice Switch |
Multiservice Optical Access. Our multiservice optical access products support storage
extension, interconnection of data centers and aggregation of enterprise data services. These
products also enable our customers to transition their networks to provide cost-effective
Ethernet services. Our multiservice optical access products enable customers to maximize network
efficiency associated with transporting, storing, retrieving and sharing data. These products
act as on and off ramps, connecting geographically-dispersed enterprise locations over privately
owned or leased networks, as well as networks maintained by service providers. Our multiservice
optical access products also address business continuity and disaster recovery needs of
enterprises, ensuring the safety, security and availability of their data. These products
include:
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CN 2000® Storage and LAN Extension Platform |
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CN 2200 Managed Optical Ethernet Multiplexer |
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CN 2300 Managed Optical Services Multiplexer |
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CN 2600 Multiservice Edge Aggregator |
Broadband Networking Products
Our broadband networking products allow telecommunications service providers to transition
their legacy voice networks to support next-generation services such as Internet-based (IP)
telephony, video services and DSL. These products, which enable telecommunications service
providers to offer broadband services over existing copper and fiber access lines, facilitate
broader service offerings to compete with cable operators. These products enable telecommunications
service providers to leverage their investment in existing or legacy voice network equipment to
provide the broadband services sought by end users, while maximizing the use of their existing
network. Our broadband networking products include:
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CNX-5 Broadband DSL System |
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CNX-5Plus Modular Broadband Loop Carrier |
Data Networking Products
Our data networking offering includes our multiservice edge switching and routing products.
These products enable
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telecommunications service providers and multiservice operators to transition
their communications networks from legacy technologies, such as ATM and Frame Relay, to
next-generation technologies, such as Ethernet and IP/MPLS. These technologies more
cost-effectively support the delivery of multiple service types, including voice, video and data
services, from service providers to end users. Our data networking products enhance bandwidth
efficiency, provisioning, and scalability, by converging traditional and emerging data services in
carrier metropolitan networks. These products include our:
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DN 7000® Series Multiservice Edge Switching and Aggregation Platform |
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CN 4350 Ethernet Services Provisioning Switch |
Network and Service Management Software
We offer integrated network and service management software products across our product lines.
Our ON-Center® Network & Service Management Suite is designed to increase network automation and
simplify network management and operation. Our network and service management products are also
designed to facilitate rapid and simplified provisioning of new or modified service connections and
the efficient allocation of bandwidth required to deliver such services. By increasing network
automation, minimizing network downtime, and monitoring network performance and service metrics,
our network and service management software enables customers to improve the cost effectiveness 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 services through our own internal Global Network Service resources and
through service partners. Our service offering includes:
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Network analysis, planning and design; |
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Operations and network management; |
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Network optimization and tuning; |
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Deployment, product installation, testing and commissioning; |
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Program or project management for complex, end-to-end communications network projects,
including the deployment of multi-vendor/multi-technology solutions; |
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Maintenance and support services, including, managed services for helpdesk and technical
assistance, spares and logistics management, software updates, engineering dispatch,
advanced technical support, and hardware and software warranty extensions; and |
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Product training, service partner certification and documentation services. |
Product Development
The industry in which we compete is subject to rapid technological developments, evolving
standards and protocols and shifts in customer demand. To remain competitive, we must continue to
introduce new products and enhance existing products by adding new features and functionality. 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. Over the last year,
we have reorganized our development efforts along technology skill sets that are applicable across
multiple products. Prior to this change, our development resources were structured along specific
product lines. We believe that this change will help drive the development of a common set of
features across our portfolio and allow us to offer a more integrated product portfolio to our
customers.
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. In some cases, we work with and make
strategic investments in technology partners to develop new or modify existing products. In
addition, we participate in industry and standards organizations where appropriate and incorporate
information from these affiliations throughout the product development process. We continually
review our existing products and development projects to determine their fit within our portfolio.
We assess the market demand and
growth opportunities, as well as the costs and resources necessary to support and enhance our
products. During 2006, our
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product development initiatives focused on adding advanced Ethernet
capabilities across our product portfolio and implementing our FlexSelect Architecture.
Our research and development expense (including stock compensation cost of $5.1 million, $4.4
million and $6.5 million, respectively) were $111.1 million, $137.2 million and $205.4 million for
fiscal 2006, 2005 and 2004, respectively. For more information regarding our research and
development expenses, see Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations.
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 throughout North 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 our brand, and our product, software and service offering.
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.
Our channel sales strategy also enables us to couple our products with complementary technologies
sold by our channel partners. 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 operations for
our products and components, and are increasingly utilizing overseas suppliers in lower cost
regions such as Asia. We believe that using contract manufacturers allows us to conserve capital,
operate without dedicating significant resources to manufacturing and 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
significant 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 in an effort to reduce product costs. We utilize an operations center in
Shenzhen, China to address materials sourcing, manufacturing resources and management of our
contract manufacturers in Asia.
Our products include some components that are proprietary in nature and only available from a
single source, as well as some components that are generally available from a 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
contract manufacturers that guarantee supply of components or their manufacturing services and our
contract manufacturers are not obligated to accept our purchase orders for components. If we
encounter difficulty continuing our relationship with a supplier, 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.
Competition
Competition is intense among providers of communications networking equipment, software and
services, particularly for sales to telecommunications service providers, which have undergone a
period of consolidation in recent years. 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: price, functionality, manufacturing
capability, installation, services, existing business and customer relationships, scalability and
the ability of products and services to meet customers immediate and future network requirements.
Competition is dominated by a small number of very large, multi-
national, vertically integrated companies. Each of these competitors has substantially greater
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financial, technical, operational and marketing resources than Ciena. Merger activity in recent
years among some of our larger competitors may intensify their advantages and affect the
competitive landscape. Our industry has also experienced increased competition from low-cost
producers in Asia, which can give rise to pricing pressure. Our competitors include Alcatel-Lucent,
Cisco, Ericsson, Fujitsu, Huawei, Nortel, Siemens, Tellabs, and ZTE.
There are also several smaller, but established, companies that offer one or more products
that compete directly or indirectly with our offerings. 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 be more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
We seek to establish and maintain proprietary rights in our technology, products and software
through the use of patents, copyrights, trademarks, and trade secret laws. We have a significant
number of trademarks and patents in the United States and foreign countries where we do business.
We also rely on contractual rights to establish proprietary rights in our products 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 all
intellectual property developed by the individual during the course of the employees work with us.
The agreements also require that each person maintain the confidentiality of all proprietary
information disclosed to them.
There can be no assurance that our proprietary rights will not be challenged, invalidated or
infringed upon. 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 and product development 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, these claims have required us to pay the patent holders substantial
sums or enter into license agreements requiring ongoing royalty payments. We believe that the
frequency of patent infringement claims is increasing as patent holders use such claims as a
competitive tactic and source of additional revenue. Such actions can be costly and may require us
to take patent licenses or to redesign or stop selling products that allegedly infringe patents
belonging to others.
Our network and service management software and other products incorporate software and
components licensed 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 the necessary licenses would 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.
Employees
As of October 31, 2006, we had 1,485 employees. We consider the relationships with our
employees to be good. We are not a party to any collective bargaining agreement.
9
Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive
officers:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Patrick H. Nettles, Ph.D. (1)
|
|
|
63 |
|
|
Executive Chairman of the Board of Directors |
Gary B. Smith (1)
|
|
|
46 |
|
|
President, Chief Executive Officer and Director
|
Stephen B. Alexander
|
|
|
47 |
|
|
Senior Vice President, Products
& Technology and Chief Technology Officer |
Michael G. Aquino
|
|
|
50 |
|
|
Senior Vice President, World Wide Sales |
Joseph R. Chinnici
|
|
|
52 |
|
|
Senior Vice President, Finance and Chief Financial Officer |
Andrew C. Petrik
|
|
|
43 |
|
|
Vice President, Controller and Treasurer |
Arthur D. Smith, Ph.D.
|
|
|
40 |
|
|
Chief Operating Officer |
Russell B. Stevenson, Jr.
|
|
|
65 |
|
|
Senior Vice President, General Counsel and Secretary |
Stephen P. Bradley, Ph.D. (1)(3)(4)
|
|
|
65 |
|
|
Director |
Harvey B. Cash (1)(2)(4)
|
|
|
68 |
|
|
Director |
Bruce L. Claflin (1)(3)
|
|
|
55 |
|
|
Director |
Lawton W. Fitt (1)(3)
|
|
|
53 |
|
|
Director |
Judith M. OBrien (1)(2)(4)
|
|
|
56 |
|
|
Director |
Michael J. Rowny (1)(3)
|
|
|
56 |
|
|
Director |
Gerald H. Taylor (1)(2)
|
|
|
65 |
|
|
Director |
|
|
|
(1) |
|
Cienas Directors hold staggered terms of office, expiring as follows: Ms. Fitt, Dr. Nettles and Mr.
Rowny in 2007; Ms. OBrien and Messrs. Cash and Smith in 2008; and Messrs. Bradley, Claflin and Taylor
in 2009. In accordance with Cienas Principles of Corporate Governance, ratification of the election of
Mr. Claflin to the class above will be considered by shareholders at the 2007 annual meeting. |
|
(2) |
|
Member of the Compensation Committee |
|
(3) |
|
Member of the Audit Committee |
|
(4) |
|
Member of the Governance and Nominations Committee |
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 board of directors of Carrius
Technologies, Inc., a privately held company.
Gary B. Smith has served as President and Chief Executive Officer since May 2001 and has
served on Cienas Board of Directors since October 2000. Mr. Smith serves on the board of directors
for CommVault Systems, Inc. and the American Electronics Association. Mr. Smith also serves as a
member of the Global Information Infrastructure Commission.
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since
September 1998 and as a Senior Vice President of Ciena 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 has served as Cienas Senior Vice President, Worldwide Sales since April
2006. Mr. Aquino joined Ciena in June 2002 and has 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. Prior to joining Ciena, from August 2001 to May 2002, Mr. Aquino served as
Vice President, Eastern Americas Sales for ONI Systems, which was acquired by Ciena in 2002.
Joseph R. Chinnici joined Ciena in 1994 and has served as Cienas Senior Vice President,
Finance and Chief Financial Officer since August 1997. Mr. Chinnici serves on the board of
directors for Brix Networks, Inc. and Sourcefire, Inc., both privately held companies.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller and
Treasurer of Ciena since August 1997.
10
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 and as Senior Vice President, Core Transport
Division, from May 2001 through June 2002.
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 board of directors of the Risk Management Foundation of the Harvard Medical
Institutions and i2 Technologies, Inc.
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 board of directors of First Acceptance Corp., i2 Technologies, Inc.,
Silicon Laboratories, Inc., Argonaut Group, Inc. and Staktek Holdings, Inc. Mr. Cash also serves on
the board of directors of Voyence Inc., a privately held company.
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. Since October 2006, Ms.
Fitt has served as a senior advisor to GSC Group, Inc., an alternative asset investment management
firm. From October 2002 to March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in
London. From 1979 to October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co.,
where she was a partner from 1994, and a managing director from 1996 to October 2002. Ms. Fitt is a
director of Reuters PLC and Citizens Communications Company.
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 a
comprehensive U.S. mobile payment service. 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 Adaptec, Inc. Ms. OBrien also serves on the board of
directors of AviaraDx, Inc., GeoVector Corporation, Grandis Inc., Mistletoe Technologies, Inc. and
Spectragenics, Inc., all of which are privately held companies.
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. Mr. Rowny also serves on the board of directors of Llamagraphics,
Inc., a privately held company.
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.
11
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.
We face intense competition that could hurt our sales and our ability to achieve and maintain
profitability.
The markets in which we compete for sales of networking equipment, software and services are
extremely competitive, particularly the market for sales to telecommunications service providers.
Competition in these markets is based on any one or a combination of the following factors: price,
functionality, manufacturing capability, installation, services, existing business and customer
relationships, scalability and the ability of products and services to meet the immediate and
future network requirements of customers. A small number of very large companies have historically
dominated the communications networking equipment industry. Many of our 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. Recent consolidation activity among large networking equipment providers has the effect of
causing our competitors to grow even larger and more powerful, magnifying their strategic
advantages. On November 30, 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
Marconi Corporation plcs telecommunications business. These mergers may adversely affect our
competitive position by causing our competitors to grow larger and increasing their resources. We
also compete with low-cost producers that can influence pricing pressure and a number of smaller
companies that provide significant competition for a specific product, 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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|
|
intense price competition, particularly from competitors in Asia; |
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early announcements of competing products and extensive marketing efforts; |
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one-stop shopping options; |
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competitors offering to repurchase our equipment from existing customers; |
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customer financing assistance; |
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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. Our inability to compete
successfully in our markets would harm our sales and our ability to maintain
profitability.
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 expenses 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,
resulting in additional 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 telecommunications service provider customers; |
|
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|
satisfaction of contractual customer acceptance criteria and related revenue recognition requirements; |
12
|
|
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delays, changes to or cancellation of orders from customers; |
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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 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. Any one or a combination of
the factors above may cause our revenue and operating results to fluctuate from quarter to quarter.
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.
Our gross margin may fluctuate from quarter to quarter and our product gross margin may be
adversely affected by a number of factors, some of which are beyond our control.
Our gross margin fluctuates from period to period and our product gross margin may be
adversely affected by numerous factors, including:
|
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increased price competition; |
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|
the mix in any period of higher and lower margin products and services; |
|
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sales volume during the period; |
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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; |
|
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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 discussed above regarding fluctuations in revenue and operating results can also
affect gross margin. We expect product gross margin to continue to fluctuate from quarter to
quarter. 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.
A small number of our telecommunication service provider customers accounted for a significant
portion of our revenue in fiscal 2006. The loss of one or more of these customers, reductions in
spending or changes affecting the market for telecommunications service providers generally, could
negatively affect our business, financial condition and results of operations.
During fiscal 2006, Sprint, Verizon and AT&T accounted for 40.2% of our revenue in the
aggregate. Our concentration in revenue increased during fiscal 2006 largely due to the effect of
mergers among some of our significant customers. The industry has experienced substantial
consolidation recently, including the merger of Verizon and MCI, and the combination of SBC, AT&T
and BellSouth, all of which have been significant customers during prior periods. These mergers
have the effect of further reducing the number of potential communications service provider
customers seeking to purchase networking equipment from vendors, thereby concentrating customer
purchasing power. Moreover, these mergers may result in delays in, or the curtailment of, network
investments. If consolidation among telecommunications carriers continues to increase, we may be
subject to additional concentration of revenue, pricing pressure and quarterly fluctuation in
revenue.
13
While we continue to diversify into new customer markets, a significant majority of our
revenue is concentrated in our traditional customer market of telecommunications service providers.
Our concentration of revenue in this customer market exposes us to significant risks associated
with a market wide change in business prospects, competitive pressures or other conditions
affecting telecommunications carriers. The telecommunications industry has undergone significant
changes in recent years and service providers have experienced increased competition from within
and outside their market. These pressures are likely to continue to cause telecommunications
service providers to seek to minimize the costs of the equipment that they buy and may cause static
or reduced capital expenditures. These competitive pressures may also result in pricing becoming a
more important factor in customer purchasing decisions. Increased focus on pricing may favor
low-cost vendors and larger competitors that can spread the effect of price discounts across a
broader offering of products and services and across a larger customer base. The loss of one or
more large customers, a significant reduction in spending by such customers, or a change negatively
affecting the business prospects of the telecommunications industry, could have a material adverse
affect on our business, financial condition and results of operations.
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 and timing of revenue recognition.
In recent years we have sought to add large communication service providers as customers for
our products, software and services. Our future success will depend on our ability to maintain and
expand our sales to existing customers and add new customers. Many of our competitors have
long-standing relationships with communications service providers, which can pose significant
obstacles to our sales efforts. Sales to large communications service providers typically involve
lengthy sales cycles, protracted or difficult contract negotiations, and extensive product testing
and network certification. We are sometimes required to assume terms or conditions that negatively
affect pricing, payment and the timing of revenue recognition in order to consummate a sale. This
may negatively affect the timing of revenue recognition, which would, in turn, negatively affect
our results of operations. Communications service providers may ultimately insist upon terms and
conditions that we deem too onerous or not in our best interest. Moreover, our customers are
typically not contractually obligated to purchase a certain amount of products or services from us
and often have the right to reduce, delay or even cancel previous orders. As a result, we may incur
substantial expenses and devote time and resources to potential relationships that never
materialize or result in lower than anticipated sales.
We may invest development resources in products or technologies for which market demand is lower than anticipated.
The market for communications networking equipment is characterized by rapidly evolving
technologies and changes in market demand. To succeed in this market, we must continue to invest in
research and development to enhance our existing products and create new ones. There is often a
significant time between beginning a new development initiative and bringing the new or revised
product to market, and during this time technology or the market may move in directions we did not
anticipate. There is a significant probability, 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. 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. Product development investment decisions are difficult and there is no assurance
that we will be successful. If we fail to make prudent research and development investments, our
competitive position may suffer and the growth of our business and revenues could be harmed.
Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of new products, and enhancements to existing products, are
complicated and often involve problems with software, components and manufacturing methods. Due to
the complexity of these products, some of them can be fully tested only when deployed in
communications networks or with other equipment. We have introduced new or upgraded products in
recent quarters 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. Modifying our products to enable customers to integrate them into a new type of
network architecture entails similar risks. If significant reliability, quality, or network
monitoring problems develop as a result of our product development, manufacturing or integration, a
number of negative effects on our business could result, including:
|
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|
increased costs associated with addressing software or hardware
defects, including service and warranty expenses; |
14
|
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payment of liquidated damages for performance failures or delays; |
|
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high inventory obsolescence 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. |
Because we outsource manufacturing to contract manufacturers and use a direct order
fulfillment model for certain of our products, we may be subject to product performance problems
resulting from the acts or omissions of these third parties. These product performance problems
could damage our business reputation and negatively affect our results of operations.
We may be required to write off significant amounts of inventory.
In recent years, we have placed the majority of our orders to manufacture components or
complete assemblies for many of our products only when we have firm orders from our customers.
Because this practice can result in delays in the delivery of products to customers and place us at
a competitive disadvantage, we now order equipment and components from our contract manufacturers
and suppliers based on forecasts of customer demand across all of our products. We believe this
change is necessary in response to increased customer insistence upon shortened delivery terms.
This change in our inventory purchases exposes us to the risk that our customers 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 may 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. In such cases, we may be required to write off inventory. We
may also be required to write off inventory as a result of the effect of environmental regulations
such as the Restriction of the Use of Certain Hazardous Substances (RoHS), adopted by the
European Union. As a result of previous component purchases
that we based on forecasted sales, we currently hold inventory that includes non-compliant
components. If we are unable to locate alternate demand for these non-compliant components outside
of the European Union, we may be required to write off or write down this inventory. If we are
required to write off, or write down inventory, it may result in an accounting charge that could
materially affect our results of operations for the quarter in which such charge occurs.
Continued 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 product portfolio, increased our use of contract manufacturers and
increased our product sales in recent years manufacturing capacity and supply constraints related
to components and subsystems have become increasingly significant issues for us. We have
encountered and continue to experience component shortages that have affected our operations and
ability to deliver products to customers 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 the Restriction of the Use of Certain Hazardous
Substances (RoHS) adopted by the European Union, have resulted in increased demand for compliant
components from suppliers. 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 persist
or worsen, 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 manufacturing capacity adequate to meet our needs, 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.
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, and federal, state and
local governments. We have less experience in these
15
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. Because we have only limited experience in
developing and managing such channels, we may not be successful in reaching additional customer
segments, expanding into new geographic regions, or reducing the financial risks of 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 debarment from 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.
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 product and could affect customer acceptance of
the product. Unexpected intellectual property disputes, failure of critical design elements, and a
host of other execution risks may delay or even prevent the introduction of these products. Our
development efforts may also be affected, particularly in the near term, by our decision to
restructure development functions around technology sets rather than product lines or
location-specific development. In addition, we expect to increase hiring of personnel for our
development facility in India and expand research and development activity. Modification of
research and development strategies and changes in allocation of resources could 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 to ensure that our product
requirements are met timely and effectively.
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 product 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. It is possible that we may not effectively
manage these contract manufacturer transitions. Moreover, new contract manufacturers may not
perform as well as expected. As a result, we experience risks associated with lead times, on time
delivery and quality assurance that could harm our business. 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 a limited number of suppliers, and for some items we do not have a substitute
supplier.
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, and in
some cases, that source also is a competitor. As a result of this concentration in our supply
chain, particularly for optical components, our business and operations would be negatively
affected if our suppliers were to experience any significant disruption affecting the price,
quality, availability or timely delivery of components. The loss of a source of key components
could require us to re-engineer 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.
16
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 expect to increasingly rely upon third
party service delivery partners for the installation of our equipment in larger network builds,
which often include more onerous installation, testing and acceptance terms. In order to ensure
that we timely install our products and satisfy obligations to our customers, we must identify,
train and certify additional appropriate partners. The certification of these partners can be
costly and time-consuming, and these partners service products for other companies, including our
competitors. We may not be able to effectively manage our relationships with our partners and we
cannot be certain that they will be able to deliver our 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 in cases where revenue recognition is
dependent upon product installation, testing and acceptance; |
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our services revenue may be adversely affected; and |
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|
our relationship with customers could suffer. |
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.
Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. This is likely to become an increasingly
important issue as we expand our product development into India and the manufacture of products and
components to 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 products is difficult, and we cannot be certain that the steps that we are
taking will prevent unauthorized use of our technology. 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 royalties, enter into license agreements and/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 development operation in India to pursue offshore development resources and are
increasingly relying upon overseas suppliers, particularly in Asia, for materials sourcing of
components and contract manufacturing of our products. We expect that our international activities
will be dynamic during fiscal 2007, and we may enter new markets and withdraw from or reduce
operations in others. These changes to our international operations will require significant
management attention and financial resources. 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, and our future results could be
adversely affected by a number of factors, including:
|
|
|
greater difficulty in collecting accounts receivable and longer collection periods; |
|
|
|
|
difficulties and costs of staffing and managing foreign operations; |
|
|
|
|
the impact of recessions in economies outside the United States; |
|
|
|
|
reduced protection for intellectual property rights in some countries; |
17
|
|
|
adverse tax consequences; |
|
|
|
|
social, political and economic instability; |
|
|
|
|
trade protection measures, export compliance, qualification to transact business and other regulatory requirements; |
|
|
|
|
effects of changes in currency exchange rates; and |
|
|
|
|
natural disasters and epidemics. |
Our efforts to offshore certain development resources and operations to India may not be successful
and may expose us to unanticipated costs or liabilities.
We have established a development operation in India and expect to increase hiring of
personnel for this facility during fiscal 2007. We have limited experience in offshoring our
business functions, particularly development operations, and there is no assurance that our plan
will enable us to achieve meaningful cost reductions or greater resource efficiency. Further,
offshoring to India involves significant risks, including:
|
|
|
difficulty hiring and retaining appropriate engineering resources due to increased
competition for such resources; |
|
|
|
|
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; |
|
|
|
|
heightened exposure to changes in the economic, security and political conditions of India; |
|
|
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|
currency exchange and tax risks associated with offshore operations; and |
|
|
|
|
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 associated with offshoring could
expose us to increased expense, impair our development efforts, harm our competitive position and
damage our reputation. Our efforts to offshore certain development resources to India could be
disruptive to our business and may cause us to incur substantial unanticipated costs or expose us
to unforeseen liabilities.
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.
Industry and economic conditions have weakened the financial position of some of our
customers. To sell to some of these customers, we may be required to take risks of uncollectible
accounts. We may be exposed to similar risks relating to third party resellers and other sales
channel partners, as we intend to increasingly utilize such parties as we enter into new
geographies, particularly in Europe. 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 would 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.
We have taken several 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 continue to make changes to our operations and allocation of
resources in order to improve efficiency and match our resources with market opportunities. These
changes could be disruptive to our business. In addition, our efforts in prior periods to reduce
cost and improve efficiency have resulted 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
restructuring efforts, our results of operations would be adversely affected in such period.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business
effectively.
18
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. We have
informed employees that we will not be issuing equity awards as broadly or at the same level as
historical stock option grants. If we are unable to attract and retain qualified personnel, we may
be unable to manage our business effectively.
We may be required to assume warranty, service, development and other unexpected obligations in
connection with our resale of complementary products of other companies.
We have entered into agreements with strategic partners that permit us to distribute the
products of other companies. As part of our strategy to diversify our product portfolio and
customer base, we may enter into additional resale and original equipment manufacturer agreements
in the future. To the extent we succeed in reselling the products of these companies, we may be
required by customers to assume certain warranty, service and development obligations. While our
suppliers often agree to support us with respect to these obligations, we may be required to extend
greater protection in order to effect a sale. Moreover, some of the companies whose products we
resell are relatively small companies with limited financial resources. If they are unable to
satisfy these obligations, we may have to expend our own resources to do so. This risk is amplified
because the equipment that we are selling has been designed and manufactured by other third parties
and may be subject to warranty claims, the magnitude of which we are unable to evaluate fully. We
may be required to assume warranty, service, development and other unexpected obligations in
connection with our resale of complementary products of other companies.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make strategic investments in other companies to add or expand the markets
we address and diversify our customer base. We may also engage in these transactions to acquire or
accelerate the development of products incorporating new technologies sought after by our
customers. To do so, we may use cash, issue equity that would dilute our current shareholders
ownership, incur debt or assume indebtedness. Strategic investments and acquisitions involve
numerous risks, including:
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|
|
difficulties in integrating the operations, technologies and products of the acquired companies; |
|
|
|
|
diversion of managements attention; |
|
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|
|
potential difficulties in completing projects of the acquired company and costs related to in-process projects; |
|
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|
the potential loss of key employees of the acquired company; |
|
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|
|
subsequent amortization expenses related to intangible assets and charges associated with impairment of goodwill; |
|
|
|
|
ineffective internal controls over financial reporting for purposes of Section 404 of the Sarbanes-Oxley Act; |
|
|
|
|
dependence on unfamiliar supply partners; and |
|
|
|
|
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.
We may be required to take further write-downs of goodwill and other intangible assets.
As of October 31, 2006, 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, 2006, we had $91.3 million of other
intangible assets on our balance sheet. The amount primarily reflects purchased technology from our
acquisitions. At October 31, 2006, goodwill and other intangible assets represented approximately
17.6% 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
19
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 earnings per share or
net loss per share could be materially adversely affected in such period.
We may be adversely affected by fluctuations in currency exchange rates.
Historically, our primary exposure to currency exchange rates has been related to non-U.S.
dollar denominated operating expenses in Europe, Asia and Canada where we sell primarily in U.S.
dollars. As we increase our international sales and utilization of international suppliers, we
expect to 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 result in reduced revenue and operating profit and
reduce the value of our local inventory presented in our financial statements. In addition,
fluctuations in foreign currency exchange rates may make our products more expensive for customers
to purchase or increase our operating costs, thereby adversely affecting our competitiveness. To
date, we have not significantly hedged against foreign currency fluctuations; however, we may
pursue hedging alternatives in the future. Although exposure to currency fluctuations to date has
not had an adverse effect on our business, 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.
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. Such report must also contain a statement that our independent
registered public accounting firm has issued an attestation report on managements assessment of
such internal controls.
We initially became subject to these requirements for our fiscal year ended October 31, 2005.
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 infrastructure, including our 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, and any modifications necessary to reflect changes in our business, 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 are unable
to assert that our internal controls over financial reporting are effective (or if our independent
registered public accounting firm is unable to attest that our managements report is fairly stated
or they are unable to express an opinion on our managements assessment of the effectiveness of
internal controls over financial reporting), 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.
Our business is dependent upon the proper functioning of our information systems and upgrading
these systems may result in disruption to our 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 expect to implement a new version
of our Oracle management information system during fiscal 2007. As a result of these changes, we
anticipate that we will have to modify a number of our operational processes and internal control
procedures to conform to the work-flows of new or upgraded information systems. We will also have
to undergo a process of validating the data in any new system to ensure its integrity and will need
to train our personnel. We cannot assure you that these changes to our information systems will
occur without some level of disruption of our operating processes and controls. Any material
disruption, malfunction or similar problems with our information systems could negatively impact
our business operations.
Obligations associated with our outstanding indebtedness on our convertible notes may adversely
affect our business.
At October 31, 2006, indebtedness on our outstanding 3.75% Convertible Notes, due February 1,
2008 and 0.25%
20
Convertible Senior Notes due May 1, 2013 totaled $842.3 million in aggregate
principal. Our indebtedness and repayment obligations could have important negative consequences,
including:
|
|
|
increasing our vulnerability to general adverse economic and industry conditions; |
|
|
|
|
limiting our ability to obtain additional financing; |
|
|
|
|
reducing the availability of cash resources available for other purposes, including capital expenditures; |
|
|
|
|
limiting our flexibility in planning for, or reacting to, changes in our business and
the industry in which we compete; and |
|
|
|
|
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. Our repayment obligations associated with our convertible notes
may adversely affect our business.
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. Volatility in our common stock price and liquidity in our common stock may also
be negatively affected by the one-for-seven reverse stock split of our common stock completed on
September 22, 2006.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of October 31, 2006, all of our properties are leased. Our principal executive offices are
located in Linthicum, Maryland. We lease twenty-four facilities related to our ongoing operations.
These include four buildings located at various sites near Linthicum, Maryland, including an
engineering facility, two manufacturing facilities, and one administrative and sales facility. We
also have engineering and/or service facilities located in Alpharetta, Georgia; Acton,
Massachusetts; and Kanata, Canada. During fiscal 2006, we commenced operations of our development
facility in Gurgaon, India and a manufacturing support office in Shenzhen, Peoples Republic of
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, 2006, our
accrued restructuring liability related to these properties was $35.6 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 Item 8. Financial Statements and
Supplementary Data.
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.
21
Thereafter, on September 19, 2006, Litton Systems filed a status
report in which it requested that the district court lift the stay of the case, which request was
denied by the district court on October 13, 2006. We believe that we have valid defenses to the
lawsuit and intend to defend it vigorously in the event the stay of the case is lifted.
As a result of our merger with ONI Systems Corp. in June 2002, we 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, if approved, 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 does 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 directed
the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005,
the district court issued a preliminary order approving the revised stipulated settlement agreement, and approving and setting
dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006,
at which time the court took the matter under advisement. If the court determines that the settlement is fair
to the class members, the settlement will be approved. 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. Because the settlement
agreement involves certification of a settlement class as part of the approval process, the impact of the
Second Circuits decision on the settlement remains unclear.
In addition to the matters described above, we are subject to various legal proceedings,
claims and litigation arising in the ordinary course of business. While the outcome of these
matters is currently not determinable, 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 2006.
PART II
Item 5. Market for Registrants Common Stock and Related Stockholder Matters
(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.
22
|
|
|
|
|
|
|
|
|
|
|
Price Range of Common Stock |
|
|
High |
|
Low |
Fiscal Year 2005 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
24.50 |
|
|
$ |
15.40 |
|
Second Quarter ended April 30 |
|
$ |
20.65 |
|
|
$ |
11.48 |
|
Third Quarter ended July 31 |
|
$ |
18.55 |
|
|
$ |
14.35 |
|
Fourth Quarter ended October 31 |
|
$ |
20.30 |
|
|
$ |
14.28 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
28.77 |
|
|
$ |
16.31 |
|
Second Quarter ended April 30 |
|
$ |
39.34 |
|
|
$ |
26.04 |
|
Third Quarter ended July 31 |
|
$ |
33.67 |
|
|
$ |
23.38 |
|
Fourth Quarter ended October 31 |
|
$ |
30.87 |
|
|
$ |
23.08 |
|
As of December 15, 2006, there were
approximately 1,958 holders of record of Cienas
common stock and 84,939,780 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.
In connection with the reverse stock split of its common shares described above, through its
transfer agent, Ciena sold 1,011 shares of its common stock on October 9, 2006. The sale resulted
in proceeds of approximately $27,500, which were used to fund the payment to shareholders of record
of cash in lieu of fractional shares resulting from the reverse stock split. The sale of these
shares was exempt from registration pursuant to Rule 236 of the Securities Act of 1933, as amended.
(b) Not applicable.
(c) Not applicable.
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. Each fiscal year in the tables below
comprised 52 weeks.
On September 22, 2006, we effected a one-for-seven reverse stock split of our authorized and
outstanding common stock. Pursuant to the reverse stock split, each seven shares of authorized and
outstanding common stock was reclassified and combined into one share of new common stock. All
references to share and per-share data for all periods presented have been adjusted to give effect
to the reverse stock split.
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, |
|
|
(in thousands) |
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
Cash, cash equivalents, short- and long-term investments |
|
$ |
2,069,812 |
|
|
$ |
1,611,467 |
|
|
$ |
1,268,823 |
|
|
$ |
1,093,487 |
|
|
$ |
1,199,964 |
|
Total assets |
|
|
2,751,022 |
|
|
|
2,378,165 |
|
|
|
2,137,054 |
|
|
|
1,675,229 |
|
|
|
1,839,713 |
|
Long-term obligations, excluding current portion |
|
|
999,935 |
|
|
|
861,149 |
|
|
|
824,053 |
|
|
|
761,398 |
|
|
|
924,484 |
|
Stockholders equity |
|
$ |
1,527,269 |
|
|
$ |
1,330,817 |
|
|
$ |
1,154,422 |
|
|
$ |
735,367 |
|
|
$ |
753,626 |
|
23
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
(in thousands, except per share data) |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Revenue |
|
$ |
361,155 |
|
|
$ |
283,136 |
|
|
$ |
298,707 |
|
|
$ |
427,257 |
|
|
$ |
564,056 |
|
Cost of goods sold |
|
|
596,034 |
|
|
|
210,091 |
|
|
|
226,954 |
|
|
|
291,067 |
|
|
|
306,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(234,879 |
) |
|
|
73,045 |
|
|
|
71,753 |
|
|
|
136,190 |
|
|
|
257,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
255,291 |
|
|
|
212,523 |
|
|
|
205,364 |
|
|
|
137,245 |
|
|
|
111,069 |
|
Selling and marketing |
|
|
133,836 |
|
|
|
105,921 |
|
|
|
112,310 |
|
|
|
115,022 |
|
|
|
104,434 |
|
General and administrative |
|
|
53,704 |
|
|
|
39,703 |
|
|
|
28,592 |
|
|
|
33,715 |
|
|
|
47,476 |
|
Amortization of intangible assets |
|
|
8,972 |
|
|
|
17,870 |
|
|
|
30,839 |
|
|
|
38,782 |
|
|
|
25,181 |
|
In-process research and development |
|
|
|
|
|
|
2,800 |
|
|
|
30,200 |
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
98,093 |
|
|
|
13,575 |
|
|
|
57,107 |
|
|
|
18,018 |
|
|
|
15,671 |
|
Goodwill impairment |
|
|
557,286 |
|
|
|
|
|
|
|
371,712 |
|
|
|
176,600 |
|
|
|
|
|
Long-lived asset impairment |
|
|
127,336 |
|
|
|
47,176 |
|
|
|
15,926 |
|
|
|
45,862 |
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,648 |
) |
Recovery of sale, export, use tax liabilities and payments |
|
|
|
|
|
|
|
|
|
|
(5,388 |
) |
|
|
|
|
|
|
|
|
Provision (benefit) for doubtful accounts |
|
|
14,813 |
|
|
|
|
|
|
|
(2,794 |
) |
|
|
2,602 |
|
|
|
(3,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,249,331 |
|
|
|
439,568 |
|
|
|
843,868 |
|
|
|
567,846 |
|
|
|
289,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1,484,210 |
) |
|
|
(366,523 |
) |
|
|
(772,115 |
) |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
Interest and other income, net |
|
|
64,173 |
|
|
|
45,987 |
|
|
|
25,936 |
|
|
|
31,294 |
|
|
|
50,245 |
|
Interest expense |
|
|
(48,367 |
) |
|
|
(39,359 |
) |
|
|
(29,841 |
) |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
Loss on equity investments, net |
|
|
(15,677 |
) |
|
|
(4,760 |
) |
|
|
(4,107 |
) |
|
|
(9,486 |
) |
|
|
215 |
|
Gain (loss) on extinguishment of debt |
|
|
(2,683 |
) |
|
|
(20,606 |
) |
|
|
(8,216 |
) |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes |
|
|
(1,486,764 |
) |
|
|
(385,261 |
) |
|
|
(788,343 |
) |
|
|
(434,379 |
) |
|
|
1,976 |
|
Provision for income taxes |
|
|
110,735 |
|
|
|
1,256 |
|
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(1,597,499 |
) |
|
$ |
(386,517 |
) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(30.62 |
) |
|
$ |
(6.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
(30.62 |
) |
|
$ |
(6.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
52,172 |
|
|
|
63,814 |
|
|
|
74,493 |
|
|
|
82,170 |
|
|
|
83,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
52,172 |
|
|
|
63,814 |
|
|
|
74,493 |
|
|
|
82,170 |
|
|
|
85,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements Discussion and Analysis of Financial Condition and Results of Operations
contains statements that discuss future events or expectations, contain projections of results of
operations or financial condition, changes in the markets for our products and services, or state
other forward-looking information. Cienas 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 Cienas securities. Ciena undertakes no
obligation to revise or update any forward-looking statements. The following discussion and
analysis should be read in conjunction with Selected Consolidated Financial Data and Cienas
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 delivery and transport of voice, video and data services. Our products are used in
communications networks operated by telecommunications service providers, cable operators,
governments and enterprises across the globe. We specialize in transitioning legacy communications
networks to converged, next-generation architectures, capable of efficiently delivering a broader
mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated services offerings, our optical, data and broadband access platforms create business and
operational value for our customers.
Over the past fiscal year, Ciena generated significant revenue growth. We also improved our
gross margin and reduced our operating costs over the prior fiscal year. Our steady progress along
these fronts has resulted in an important milestone for our business and financial results. For the
fourth quarter of fiscal 2006, Ciena had net income of $13.1 million, or $0.14 per diluted share,
representing the achievement of quarterly profitability on a GAAP basis for the first time since
the third quarter of 2001. These quarterly results enabled us to achieve net income of $0.6
million, or $0.01 per diluted share for fiscal 2006.
Revenue was $160.0 million for the fourth quarter of fiscal 2006, representing our eleventh
consecutive sequential quarterly increase. Revenue increased 32.0% from $427.3 million in fiscal
2005 to $564.1 million in fiscal 2006. Revenue growth continues to be driven, in substantial part,
by customers transitioning legacy networks to next-generation networks better able to address a
broader mix of traffic types and services. In addition, increased broadband usage by end users
continues to fuel demand for our products as service providers address network capacity
requirements. We expect that current market conditions will enable further growth of our business,
including opportunities for sales of our metro transport and switching products, particularly for
Ethernet-driven applications. Our percentage of international revenue increased from $86.5 million,
or 20.2% of total revenue in fiscal 2005, to $140.4 million, or 24.9% of total revenue in fiscal
2006. As a result of our participation in BT network builds, including their 21st
Century Network project, or 21CN, and other international network projects, we expect our
international sales to continue to increase in fiscal 2007 and be a significant contributor to our
growth. While we believe that current market conditions will enable us to continue to grow our
revenue during fiscal 2007, our business remains susceptible to fluctuation from quarter to quarter
due to 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.
Sprint, Verizon and AT&T each accounted for greater than 10% of our fiscal 2006 revenue, and
40.2% in the aggregate. BellSouth, Verizon and SAIC each accounted for greater than 10% of our
fiscal 2005 revenue, and 31.3% in the aggregate. Our concentration in revenue increased during
fiscal 2006 largely due to the effect of mergers involving some of our largest customers. The
telecommunications industry has experienced substantial consolidation, including the mergers of
Verizon and MCI, and SBC and AT&T during our fiscal 2006. Each of these companies has been a
significant customer during prior periods. In addition, AT&T completed its acquisition of BellSouth
in December 2006. As a result, AT&T is likely to represent a greater percentage of our revenue in
fiscal 2007.
Improving gross margin was a significant focus for us during fiscal 2006. Gross margin for
fiscal 2006 was 45.7%, up from 31.9% in fiscal 2005. Increased gross margin during fiscal 2006
reflects favorable product mix, product cost reductions
25
and improved manufacturing efficiencies. To
the extent we encounter increased pricing pressure during fiscal 2007, achieving further product
cost improvements will be important for us to maintain the gross margin levels attained during
fiscal 2006. To
continue to drive these product cost reductions, we are emphasizing a global approach to
sourcing components and manufacturing our products, and are increasingly utilizing overseas
suppliers in lower cost regions, particularly in Asia. While we experienced improved gross margin
stability during fiscal 2006, gross margin may be susceptible to fluctuation in fiscal 2007 due to
product and customer mix, our ability to drive further product cost reductions and pricing
pressure.
Operating expense decreased from $301.8 million in the fourth quarter of fiscal 2005 to $68.9
million in the fourth quarter of fiscal 2006. Operating expense decreased from $567.8 million in
fiscal 2005 to $289.2 million in fiscal 2006. During the fourth quarter of fiscal 2005, we incurred
aggregate charges of $222.3 million associated with impairment of goodwill and long-lived assets.
Exclusive of these impairment charges, the steps we have taken to improve operational efficiencies
enabled us to reduce our operating expense during fiscal 2006. We expect quarterly operating
expense to increase from the fourth quarter of fiscal 2006 during fiscal 2007 as we fund the growth
of our business through research and development initiatives, increased hiring and the expansion of
our development operations in India. While we expect operating expense to increase, reducing these
expenses as a percentage of revenue will be critical if we are to maintain and build upon the
profitable operating results achieved in fiscal 2006.
During fiscal 2006, we completed a public offering of 0.25% Convertible Senior Notes due May
1, 2013, in aggregate principal amount of $300.0 million. This offering resulted in proceeds of
$263.6 million, net of offering expenses, underwriting discounts and the $28.5 million cost of a
call spread option purchased by Ciena. During fiscal 2006, we also repurchased $106.5 million of
our outstanding 3.75% convertible notes, due February 1, 2008, 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. At October 31, 2006, the remaining principal balance on
our outstanding 3.75% convertible notes was $542.3 million. Additional information regarding our
outstanding convertible notes can be found in Note 12 to the Consolidated Financial Statements
under Item 8 of Part II of this annual report.
During fiscal 2006, we eliminated our former business units and discontinued reporting our
results of operations on a historical operating segment basis. Cienas financial results for fiscal
2006 are reported in this annual report as a single business segment. Financial results for fiscal
2006 also represent our first full fiscal year reflecting the effect of our adoption of Statement
of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. SFAS 123(R) requires
that we recognize compensation expense on our consolidated statement of operations for all
share-based awards made to employees and directors based on estimated fair values. We adopted SFAS
123(R) using the modified prospective application transition method, and accordingly have not
restated financial statements for prior periods to include the impact of SFAS 123(R). Share-based
compensation was $14.0 million during fiscal 2006, of which $0.3 million was capitalized as part of
inventory. Additional information regarding our adoption of SFAS 123(R) is set forth in the Note 16
to the Consolidated Financial Statements under Item 8 of Part II of this annual report and in
Critical Accounting Policies and Estimates below.
Results of Operations
Fiscal 2005 compared to Fiscal 2006
Revenue, cost of goods sold and gross profit
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.
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost
of goods sold and gross profit from fiscal 2005 to fiscal 2006.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from fiscal 2005 to fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from fiscal 2005 to fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
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 from fiscal
2005 to fiscal 2006.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
During fiscal 2005 and fiscal 2006, certain customers accounted for 10% or more of our
revenue during the respective periods as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from fiscal 2005 to fiscal 2006, primarily due to 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 CoreDirector®
Multiservice Switch. |
|
|
|
|
Service revenue increased from fiscal 2005 to fiscal 2006, 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 from fiscal 2005 to fiscal 2006, primarily due
to a $38.1 million increase in sales from our core transport products, a $30.7 million
increase in sales from our CoreDirector® Multiservice Switch, and a $15.9 million increase
from sales our CN 4200 FlexSelect Advanced Services Platform. |
|
|
|
|
International revenue increased from fiscal 2005 to fiscal 2006, primarily due
to a $32.4 million increase in sales from our CN 4200 FlexSelect Advanced Services
Platform and a $10.9 million increase in sales from our multiservice optical access
products. |
Gross profit
|
|
|
Gross profit as a percentage of revenue increased from fiscal 2005 to fiscal
2006 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 from
fiscal 2005 to the fiscal 2006, primarily due to cost reductions and higher margin product
mix. |
|
|
|
|
Gross profit on services as a percentage of services revenue increased from
fiscal 2005 to fiscal 2006, primarily due to service rate stability in connection with our
deployment services and reduced service overhead and deployment costs. |
28
Operating expenses
The table below (in thousands, except percentage data) sets forth the changes in operating
expenses from fiscal 2005 to fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from fiscal 2005 to fiscal 2006,
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. We expect research and development expense
to increase during fiscal 2007 as a result of increased development activity, offset to
some extent by cost efficiencies from our India development operations. |
|
|
|
|
Selling and marketing expense decreased from fiscal 2005 to fiscal 2006 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. We also expect sales and marketing expense to
increase during fiscal 2007 as we continue to grow our revenue. |
|
|
|
|
General and administrative expense increased from fiscal 2005 to fiscal 2006
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 costs decreased from fiscal 2005 to fiscal
2006 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. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
from fiscal 2005 to fiscal 2006.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from fiscal 2005 to fiscal 2006 primarily
due to higher interest rates. |
|
|
|
|
Interest expense decreased from fiscal 2005 to fiscal 2006 due to the
repurchase of a portion of our outstanding 3.75% convertible notes during fiscal 2005 and
fiscal 2006. |
|
|
|
|
Gain (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 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. |
Fiscal 2004 compared to Fiscal 2005
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 from fiscal 2004 to fiscal 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
250,210 |
|
|
|
83.8 |
|
|
$ |
374,275 |
|
|
|
87.6 |
|
|
$ |
124,065 |
|
|
|
49.6 |
|
Services |
|
|
48,497 |
|
|
|
16.2 |
|
|
|
52,982 |
|
|
|
12.4 |
|
|
|
4,485 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
298,707 |
|
|
|
100.0 |
|
|
|
427,257 |
|
|
|
100.0 |
|
|
|
128,550 |
|
|
|
43.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
186,461 |
|
|
|
62.4 |
|
|
|
248,931 |
|
|
|
58.2 |
|
|
|
62,470 |
|
|
|
33.5 |
|
Services |
|
|
40,493 |
|
|
|
13.6 |
|
|
|
42,136 |
|
|
|
9.9 |
|
|
|
1,643 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
226,954 |
|
|
|
76.0 |
|
|
|
291,067 |
|
|
|
68.1 |
|
|
|
64,113 |
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
71,753 |
|
|
|
24.0 |
|
|
$ |
136,190 |
|
|
|
31.9 |
|
|
$ |
64,437 |
|
|
|
89.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit from fiscal 2004 to fiscal 2005
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
250,210 |
|
|
|
100.0 |
|
|
$ |
374,275 |
|
|
|
100.0 |
|
|
$ |
124,065 |
|
|
|
49.6 |
|
Product cost of goods sold |
|
|
186,461 |
|
|
|
74.5 |
|
|
|
248,931 |
|
|
|
66.5 |
|
|
|
62,470 |
|
|
|
33.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
63,749 |
|
|
|
25.5 |
|
|
$ |
125,344 |
|
|
|
33.5 |
|
|
$ |
61,595 |
|
|
|
96.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
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) from fiscal 2004 to fiscal
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
48,497 |
|
|
|
100.0 |
|
|
$ |
52,982 |
|
|
|
100.0 |
|
|
$ |
4,485 |
|
|
|
9.2 |
|
Service cost of goods sold |
|
|
40,493 |
|
|
|
83.5 |
|
|
|
42,136 |
|
|
|
79.5 |
|
|
|
1,643 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
8,004 |
|
|
|
16.5 |
|
|
$ |
10,846 |
|
|
|
20.5 |
|
|
$ |
2,842 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
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 from fiscal 2004 to fiscal 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
221,456 |
|
|
|
74.1 |
|
|
$ |
340,774 |
|
|
|
79.8 |
|
|
$ |
119,318 |
|
|
|
53.9 |
|
International |
|
|
77,251 |
|
|
|
25.9 |
|
|
|
86,483 |
|
|
|
20.2 |
|
|
|
9,232 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
298,707 |
|
|
|
100.0 |
|
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
128,550 |
|
|
|
43.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
During fiscal 2004 and fiscal 2005, certain customers each accounted for at least 10% of our
revenue during the respective periods as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
Verizon |
|
$ |
N/A |
|
|
|
|
|
|
$ |
43,673 |
|
|
|
10.2 |
|
BellSouth |
|
|
N/A |
|
|
|
|
|
|
|
43,946 |
|
|
|
10.3 |
|
SAIC |
|
|
46,557 |
|
|
|
15.6 |
|
|
|
46,058 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,557 |
|
|
|
15.6 |
|
|
$ |
133,677 |
|
|
|
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
Denotes revenues recognized less than 10% for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased from fiscal 2004 to fiscal 2005 due to a $51.4
million increase in sales of broadband access systems obtained from our May 2004
acquisition of Catena Networks, a $36.5 million increase in sales from our core transport
products, a $12.0 million increase in sales of our metro transport and switching products,
an |
31
|
|
|
$11.1 million increase in sales of our data networking products, and a $9.6 million
increase in sales of our CoreDirector® Multiservice Switch. As a result of the timing of
our acquisitions of Catena and IPI, product revenue for fiscal 2004 reflects only two
quarters of revenue from these acquired products. |
|
|
|
Service revenue increased from fiscal 2004 to fiscal 2005 due to a $2.4 million
increase in deployment services and a $1.6 million increase from sales of training in
fiscal 2005. |
|
|
|
|
|
United States revenue increased from fiscal 2004 to
fiscal 2005 due to a $51.2
million increase in sales of broadband access systems, a $19.0 million increase in sales of
our CoreDirector® Multiservice Switch, a $17.6 million increase in sales from our core
transport products, an $11.4 million increase in sales of our data networking products, a
$9.4 million increase in sales of our metro transport and switching products, and a $7.2
million increase in sales of deployment services, maintenance and support, and training. |
|
|
|
|
|
International revenue increased from fiscal 2004 to fiscal 2005 due an $18.9
million increase in sales from our core transport products, and a $ 2.6 million increase in
sales of our metro transport and switching products, partially offset by a $9.4 million
decrease in sales of our CoreDirector® Multiservice Switch and a $ 2.7 million decrease in
sales of deployment services, maintenance and support, and training. |
Gross profit
|
|
|
Gross profit as a percentage of revenue increased from fiscal 2004 to fiscal
2005 primarily due to improvements in product gross profit and to a lesser extent,
improvements in service margins. |
|
|
|
|
Product gross profit as a percentage of product revenue increased from fiscal
2004 to fiscal 2005 largely due to favorable product mix, including a full year of sales
of broadband access products in fiscal 2005, and product cost reductions and improved
manufacturing efficiencies. |
|
|
|
|
Service gross profit as a percentage of services revenue increased from fiscal
2004 to fiscal 2005 primarily due to increased sales of training and reduced service
overhead costs in fiscal 2005. |
Operating expenses
The table below (in thousands, except percentage data) sets forth the changes in operating
expenses from fiscal 2004 to fiscal 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
205,364 |
|
|
|
68.8 |
|
|
$ |
137,245 |
|
|
|
32.1 |
|
|
$ |
(68,119 |
) |
|
|
(33.2 |
) |
Selling and marketing |
|
|
112,310 |
|
|
|
37.6 |
|
|
|
115,022 |
|
|
|
26.9 |
|
|
|
2,712 |
|
|
|
2.4 |
|
General and administrative |
|
|
28,592 |
|
|
|
9.6 |
|
|
|
33,715 |
|
|
|
7.9 |
|
|
|
5,123 |
|
|
|
17.9 |
|
Amortization of intangible assets |
|
|
30,839 |
|
|
|
10.3 |
|
|
|
38,782 |
|
|
|
9.1 |
|
|
|
7,943 |
|
|
|
25.8 |
|
In-process research and development |
|
|
30,200 |
|
|
|
10.1 |
|
|
|
|
|
|
|
0.0 |
|
|
|
(30,200 |
) |
|
|
(100.0 |
) |
Restructuring costs |
|
|
57,107 |
|
|
|
19.1 |
|
|
|
18,018 |
|
|
|
4.2 |
|
|
|
(39,089 |
) |
|
|
(68.4 |
) |
Goodwill impairment |
|
|
371,712 |
|
|
|
124.4 |
|
|
|
176,600 |
|
|
|
41.3 |
|
|
|
(195,112 |
) |
|
|
(52.5 |
) |
Long-lived asset impairment |
|
|
15,926 |
|
|
|
5.3 |
|
|
|
45,862 |
|
|
|
10.7 |
|
|
|
29,936 |
|
|
|
188.0 |
|
Recovery of sale, export, use tax liabilities and payments |
|
|
(5,388 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
5,388 |
|
|
|
(100.0 |
) |
(Recovery of) provision for doubtful accounts, net |
|
|
(2,794 |
) |
|
|
(0.9 |
) |
|
|
2,602 |
|
|
|
0.6 |
|
|
|
5,396 |
|
|
|
(193.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
843,868 |
|
|
|
282.5 |
|
|
$ |
567,846 |
|
|
|
132.9 |
|
|
$ |
(276,022 |
) |
|
|
(32.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
|
|
|
Research and development expense decreased from fiscal 2004 to fiscal 2005
primarily due to $22.5 million of accelerated leasehold amortization recorded in fiscal
2004 with no comparable expense in fiscal 2005. This reduction of expense also included a
reduction of $15.6 million in employee-related costs, $9.9 million in depreciation expense,
$8.3 million in facility related costs, $7.2 million in consulting costs, and $3.4 million
in information systems costs during fiscal 2005. Cienas accelerated leasehold amortization
expense during fiscal 2004 was due to the closing of our San Jose, CA facility in September
2004. Employee-related expense reductions in 2005 reflect lower headcount from the closing
of our San Jose, CA facility and our further headcount reductions in fiscal 2005. |
32
|
|
|
Selling and marketing expense increased from fiscal 2004 to fiscal 2005 due to
an increase of $3.0 million related to customer demonstration systems, $1.1 million in
tradeshow and marketing activities, $1.4 million employee-related cost, and $0.6 million
consulting, partially offset by reductions in depreciation expense of $1.7 million and
reductions of information system expenses of $1.3 million. |
|
|
|
|
General and administrative expense increased from fiscal 2004 to fiscal 2005
primarily due to an increase of $2.6 million related to legal services, $1.7 million for
outside services related to Sarbanes-Oxley compliance, $1.2 million related to the
outsourcing of certain accounting services for our international operations, and $1.3
million information systems. This was partially offset by a reduction of $1.9 million in
employee-related costs. |
|
|
|
|
Amortization of intangible assets costs increased from fiscal 2004 to fiscal
2005 due to higher amounts of purchased intangible assets, such as developed technology
and customer relationships, resulting from our acquisitions of Catena Networks and
Internet Photonics in May 2004. As a result of the timing of these acquisitions,
amortization of intangible assets in fiscal 2004 reflects only two fiscal quarters
associated with these additional purchased intangible assets. |
|
|
|
|
In-process research and development (IPR&D) represents the estimated value of
purchased in-process technology that had not reached technological feasibility and had no
alternative future use at the time of acquisition. In the third quarter of fiscal 2004 we
recorded $25.0 million and $5.2 million of IPR&D from our Catena and Internet Photonics
acquisitions, respectively. We had no acquisitions in fiscal 2005. |
|
|
|
|
Restructuring costs decreased from fiscal 2004 to fiscal 2005. In 2005,
restructuring costs include an adjustment of $11.4 million related to previously
restructured facilities, due to lower expected sublease payments from the continued excess
supply of commercial property in certain markets where our unused facilities are located.
Restructuring costs for fiscal 2005 also include $6.6 million primarily related to
workforce reductions of approximately 177 employees. In 2004, restructuring costs included
$27.8 million, primarily related to the closure of our San Jose, CA facility. Restructuring
costs in 2004 also included $21.8 million related to workforce reductions of approximately
560 employees and adjustments of $7.5 million, related to previously restructured
facilities, associated with lower expected sublease payments and increased estimated
operating expenses. These workforce reductions were taken as part of our plan to reduce our
costs and align resources with market opportunities. |
|
|
|
|
Goodwill impairment decreased from fiscal 2004 to fiscal 2005. We incurred a
goodwill impairment of $176.6 million related to one of our former business units in
fiscal 2005. This impairment was related to our decision to suspend research and
development for our CN 1000 Next-Generation Broadband Access platform. We recorded a
goodwill impairment of $371.7 million related to three of our former business units in
fiscal 2004. This impairment was related to the decline in the forecasted demand for our
products, along with the reduction in valuations of comparable businesses. |
|
|
|
|
Long-lived assets impairment charges for fiscal 2005 were $45.9 million, and
were largely attributable to our decision to suspend research and development of our CN
1000 Next-Generation Broadband Access platform and market conditions affecting our
broadband access products. The impairment of long-lived assets in fiscal 2005 included
$45.7 million of intangible assets and $0.2 million of impaired research and development
equipment, which was classified as held for sale. During fiscal 2004, we recorded $15.9
million long-lived assets impairment, largely attributable to the closure of our San Jose,
CA facility. The impairment of long-lived assets in fiscal 2004 included $15.9 million of
impaired research and development equipment, which was classified as held for sale. |
|
|
|
|
Recovery of sales, export, use tax liabilities and payments during the fiscal
2004 was due to the resolution of a use tax audit related to assets acquired from ONI. |
|
|
|
|
(Recovery of) provision for doubtful accounts, net during fiscal 2005 was $2.6 million and
was related to one customer from which payment was deemed doubtful due to the customers
financial condition. During fiscal 2004, we recorded a recovery of doubtful accounts of
$2.8 million, related primarily to the receipt of payment from a customer from which
payment was previously deemed doubtful. We maintain an allowance for potential losses on a
specific identification basis. |
Other items
The
table below (in thousands, except percentage data) sets forth the changes in other items
from fiscal 2004 to fiscal 2005.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
2004 |
|
%* |
|
2005 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
25,936 |
|
|
|
8.7 |
|
|
$ |
31,294 |
|
|
|
7.3 |
|
|
$ |
5,358 |
|
|
|
20.7 |
|
Interest expense |
|
$ |
29,841 |
|
|
|
10.0 |
|
|
$ |
28,413 |
|
|
|
6.7 |
|
|
$ |
(1,428 |
) |
|
|
(4.8 |
) |
Loss on equity investments, net |
|
$ |
4,107 |
|
|
|
1.4 |
|
|
$ |
9,486 |
|
|
|
2.2 |
|
|
$ |
5,379 |
|
|
|
131.0 |
|
Gain (loss) on extingusihment of debt |
|
$ |
(8,216 |
) |
|
|
(2.8 |
) |
|
$ |
3,882 |
|
|
|
0.9 |
|
|
$ |
12,098 |
|
|
|
(147.2 |
) |
Provision for income taxes |
|
$ |
1,121 |
|
|
|
0.4 |
|
|
$ |
1,320 |
|
|
|
0.3 |
|
|
$ |
199 |
|
|
|
17.8 |
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from fiscal 2004 to fiscal 2005 |
|
|
|
Interest and other income, net increased from fiscal 2004 to fiscal 2005
because of higher rates of return on our investments. |
|
|
|
|
Interest expense decreased from fiscal 2004 to fiscal 2005 due to the decrease
in our outstanding debt obligations in fiscal 2005, resulting from our repurchase of all of
the remaining outstanding ONI 5.0% convertible subordinated notes during fiscal 2004 and
the repurchase of $41.2 million in principal amount of our 3.75% convertible notes during
the third quarter of fiscal 2005. |
|
|
|
|
Loss on equity investments, net increased from fiscal 2004 to fiscal 2005 due
to a further 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 during fiscal 2005 resulted from our repurchase
of $41.2 million of our outstanding 3.75% convertible notes, due February 1, 2008, in open
market transactions for $36.9 million. We 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. During fiscal
2004, we recorded an $8.2 million loss on the extinguishment of debt related to our
repurchase of all of the remaining ONI 5.0% convertible subordinated notes outstanding. |
|
|
|
|
Provision for income taxes for 2004 and 2005 was primarily attributable to
foreign tax related to Cienas foreign operations. We did not record a tax benefit for our
domestic losses during either period. We will continue to maintain a valuation allowance
against certain deferred tax assets until sufficient evidence exists to support its
reversal. |
Liquidity and Capital Resources
At October 31, 2006, our principal source of liquidity was cash and cash equivalents,
short-term investments and long-term investments. The following table summarizes our cash and cash
equivalents, short-term investments and long-term investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
October 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2006 |
|
|
(decrease) |
|
Cash and cash equivalents |
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
$ |
(137,848 |
) |
Short-term investments |
|
|
579,531 |
|
|
|
628,393 |
|
|
|
48,862 |
|
Long-term investments |
|
|
155,944 |
|
|
|
351,407 |
|
|
|
195,463 |
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, short-term and long-term investment |
|
$ |
1,093,487 |
|
|
$ |
1,199,964 |
|
|
$ |
106,477 |
|
|
|
|
|
|
|
|
|
|
|
The increase in total cash, cash equivalents and short-term and long-term investments during
fiscal 2006 was primarily related to our issuance on April 10, 2006 of $300.0 million in aggregate
principal amount of 0.25% Convertible Senior Notes due May 1, 2013, resulting in proceeds of $263.6
million, net of offering expenses, underwriting discounts and the $28.5 million cost of a call
spread option purchased by Ciena. This increase was partially offset by $98.4 million of cash used
to
repurchase a portion of our outstanding 3.75% convertible notes. Cash, cash equivalents and
short-term and long-term investments at October 31, 2006 also reflect $79.4 million of cash
consumed in operating activities during fiscal 2006. Based on past performance and current
expectations, we believe that our cash and cash equivalents, short-term investments, 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.
The following sections review the significant activities that had an impact on our cash during
fiscal 2006.
34
Operating Activities
The following tables set forth (in thousands) significant components of our $79.4 million of
cash used in operating activities for fiscal 2006.
Net income
|
|
|
|
|
|
|
Year Ended |
|
|
|
October 31, 2006 |
|
Net income |
|
$ |
595 |
|
|
|
|
|
Our net income for fiscal 2006 included the significant non-cash items summarized in the
following table (in thousands):
|
|
|
|
|
Gain on early extinguishment of debt |
|
$ |
(7,052 |
) |
Amortization of intangibles |
|
|
29,050 |
|
Share-based compensation costs |
|
|
14,042 |
|
Depreciation and amortization of leasehold improvements |
|
|
16,401 |
|
Provision for inventory excess and obsolescence |
|
|
9,012 |
|
Provision for warranty |
|
|
14,522 |
|
|
|
|
|
Total significant non-cash charges |
|
$ |
75,975 |
|
|
|
|
|
Accounts Receivable, Net
Cash consumed by accounts receivable, net increased from fiscal 2005 to fiscal 2006, due to
increased sales volume, contractual acceptance terms affecting the timing of our invoicing,
recognition of revenue and longer payment terms associated with our increased international
revenue. The increase in our accounts receivable caused our days sales outstanding (DSO) to
increase from 61 days for fiscal 2005 to 68 days for fiscal 2006. We expect that our accounts
receivable, net may fluctuate from quarter to quarter, but generally will increase during fiscal
2007, due to expected increased sales volume, and longer payment terms particularly related to our
international customers.
The following table sets forth (in thousands) changes to our accounts receivable, net of
allowance for doubtful accounts, balance from the end of fiscal 2005 to the end of fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
October 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2006 |
|
|
(decrease) |
|
Accounts receivable, net |
|
$ |
72,786 |
|
|
$ |
107,172 |
|
|
$ |
34,386 |
|
|
|
|
|
|
|
|
|
|
|
Inventory, Net
Cash consumed by inventory, net increased from the end of fiscal 2005 to the end of fiscal
2006, due to a combination of inventory purchased based on customer forecasts in advance of orders,
finished goods inventory located at customer facilities awaiting contractual acceptance and
contract manufacturer transitions to consolidate our supply chain and reduce product costs. As a
result, Cienas inventory turns declined from 5.0 turns per year for the period ending October 31,
2005 to 2.5 turns per year for the period ending October 31, 2006. Our cash consumed by inventory
has increased in recent quarters. We expect our inventory turns will increase during fiscal 2007.
The following table sets forth (in thousands) changes to the components of our inventory from
the end of fiscal 2005 through the end of fiscal 2006.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
October 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2006 |
|
|
(decrease) |
|
Raw materials |
|
$ |
21,177 |
|
|
$ |
29,627 |
|
|
$ |
8,450 |
|
Work-in-process |
|
|
3,136 |
|
|
|
9,156 |
|
|
|
6,020 |
|
Finished goods |
|
|
47,615 |
|
|
|
89,628 |
|
|
|
42,013 |
|
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
71,928 |
|
|
|
128,411 |
|
|
|
56,483 |
|
Reserve for excess and obsolescence |
|
|
(22,595 |
) |
|
|
(22,326 |
) |
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
Net inventory |
|
$ |
49,333 |
|
|
$ |
106,085 |
|
|
$ |
56,752 |
|
|
|
|
|
|
|
|
|
|
|
Restructuring and unfavorable lease commitments
During fiscal 2006, we paid $23.6 million in connection with a termination of our obligations
under leases for our former Fremont, CA and Cupertino, CA facilities. We paid an additional $9.5
million on leases related to restructured facilities and $9.3 million on leases associated with
unfavorable lease commitments. 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 2005 through the end of fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
October 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2006 |
|
|
(decrease) |
|
Restructuring liabilities |
|
$ |
15,492 |
|
|
$ |
8,914 |
|
|
$ |
(6,578 |
) |
Unfavorable lease commitments |
|
|
9,011 |
|
|
|
8,512 |
|
|
|
(499 |
) |
Long-term restructuring liabilities |
|
|
54,285 |
|
|
|
26,720 |
|
|
|
(27,565 |
) |
Long-term unfavorable lease commitments |
|
|
41,364 |
|
|
|
32,785 |
|
|
|
(8,579 |
) |
|
|
|
|
|
|
|
|
|
|
Total
restructuring liabilities and unfavorable lease commitments |
|
$ |
120,152 |
|
|
$ |
76,931 |
|
|
$ |
(43,221 |
) |
|
|
|
|
|
|
|
|
|
|
Interest Payable on Cienas Convertible Notes
Interest on Cienas outstanding 3.75% convertible notes, due February 1, 2008, is payable on
February 1st and August 1st of each year. During fiscal 2006, Ciena paid
$21.7 million in interest on the 3.75% convertible notes.
Interest on Cienas outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on
May 1st and November 1st of each year, commencing on November 1, 2006.
The following table reflects (in thousands) the balance of interest payable and the change in
this balance from the end of fiscal 2005 through the end of fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
October 31, |
|
Increase |
|
|
2005 |
|
2006 |
|
(decrease) |
Accrued interest payable |
|
$ |
6,082 |
|
|
$ |
5,502 |
|
|
$ |
(580 |
) |
Financing Activities
Cash provided by financing activities during fiscal 2006 was primarily related to a public
offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggregate principal amount of $300.0
million that was completed during the second quarter of fiscal 2006. Associated with the offering,
we purchased a call spread option on our common stock for $28.5 million and paid debt issuance
costs of $7.9 million. During fiscal 2006, we also repurchased $106.5 million of our outstanding
3.75% convertible notes, due February 1, 2008, in open market transactions for $98.4 million. We
also received $28.0 million from the exercise of employee stock options and employee participation
in Cienas employee stock purchase plan.
Contractual Obligations
The following is a summary of our future minimum payments under contractual obligations as of
October 31, 2006 (in thousands):
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Convertible notes (1) |
|
$ |
878,057 |
|
|
$ |
21,128 |
|
|
$ |
553,929 |
|
|
$ |
1,500 |
|
|
$ |
301,500 |
|
Operating leases |
|
|
126,882 |
|
|
|
26,141 |
|
|
|
46,628 |
|
|
|
35,143 |
|
|
|
18,970 |
|
Purchase obligations (2) |
|
|
97,326 |
|
|
|
97,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,102,265 |
|
|
$ |
144,595 |
|
|
$ |
600,557 |
|
|
$ |
36,643 |
|
|
$ |
320,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our outstanding 3.75% convertible notes, due February 1, 2008, have an aggregate principal amount of $542.3 million. Interest is payable on February 1st and
August 1st of each year. Our outstanding 0.25% convertible senior notes, due May 1, 2013, have an aggregate principal amount of $300.0 million. Interest on these notes
is payable on November 1st and May 1st of each year, beginning on November 1, 2006. |
|
(2) |
|
Purchase commitments relate to amounts we are obligated to pay to our contract manufacturers and component suppliers for inventory. |
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,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Standby letters of credit |
|
$ |
8,415 |
|
|
$ |
8,315 |
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
Ciena does not engage in any off-balance sheet financing arrangements. In particular, we do
not have any interest in so-called limited purpose entities, which include special purpose entities
(SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires Ciena to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. 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.
Ciena bases its 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.
Revenue Recognition
Some of our communications networking equipment is integrated with software that is essential
to the functionality of the equipment. We provide unspecified software upgrades and enhancements
related to the equipment through our maintenance contracts for these products. Accordingly, we
account for revenue in accordance with Statement of Position No. 97-2, Software Revenue
Recognition, and all related interpretations. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is
reasonably assured. In instances where final acceptance of the product is specified by the
customer, revenue is deferred until all acceptance criteria
have been met. 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.
When a sale involves multiple elements, such as sales of products that include services, the entire
fee from the arrangement is allocated to each respective element based on its relative fair value
and recognized when revenue recognition criteria for each element are 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
37
arrangement and our ability to establish vendor-specific objective
evidence for those elements could affect the timing of revenue recognition. Our total deferred
revenue for products was $14.5 million and $4.3 million as of October 31, 2005 and October 31,
2006, 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 $29.0 million
and $36.4 million as of October 31, 2005 and October 31, 2006, respectively.
Share-Based Compensation
On November 1, 2005, Ciena adopted SFAS 123(R), Shared-Based Payment, which requires the
measurement and recognition of compensation expense, based on estimated fair values, for all
share-based awards, made to employees and directors, including stock options, restricted stock,
restricted stock units and participation in Cienas employee stock purchase plan. Share-based
compensation expense recognized in Cienas consolidated statement of operations for fiscal 2006
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).
We estimate the fair value of stock options granted using the Black-Scholes option-pricing
model. This option pricing model requires the input of highly subjective assumptions, 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 Ciena considers its options to be plain vanilla we calculate the
expected term using the simplified method as prescribed in Staff
Accounting Bulletin (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; options are non-transferable and non-hedgeable. The expected stock price volatility was
determined using a combination of historical and implied volatility of Cienas common stock. The
fair value is then amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period. Because share-based compensation expense is based on
awards that are ultimately expected to vest, it has been reduced to account for 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. In Cienas pro
forma information required under SFAS 123 for the periods prior to fiscal 2006, Ciena accounted for
forfeitures as they occurred. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation.
See
Note 16 to the Consolidated Financial Statements under Item 8 of Part
II of this annual report for information regarding Cienas
treatment of share-based compensation, including information
regarding treatment prior to Cienas adoption of SFAS 123(R).
Reserve for Inventory Obsolescence
Ciena writes 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. During fiscal 2006, we recorded a charge of $9.0 million
primarily related to excess inventory due to a change in forecasted sales for certain products. In
an effort to limit our exposure to delivery delays and to satisfy customer needs for shorter
delivery terms, we have transitioned our manufacturing operations from the build-to-order model we
have used in recent years, to a build-to-forecast model across our product lines. This change in
our inventory purchases exposes us to the risk that our customers will not order those products for
which we have forecasted sales, or will purchase less than we have forecasted. If actual market
conditions differ from those we have assumed, we may be required to take additional inventory
write-downs or benefits.
Restructuring
As part of its restructuring costs, Ciena provides 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, 2006, Cienas accrued restructuring liability
related to net lease expense and other related charges was $35.6 million. The total minimum lease
payments for these restructured facilities are $44.5 million. These lease payments will be made
over the remaining lives of our leases, which range from one month to thirteen 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
have recognized net adjustments resulting in restructuring costs of $9.2 million, which includes a
$10.0 million adjustment during the third quarter of fiscal 2006 relating to our unused San Jose,
CA facilities.
38
Allowance for Doubtful Accounts
Cienas allowance for doubtful accounts is based on our 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, management considers each individual customer account receivable in order to determine
collectibility. 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. During fiscal 2006, Ciena
recorded the recovery of a doubtful account 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 the
customers financial condition.
Goodwill
At October 31, 2006, Cienas consolidated balance sheet included $232.0 million in goodwill.
In accordance with SFAS 142, Ciena tests its goodwill for impairment on an annual basis, which
Ciena has 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. If actual market conditions differ or
forecasts change at the time of our annual assessment in fiscal 2007 or in periods prior to our
annual assessment, we may be required to record additional goodwill impairment charges.
As described in the Overview above, we have eliminated our former operating segments and
have discontinued reporting our results of operations on a segment basis. In accordance with SFAS
142, goodwill is allocated and assessed at a reporting unit level. SFAS 142 delineates a reporting
unit as an operating segment or one level below an operating segment (referred to as a component).
A component of an operating segment is a reporting unit if the component constitutes a business for
which discrete financial information is available and segment management reviews the operating
results of that component. Our former operating segments had no component operations below the
operating segment level. Our operating segments were considered the reporting units for purposes of
goodwill allocation and assessment. As of the third quarter of fiscal 2006, we no longer managed
our business, allocated resources or evaluated operating performances on the basis of discrete
financial information about our former operating segments and consequently our goodwill allocations
and assessments were made on a single reporting unit basis.
Intangible Assets
As of October 31, 2006, Cienas consolidated balance sheet included $91.3 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, Ciena tests each intangible asset for impairment whenever
events or changes in circumstances indicate that the assets carrying amount may not be
recoverable. If actual market conditions differ or forecasts change, we may be required to record
additional impairment charges in future periods.
Investments
As
of October 31, 2006 Cienas marketable debt investments had unrealized losses of $1.2
million. The 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 on
its marketable debt investments at October 31, 2006 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 October 31, 2006, Cienas minority investments in privately held technology companies
were $6.5 million. These
investments are generally carried at cost because Ciena owns less than 20% of the voting
equity and does not have the ability to exercise significant influence over any of these companies.
These investments are inherently high risk as the market 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 materialize or become 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. If market conditions, expected financial performance
or the competitive position of the companies in which we invest deteriorate, Ciena may be required
to record an additional charge in future periods.
39
Deferred Tax Valuation Allowance
As of October 31, 2006, Ciena has recorded a valuation allowance of $1.2 billion against our
net 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 when measuring the need for a valuation allowance. Evidence such as
operating results during the most recent three-year period is given more weight than forecasted
results, due to our current lack of visibility and the degree of uncertainty that we will achieve
the level of future profitability needed to record the deferred assets. Our cumulative loss in the
most recent three-year period represents sufficient negative evidence to require a valuation
allowance under the provisions of SFAS 109. We intend to maintain a valuation allowance until
sufficient positive evidence exists to support its reversal.
Warranty
The liability for product warranties, included in other accrued liabilities, was $31.8 million
as of October 31, 2006, compared to $27.0 million as of October 31, 2005. Our products are
generally covered by a warranty for periods ranging from one to five years. Ciena accrues for
warranty costs as part of our cost of sales 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.
Effects of Recent Accounting Pronouncements
In
September 2006, the Securities and Exchange Commission 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. Ciena does not believe that the adoption of this statement will
have a material impact on its financial condition, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board (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 financial statements issued for fiscal years beginning
after November 15, 2007, 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 the adoption of this
statement could have on its financial condition, results of operations and cash flows.
In February 2006, the 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. Ciena does not
believe the adoption of this statement will have a material impact on its financial condition,
results of operations or cash flows.
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
40
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. Ciena does not believe that the adoption of this statement will have a material impact on its
financial condition, results of operations or cash flows.
41
Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results
represented by certain items in Cienas statements of operations for each of the eight quarters in
the period ended October 31, 2006. 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, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
82,300 |
|
|
$ |
91,618 |
|
|
$ |
97,448 |
|
|
$ |
102,909 |
|
|
$ |
105,941 |
|
|
$ |
117,208 |
|
|
$ |
137,809 |
|
|
$ |
141,469 |
|
Services |
|
|
12,448 |
|
|
|
12,228 |
|
|
|
13,032 |
|
|
|
15,274 |
|
|
|
14,489 |
|
|
|
13,967 |
|
|
|
14,690 |
|
|
|
18,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
94,748 |
|
|
|
103,846 |
|
|
|
110,480 |
|
|
|
118,183 |
|
|
|
120,430 |
|
|
|
131,175 |
|
|
|
152,499 |
|
|
|
159,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
60,848 |
|
|
|
65,843 |
|
|
|
62,756 |
|
|
|
59,484 |
|
|
|
60,399 |
|
|
|
58,957 |
|
|
|
70,356 |
|
|
|
73,955 |
|
Services |
|
|
9,669 |
|
|
|
10,837 |
|
|
|
10,095 |
|
|
|
11,535 |
|
|
|
9,576 |
|
|
|
9,312 |
|
|
|
10,479 |
|
|
|
13,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
70,517 |
|
|
|
76,680 |
|
|
|
72,851 |
|
|
|
71,019 |
|
|
|
69,975 |
|
|
|
68,269 |
|
|
|
80,835 |
|
|
|
87,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
24,231 |
|
|
|
27,166 |
|
|
|
37,629 |
|
|
|
47,164 |
|
|
|
50,455 |
|
|
|
62,906 |
|
|
|
71,664 |
|
|
|
72,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
34,662 |
|
|
|
35,608 |
|
|
|
34,814 |
|
|
|
32,161 |
|
|
|
29,462 |
|
|
|
28,856 |
|
|
|
26,190 |
|
|
|
26,561 |
|
Selling and marketing |
|
|
26,840 |
|
|
|
29,648 |
|
|
|
30,209 |
|
|
|
28,325 |
|
|
|
26,572 |
|
|
|
26,657 |
|
|
|
24,903 |
|
|
|
26,302 |
|
General and administrative |
|
|
7,656 |
|
|
|
8,894 |
|
|
|
9,493 |
|
|
|
7,672 |
|
|
|
9,896 |
|
|
|
11,246 |
|
|
|
16,217 |
|
|
|
10,117 |
|
Amortization of intangible assets |
|
|
10,411 |
|
|
|
10,204 |
|
|
|
9,653 |
|
|
|
8,514 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,296 |
|
Restructuring costs |
|
|
1,125 |
|
|
|
9,765 |
|
|
|
4,355 |
|
|
|
2,773 |
|
|
|
2,015 |
|
|
|
3,014 |
|
|
|
11,008 |
|
|
|
(366 |
) |
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived asset impairment |
|
|
184 |
|
|
|
(25 |
) |
|
|
(25 |
) |
|
|
45,728 |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
6 |
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,020 |
) |
|
|
(5,628 |
) |
|
|
|
|
|
|
|
|
Recovery of (provision for) doubtful accounts, net |
|
|
|
|
|
|
|
|
|
|
2,604 |
|
|
|
(2 |
) |
|
|
(2,604 |
) |
|
|
(247 |
) |
|
|
(139 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80,878 |
|
|
|
94,094 |
|
|
|
91,103 |
|
|
|
301,771 |
|
|
|
65,613 |
|
|
|
70,190 |
|
|
|
84,474 |
|
|
|
68,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(56,647 |
) |
|
|
(66,928 |
) |
|
|
(53,474 |
) |
|
|
(254,607 |
) |
|
|
(15,158 |
) |
|
|
(7,284 |
) |
|
|
(12,810 |
) |
|
|
3,881 |
|
Interest and other income, net |
|
|
7,433 |
|
|
|
7,103 |
|
|
|
7,522 |
|
|
|
9,236 |
|
|
|
9,262 |
|
|
|
11,197 |
|
|
|
14,045 |
|
|
|
15,741 |
|
Interest expense |
|
|
(7,226 |
) |
|
|
(7,230 |
) |
|
|
(7,163 |
) |
|
|
(6,794 |
) |
|
|
(6,053 |
) |
|
|
(5,815 |
) |
|
|
(6,148 |
) |
|
|
(6,149 |
) |
Gain (loss) on equity investments, net |
|
|
22 |
|
|
|
(7,300 |
) |
|
|
(1,708 |
) |
|
|
(500 |
) |
|
|
(733 |
) |
|
|
|
|
|
|
948 |
|
|
|
|
|
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
3,882 |
|
|
|
|
|
|
|
6,690 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(56,418 |
) |
|
|
(74,355 |
) |
|
|
(50,941 |
) |
|
|
(252,665 |
) |
|
|
(5,992 |
) |
|
|
(1,540 |
) |
|
|
(3,965 |
) |
|
|
13,473 |
|
Provision for income tax |
|
|
577 |
|
|
|
452 |
|
|
|
86 |
|
|
|
205 |
|
|
|
299 |
|
|
|
370 |
|
|
|
320 |
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(56,995 |
) |
|
$ |
(74,807 |
) |
|
$ |
(51,027 |
) |
|
$ |
(252,870 |
) |
|
$ |
(6,291 |
) |
|
$ |
(1,910 |
) |
|
$ |
(4,285 |
) |
|
$ |
13,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(0.70 |
) |
|
$ |
(0.91 |
) |
|
$ |
(0.62 |
) |
|
$ |
(3.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
(0.70 |
) |
|
$ |
(0.91 |
) |
|
$ |
(0.62 |
) |
|
$ |
(3.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
81,653 |
|
|
|
81,938 |
|
|
|
82,333 |
|
|
|
82,689 |
|
|
|
82,967 |
|
|
|
83,518 |
|
|
|
84,197 |
|
|
|
84,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
81,653 |
|
|
|
81,938 |
|
|
|
82,333 |
|
|
|
82,689 |
|
|
|
82,967 |
|
|
|
83,518 |
|
|
|
84,197 |
|
|
|
93,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about Cienas market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the forward-looking
statements. Ciena is exposed to market risk related to changes in interest rates and foreign
currency exchange rates. Ciena does not use derivative financial instruments for speculative or
trading purposes.
Interest Rate Sensitivity. Ciena maintains a short-term and long-term investment portfolio.
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, 2006, the fair value of the portfolio would decline by
approximately $62.1 million.
Foreign Currency Exchange Risk. As a global concern, Ciena faces exposure to adverse movements
in foreign currency exchange rates. These exposures may change over time as business practices
evolve and if our exposure increases, adverse movement in foreign currency exchange rates could
have a material adverse impact on Cienas financial results. Historically, Cienas primary
exposures have been related to non-dollar denominated operating expenses in Europe and Asia where
Ciena sells primarily in U.S. dollars. Ciena is prepared to hedge against fluctuations in foreign
currency if this exposure becomes material. As of October 31, 2006, the assets and liabilities of
Ciena related to non-dollar denominated currencies were not material. Therefore, we do not expect
an increase or decrease of 10% in the foreign exchange rate would have a material impact on Cienas
financial position.
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 |
|
|
44 |
|
Consolidated Balance Sheets |
|
|
45 |
|
Consolidated Statements of Operations |
|
|
46 |
|
Consolidated Statements of Changes in Stockholders Equity |
|
|
47 |
|
Consolidated Statements of Cash Flows |
|
|
48 |
|
Notes to Consolidated Financial Statements |
|
|
49 |
|
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Ciena Corporation:
We have completed integrated audits of Ciena Corporations 2006 and 2005 consolidated
financial statements and of its internal control over financial reporting as of October 31, 2006,
and an audit of its 2004 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements
In our opinion, the 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, 2006 and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended October 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Report of Management on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of October 31, 2006 based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of October 31, 2006, based on criteria established in Internal
Control Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
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
January 10, 2007
44
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
358,012 |
|
|
$ |
220,164 |
|
Short-term investments |
|
|
579,531 |
|
|
|
628,393 |
|
Accounts receivable, net |
|
|
72,786 |
|
|
|
107,172 |
|
Inventories, net |
|
|
49,333 |
|
|
|
106,085 |
|
Prepaid expenses and other |
|
|
37,867 |
|
|
|
36,372 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,097,529 |
|
|
|
1,098,186 |
|
Long-term investments |
|
|
155,944 |
|
|
|
351,407 |
|
Equipment, furniture and fixtures, net |
|
|
28,090 |
|
|
|
29,427 |
|
Goodwill |
|
|
232,015 |
|
|
|
232,015 |
|
Other intangible assets, net |
|
|
120,324 |
|
|
|
91,274 |
|
Other long-term assets |
|
|
41,327 |
|
|
|
37,404 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,675,229 |
|
|
$ |
1,839,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
43,868 |
|
|
$ |
39,277 |
|
Accrued liabilities |
|
|
76,491 |
|
|
|
79,282 |
|
Restructuring liabilities |
|
|
15,492 |
|
|
|
8,914 |
|
Unfavorable lease commitments |
|
|
9,011 |
|
|
|
8,512 |
|
Income taxes payable |
|
|
5,785 |
|
|
|
5,981 |
|
Deferred revenue |
|
|
27,817 |
|
|
|
19,637 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
178,464 |
|
|
|
161,603 |
|
Long-term deferred revenue |
|
|
15,701 |
|
|
|
21,039 |
|
Long-term restructuring liabilities |
|
|
54,285 |
|
|
|
26,720 |
|
Long-term unfavorable lease commitments |
|
|
41,364 |
|
|
|
32,785 |
|
Other long-term obligations |
|
|
1,296 |
|
|
|
1,678 |
|
Convertible notes payable |
|
|
648,752 |
|
|
|
842,262 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
939,862 |
|
|
|
1,086,087 |
|
|
|
|
|
|
|
|
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; 82,905,849 and 84,891,656 shares
issued and outstanding |
|
|
829 |
|
|
|
849 |
|
Additional paid-in capital |
|
|
5,494,587 |
|
|
|
5,505,853 |
|
Deferred stock compensation |
|
|
(2,286 |
) |
|
|
|
|
Changes in unrealized gains on investments, net |
|
|
(4,673 |
) |
|
|
(496 |
) |
Translation adjustment |
|
|
(495 |
) |
|
|
(580 |
) |
Accumulated deficit |
|
|
(4,752,595 |
) |
|
|
(4,752,000 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
735,367 |
|
|
|
753,626 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,675,229 |
|
|
$ |
1,839,713 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
45
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
250,210 |
|
|
$ |
374,275 |
|
|
$ |
502,427 |
|
Services |
|
|
48,497 |
|
|
|
52,982 |
|
|
|
61,629 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
298,707 |
|
|
|
427,257 |
|
|
|
564,056 |
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
186,461 |
|
|
|
248,931 |
|
|
|
263,667 |
|
Services |
|
|
40,493 |
|
|
|
42,136 |
|
|
|
42,608 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
226,954 |
|
|
|
291,067 |
|
|
|
306,275 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
71,753 |
|
|
|
136,190 |
|
|
|
257,781 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
205,364 |
|
|
|
137,245 |
|
|
|
111,069 |
|
Selling and marketing |
|
|
112,310 |
|
|
|
115,022 |
|
|
|
104,434 |
|
General and administrative |
|
|
28,592 |
|
|
|
33,715 |
|
|
|
47,476 |
|
Amortization of intangible assets |
|
|
30,839 |
|
|
|
38,782 |
|
|
|
25,181 |
|
In-process research and development |
|
|
30,200 |
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
57,107 |
|
|
|
18,018 |
|
|
|
15,671 |
|
Goodwill impairment |
|
|
371,712 |
|
|
|
176,600 |
|
|
|
|
|
Long-lived asset impairment |
|
|
15,926 |
|
|
|
45,862 |
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
(11,648 |
) |
Recovery of sale,export, use tax liabilities and payments |
|
|
(5,388 |
) |
|
|
|
|
|
|
|
|
Provision for (recovery of) doubtful accounts |
|
|
(2,794 |
) |
|
|
2,602 |
|
|
|
(3,031 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
843,868 |
|
|
|
567,846 |
|
|
|
289,152 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(772,115 |
) |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
Interest and other income (expense), net |
|
|
25,936 |
|
|
|
31,294 |
|
|
|
50,245 |
|
Interest expense |
|
|
(29,841 |
) |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
Gain (loss) on equity investments, net |
|
|
(4,107 |
) |
|
|
(9,486 |
) |
|
|
215 |
|
Gain (loss) on extinguishment of debt |
|
|
(8,216 |
) |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(788,343 |
) |
|
|
(434,379 |
) |
|
|
1,976 |
|
Provision for income taxes |
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
83,840 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
85,011 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
46
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Additional Paid- |
|
|
Deferred Stock |
|
|
Notes From |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
in-Capital |
|
|
Compensation |
|
|
Stockholders |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance at October 31, 2003 |
|
|
67,602,122 |
|
|
$ |
676 |
|
|
$ |
4,865,238 |
|
|
$ |
(9,664 |
) |
|
$ |
(448 |
) |
|
$ |
2,447 |
|
|
$ |
(3,527,432 |
) |
|
$ |
1,330,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(789,464 |
) |
|
|
(789,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,280 |
) |
|
|
|
|
|
|
(5,280 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794,676 |
) |
Exercise of warrant |
|
|
7,020 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, net |
|
|
1,142,272 |
|
|
|
11 |
|
|
|
16,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,780 |
|
Unearned stock compensation |
|
|
|
|
|
|
|
|
|
|
955 |
|
|
|
(18,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,223 |
) |
Deferred stock compensation costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,883 |
|
Forfeiture of unearned stock compensation |
|
|
|
|
|
|
|
|
|
|
(2,198 |
) |
|
|
2,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisitions, net of issuance costs |
|
|
12,913,823 |
|
|
|
129 |
|
|
|
606,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,441 |
|
Reduction of receivables from stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
47
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishment of debt |
|
|
8,216 |
|
|
|
(3,882 |
) |
|
|
(7,052 |
) |
Amortization of premium (discount) on marketable securities |
|
|
26,924 |
|
|
|
13,636 |
|
|
|
(823 |
) |
Non-cash loss from equity investments |
|
|
4,107 |
|
|
|
9,486 |
|
|
|
733 |
|
Non-cash impairment of long-lived assets |
|
|
15,926 |
|
|
|
45,862 |
|
|
|
|
|
Accretion of convertible notes payable |
|
|
599 |
|
|
|
|
|
|
|
|
|
In-process research and development |
|
|
30,200 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization of leasehold improvements |
|
|
72,213 |
|
|
|
33,377 |
|
|
|
16,401 |
|
Goodwill impairment |
|
|
371,712 |
|
|
|
176,600 |
|
|
|
|
|
Stock compensation |
|
|
11,883 |
|
|
|
9,441 |
|
|
|
14,042 |
|
Amortization of intangibles |
|
|
34,708 |
|
|
|
42,651 |
|
|
|
29,050 |
|
Provision for doubtful accounts |
|
|
284 |
|
|
|
2,602 |
|
|
|
|
|
Provision for inventory excess and obsolescence |
|
|
4,172 |
|
|
|
5,232 |
|
|
|
9,012 |
|
Provision for warranty and other contractual obligations |
|
|
8,351 |
|
|
|
9,738 |
|
|
|
14,522 |
|
Other |
|
|
3,449 |
|
|
|
3,218 |
|
|
|
2,028 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,562 |
) |
|
|
(29,510 |
) |
|
|
(34,386 |
) |
Inventories |
|
|
962 |
|
|
|
(6,951 |
) |
|
|
(65,764 |
) |
Prepaid expenses and other |
|
|
15,253 |
|
|
|
7,420 |
|
|
|
4,056 |
|
Accounts payable and accruals |
|
|
(67,671 |
) |
|
|
(19,633 |
) |
|
|
(59,161 |
) |
Income taxes payable |
|
|
(1,286 |
) |
|
|
2,431 |
|
|
|
196 |
|
Deferred revenue and other obligations |
|
|
6,589 |
|
|
|
5,942 |
|
|
|
(2,842 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(245,435 |
) |
|
|
(128,039 |
) |
|
|
(79,393 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to equipment, furniture, fixtures and intellectual property |
|
|
(32,999 |
) |
|
|
(11,315 |
) |
|
|
(17,760 |
) |
Proceeds from sale of equipment, furniture and fixtures |
|
|
1,857 |
|
|
|
278 |
|
|
|
|
|
Restricted cash |
|
|
(2,004 |
) |
|
|
1,986 |
|
|
|
4,552 |
|
Purchase of available for sale securities |
|
|
(696,344 |
) |
|
|
(578,846 |
) |
|
|
(1,090,409 |
) |
Maturities of available for sale securities |
|
|
897,738 |
|
|
|
910,505 |
|
|
|
851,084 |
|
Acquisition of business, net of cash acquired |
|
|
4,864 |
|
|
|
|
|
|
|
|
|
Minority equity investments, net |
|
|
(4,407 |
) |
|
|
4,882 |
|
|
|
948 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
168,705 |
|
|
|
327,490 |
|
|
|
(251,585 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of 0.25% convertible senior notes payable |
|
|
|
|
|
|
|
|
|
|
300,000 |
|
Repurchase of 3.75% convertible notes payable |
|
|
|
|
|
|
(36,913 |
) |
|
|
(98,410 |
) |
Repurchase of ONI 5.00% convertible subordinated notes payable |
|
|
(49,243 |
) |
|
|
|
|
|
|
|
|
Net proceeds from other obligations |
|
|
100 |
|
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
(7,990 |
) |
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(28,457 |
) |
Proceeds from issuance of common stock and warrants |
|
|
16,780 |
|
|
|
9,558 |
|
|
|
27,987 |
|
Repayment of notes receivable from stockholders |
|
|
47 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(32,316 |
) |
|
|
(27,307 |
) |
|
|
193,130 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(109,046 |
) |
|
|
172,144 |
|
|
|
(137,848 |
) |
Cash and cash equivalents at beginning of period |
|
|
294,914 |
|
|
|
185,868 |
|
|
|
358,012 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
185,868 |
|
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
26,927 |
|
|
$ |
25,817 |
|
|
$ |
21,685 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
2,363 |
|
|
$ |
977 |
|
|
$ |
969 |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
48
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 delivery and transport of voice, video and data services. Our products are used in
communications networks operated by telecommunications service providers, cable operators,
governments and enterprises across the globe. We specialize in transitioning legacy communications
networks to converged, next-generation architectures, capable of efficiently delivering a broader
mix of high-bandwidth services. By improving network productivity, reducing costs and enabling
integrated services offerings, our optical, data and broadband access platforms create business and
operational value for our customers.
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 1201 Winterson Road,
Linthicum, Maryland 21090.
Principles of Consolidation
Ciena has 14 wholly owned U.S. and international subsidiaries, which have been consolidated in
the accompanying financial statements. On May 3, 2004, Ciena acquired by merger Catena Networks
Inc. (Catena), a Delaware company based in Kanata, Canada, and Internet Photonics, Inc.
(Internet Photonics), a Delaware company based in Shrewsbury, New Jersey. The Catena and Internet
Photonics transactions were both accomplished as tax-free reorganizations, and were recorded using
the purchase accounting method.
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 28, 2006, October 29, 2005, and October 30, 2004). For purposes of
financial statement presentation, each fiscal year is described as having ended on October 31.
Fiscal 2006, fiscal 2005 and fiscal 2004 were each comprised of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires Ciena to make estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, together with amounts disclosed in the
related notes to the financial statements. Actual results could differ from the recorded estimates.
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 short-term and long-term investments are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses, net of tax, 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.
Ciena also has certain other minority equity investments in privately held technology
companies. 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
49
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.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on the first-in,
first-out basis. Ciena records a provision for excess and obsolete inventory whenever 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 nine months to ten years 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 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. 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. For additional information see Note 4.
Concentrations
Substantially all of Cienas cash and cash equivalents, short-term and long-term investments,
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, bear minimal risk.
During fiscal 2006, Sprint, Verizon and AT&T each accounted for at least 10% of Cienas
revenue. During fiscal 2005, Verizon, BellSouth, and Science Applications International Corporation
(SAIC) each accounted for at least 10% of Cienas revenue. During fiscal 2004, only SAIC accounted
for at least 10% of Cienas revenue. The substantial reduction in orders by, or loss of, any
significant customer, could materially adversely affect Cienas financial condition or operating
results. For additional information see Note 19.
Additionally, Cienas access to certain raw materials is dependent upon single and sole 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 operations 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, 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. In instances where final
acceptance of the product, system, or solution is specified by the
50
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. In some cases, Ciena provides unspecified software
upgrades and enhancements related to the equipment through maintenance contracts for these
products. For transactions involving the sale of software, revenue is recognized in accordance with
SOP 97-2, Software Revenue Recognition, including deferral of revenue recognition in instances
where vendor specific objective evidence for undelivered elements is not determinable.
For arrangements that involve the delivery or performance of multiple products, services
and/or rights to use assets, except as otherwise covered by SOP 97-2, the determination as to how
the arrangement consideration should be measured and allocated to the separate deliverables of the
arrangement is determined in accordance with EITF 00-21, Revenue Arrangements with Multiple
Deliverables. When a sale involves multiple elements, such as sales of products that include
services, the entire fee from the arrangement is allocated to each respective element based on its
relative fair value and recognized when revenue recognition criteria for each element are met. Fair
value for each element is established based on the sales price charged when the same element is
sold separately.
Revenue Related Accruals
Ciena provides for the estimated costs to fulfill customer warranty and other contractual
obligations upon the recognition of the related revenue. Such reserves are determined based upon
actual warranty cost experience, estimates of component failure rates, and managements industry
experience. Cienas sales contracts do not permit the right of return of product by the customer
after the product has been accepted.
Accounts Receivable Trade, Net
Cienas allowance for doubtful accounts 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, management considers each individual customer account receivable in order to determine
collectibility. 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.
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.
Share-Based Compensation Expense
On November 1, 2005, Ciena adopted SFAS 123(R), Share-Based Payment, which requires the
measurement and recognition of compensation expense, based on estimated fair values, for all
share-based awards, made to employees and directors, including stock options, restricted stock,
restricted stock units and participation in Cienas employee stock purchase plan. In March 2005,
the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R). Ciena has applied
the provisions of SAB 107 in its adoption of SFAS 123(R).
Ciena adopted SFAS 123(R) using the modified prospective application transition method, which
requires the application of the accounting standard as of November 1, 2005, the first day of
Cienas fiscal year 2006. Cienas consolidated financial statements for fiscal 2006 reflect the
impact of SFAS 123(R). In accordance with the modified prospective application transition method,
Cienas consolidated financial statements for prior periods have not been restated
to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation cost recognized
under SFAS 123(R) for fiscal 2006 was $14.0 million, of which $0.3 million was capitalized as part
of inventory.
51
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 Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, as interpreted by FASB Interpretation
(FIN) No. 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.
Share-based compensation expense of $9.4 million and $11.9 million for fiscal 2005 and fiscal 2004,
respectively, was solely related to share-based awards assumed through acquisitions and restricted
stock unit awards that Ciena had been recognizing in its consolidated statement of operations in
accordance with the provisions set forth above. Because the exercise price of Cienas stock options
granted to employees and directors equaled the fair market value of the underlying stock at the
grant date, under the intrinsic value method, no share-based compensation expense was otherwise
recognized in Cienas consolidated statement of operations.
SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of
grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense in Cienas consolidated statement of operations over the
requisite service periods. Share-based compensation expense recognized in Cienas consolidated
statement of operations for fiscal 2006 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). Upon
adoption of SFAS 123(R), Ciena changed its method of attributing the value of share-based
compensation expense from the accelerated multiple-option approach to the straight-line
single-option method. Compensation expense for all share-based awards granted on or prior to
October 31, 2005 will continue to be recognized using the accelerated multiple-option approach.
Compensation expense for all share-based awards subsequent to October 31, 2005 is recognized using
the straight-line single-option method. Because share-based compensation expense is based on awards
that are ultimately expected to vest, share-based compensation expense has been reduced to account
for 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.
In Cienas pro forma information required under SFAS 123 for periods prior to fiscal 2006, Ciena
accounted for forfeitures as they occurred.
To calculate option-based compensation under SFAS 123(R), Ciena uses the Black-Scholes
option-pricing model, which it had previously used for valuation of option-based awards for its pro
forma information required under SFAS 123 for periods prior to fiscal 2006. Cienas determination
of fair value of option-based awards on the date of grant using the Black-Scholes model is affected
by Cienas stock price as well as assumptions regarding a number of subjective variables. These
variables include, but are not limited to Cienas expected stock price volatility over the term of
the awards, and actual and projected employee stock option exercise behaviors. For additional
information see Note 16.
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.
Fair Value of Financial Instruments
The carrying amounts of Cienas financial instruments, which include short-term and long-term
investments, 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. Resulting translation adjustments are recorded directly to a
separate component of
52
stockholders equity. Where the U.S. dollar is the functional currency,
translation adjustments are recorded in other income. The net gain (loss) on foreign currency
re-measurement and exchange rate changes for fiscal 2006, fiscal 2005 and fiscal 2004 was
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 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.
Prior to the third quarter of fiscal 2006 Ciena reported its results of operations based on
four operating segments: the Transport and Switching Group (TSG), the Data Networking Group (DNG),
the Broadband Access Group (BBG) and Global Network Services (GNS). In an effort to address
increased market opportunities for product convergence, facilitate product functionality cross-over
and improve operational efficiency, Ciena reorganized aspects of the management of its business.
Ciena eliminated its former business units and no longer has operating segment general managers.
Cienas development resources were reorganized along technology skill sets applicable across
multiple products, rather than by specific product lines. In addition, Ciena no longer manages its
business, allocates its resources or evaluates its operating performance on the basis of financial
information about its former business units. As a consequence, Ciena eliminated its historical
operating segments and discontinued reporting its results of operations on a historical segment
basis.
Revenue from sales to customers outside of the United States is reflected as International in
Cienas geographic distribution of revenue in entity wide disclosures.
Reclassification
Certain prior year amounts have been reclassified to conform to current year consolidated
financial statement presentation.
Newly Issued Accounting Standards
In September 2006, the Securities and Exchange Commission (SEC) issued SAB 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. Ciena
does not believe that the adoption of this statement will have a material impact on its financial
condition, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board (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 financial statements issued for fiscal years beginning
after November 15, 2007, 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 or cash flows.
53
In July 2006, the FASB issued FIN 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 the adoption of this interpretation could have
on its financial condition, results of operations or cash flows.
In February 2006, the 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. Ciena does not believe the adoption of this statement will have a material
impact on its financial condition, results of operations or cash flows.
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. Ciena does not believe that the adoption of this statement will have a material impact on its
financial condition, results of operations or cash flows.
(2) BUSINESS COMBINATIONS
In fiscal 2004, Ciena acquired Catena and Internet Photonics. As a result of these
acquisitions, Ciena has recorded charges for in-process research and development and recorded
intangible assets related to existing technology.
In-process research and development represents in-process technology that, as of the date of
acquisition, has not reached technological feasibility and has no alternative future use. Based on
valuation assessments, the value of in-process technology is determined by estimating the net cash
flows from the sale of products resulting from the completion of the projects, reduced by the
portions of revenue attributable to developed technology and future completion of the project. The
resulting cash flows are then discounted back to their present values at appropriate discount
rates.
Existing technology represents purchased technology for which development had been completed
as of the date of acquisition. This amount is determined using the income approach. This method
consisted of estimating future net cash flows attributable to existing technology for a discrete
projection period and discounting the net cash flows to their present value. The existing
technology will be amortized over its useful life.
The purchase price for Cienas acquisitions were based on the average closing price of Cienas
common stock for the two trading days prior to the announcement of the acquisition, the date of the
announcement, and the two trading days after the announcement.
The following table summarizes the allocation of the purchase price at the date of the acquisitions
(in thousands):
54
|
|
|
|
|
|
|
|
|
|
|
Internet |
|
|
|
|
|
|
Photonics at |
|
|
Catena at |
|
|
|
May 3, 2004 |
|
|
May 3, 2004 |
|
Cash, cash equivalents, long and short-term investments |
|
$ |
767 |
|
|
$ |
12,936 |
|
Inventory |
|
|
1,499 |
|
|
|
6,254 |
|
Equipment, furniture and fixtures |
|
|
1,287 |
|
|
|
2,813 |
|
Other tangible assets |
|
|
1,666 |
|
|
|
9,236 |
|
Existing technology |
|
|
10,000 |
|
|
|
73,000 |
|
Non-compete agreements |
|
|
2,200 |
|
|
|
|
|
Contracts and purchase orders |
|
|
21,100 |
|
|
|
18,000 |
|
Goodwill |
|
|
120,574 |
|
|
|
326,241 |
|
Deferred stock compensation |
|
|
1,094 |
|
|
|
16,130 |
|
Other assumed liabilities |
|
|
(6,857 |
) |
|
|
(23,150 |
) |
Ciena initial investment |
|
|
|
|
|
|
|
|
Unfavorable lease commitments |
|
|
|
|
|
|
(351 |
) |
Promissory notes and loans |
|
|
(9,357 |
) |
|
|
|
|
In-process research and development |
|
|
5,200 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
149,173 |
|
|
$ |
466,109 |
|
|
|
|
|
|
|
|
Catena
Catena was a privately held corporation headquartered in Kanata, Canada. Pursuant to the terms
of the acquisition agreement, Catena merged into Ciena, and the outstanding shares of Catena common
and preferred stock were exchanged for approximately 9,681,920 shares of Ciena common stock. The
aggregate purchase price was $466.1 million, which included Ciena common stock valued at $407.2
million, Ciena options, warrants and restricted stock valued at $53.7 million, and transaction
costs of $5.2 million.
The $73.0 million assigned to existing technology will be amortized over periods ranging from
4.5 to 6.5 years. The $18.0 million assigned to the contracts, customer relationships and purchase
orders will be amortized over periods ranging from 3 months to 4.5 years.
The goodwill allocated to the purchase price was $326.2 million and is not deductible for tax
purposes. The operations of Catena were originally incorporated into Cienas former BBG operating
segment, and accordingly, the goodwill from the transaction was assigned to that operating segment.
For additional information see Note 4.
The following unaudited pro forma data summarizes the results of operations for fiscal 2004 as
if the Catena acquisition had been completed as of November 1, 2003. The unaudited pro forma data
gives effect to the combined actual operating results prior to the May 3, 2004 acquisition,
adjusted to include the pro forma effect of amortization of intangibles and deferred stock
compensation costs. These pro forma amounts (in thousands, except per share data) do not purport to
be indicative of the results that would have actually been obtained if the acquisition had occurred
as of November 1, 2003 or the results that may be obtained in the future.
|
|
|
|
|
|
|
Fiscal Year (unaudited) |
|
|
|
2004 |
|
Revenue |
|
$ |
348,943 |
|
|
|
|
|
Net loss |
|
$ |
(802,038 |
) |
|
|
|
|
Diluted net loss per common share
and dilutive potential common share |
|
$ |
(10.10 |
) |
|
|
|
|
Internet Photonics
Internet Photonics was a privately held corporation headquartered in Shrewsbury, New Jersey.
Pursuant to the terms of the acquisition agreement, Internet Photonics merged into Ciena, and the
outstanding shares of Internet Photonics common
55
and preferred stock were exchanged for
approximately 3,231,902 shares of Ciena common stock. The aggregate purchase price was $149.2
million, which included Ciena common stock valued at $139.4 million, options and restricted stock
valued at $6.1 million, and transaction costs of $3.7 million.
The $10.0 million assigned to existing technology will be amortized over 6.5 years. The $2.2
million assigned to non-compete agreements will be amortized over 12 months. The $21.1 million
assigned to the contracts, customer relationships and purchase orders will be amortized over
periods ranging from 3 months to 6.5 years. The $9.4 million assigned to the value of the loan
payable to Ciena was based upon the present value of the loan at the time of the acquisition. This
loan was eliminated during the allocation of the purchase price.
The goodwill allocated to the purchase price was $120.6 million and is not deductible for tax
purposes. The operations of Internet Photonics were originally incorporated into Cienas former TSG
operating segment, and accordingly, the goodwill from the transaction was assigned to that
operating segment. For additional information see Note 4. The operations of Internet Photonics are
not material to the consolidated financial statements of Ciena, and accordingly, separate pro forma
financial information has not been presented.
(3) RESTRUCTURING COSTS
Ciena has previously taken actions to align its workforce, facilities and operating costs with
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 years ended October 31, 2005 and
October 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
Workforce |
|
|
of excess |
|
|
|
|
|
|
reduction |
|
|
facilities |
|
|
Total |
|
Balance at October 31, 2003 |
|
$ |
2,849 |
|
|
$ |
63,693 |
|
|
$ |
66,542 |
|
Additional liability recorded |
|
|
21,796 |
(a) |
|
|
27,834 |
(a) |
|
|
49,630 |
|
Adjustment to previous estimates |
|
|
154 |
(a) |
|
|
7,323 |
(a) |
|
|
7,477 |
|
Cash payments |
|
|
(23,353 |
) |
|
|
(18,913 |
) |
|
|
(42,266 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2004 |
|
|
1,446 |
|
|
|
79,937 |
|
|
|
81,383 |
|
Additional
liability recorded |
|
|
5,770 |
(b) |
|
|
884 |
(b) |
|
|
6,654 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
11,364 |
(b) |
|
|
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 |
(c) |
|
|
1,782 |
(c) |
|
|
6,434 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
9,237 |
(c) |
|
|
9,237 |
|
Lease settlements |
|
|
|
|
|
|
(11,648 |
)(c) |
|
|
(11,648 |
) |
Cash payments |
|
|
(4,922 |
) |
|
|
(33,244 |
) |
|
|
(38,166 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006 |
|
$ |
|
|
|
$ |
35,634 |
|
|
$ |
35,634 |
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities |
|
$ |
|
|
|
$ |
8,914 |
|
|
$ |
8,914 |
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring liabilities |
|
$ |
|
|
|
$ |
26,720 |
|
|
$ |
26,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of fiscal 2004, Ciena recorded a restructuring charge of
$1.3 million related to the exit of a warehouse, $1.4 million related to workforce
reductions of 52 employees and $0.7 million related to an adjustment to estimates
associated with costs for previously restructured facilities. |
|
|
|
During the second quarter of fiscal 2004, Ciena recorded a restructuring charge of $2.5
million related to a workforce reduction of 68 employees and $2.6 million primarily related
to an adjustment to estimates associated with costs for previously restructured facilities. |
|
|
|
During the third quarter of fiscal 2004, Ciena recorded a restructuring charge of $12.5
million related to a workforce reduction of 321 employees, $0.7 million related to exit
activities associated with Cienas San Jose, CA facility and an adjustment of $0.3 million
related to an adjustment to estimates associated with costs for previously restructured
facilities. |
|
|
|
During the fourth quarter of fiscal 2004, Ciena recorded a restructuring charge of $5.4
million related to a workforce reduction of 119 employees, $25.8 million primarily related
to exit activities associated with Cienas San Jose, CA facility and $3.8 million primarily
related to an adjustment to estimates associated with costs for previously
restructured facilities |
|
(b) |
|
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. |
56
|
|
|
|
|
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. |
|
(c) |
|
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. |
(4) 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 2006, fiscal 2005 and fiscal 2004, Ciena has determined that
its operating segments and reporting units are the same. Due to the elimination of Cienas former
business units in the third quarter of fiscal 2006, the fair value of Cienas goodwill was tested
for impairment on an enterprise level for fiscal 2006. For fiscal 2005 and fiscal 2004, the fair
value of Cienas goodwill was tested for impairment on a segment level. The table below sets forth
changes in carrying amount of goodwill during fiscal 2004, fiscal 2005 and fiscal 2006 (in
thousands):
|
|
|
|
|
|
|
Total |
|
Balance as of October 31, 2003 |
|
$ |
336,039 |
|
Goodwill acquired |
|
|
446,815 |
|
Purchase adjustments |
|
|
(2,527 |
) |
Impairment losses |
|
|
(371,712 |
) |
|
|
|
|
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 Assessment Fiscal 2006
During fiscal 2006, Ciena performed an assessment of the fair value of Cienas single
reporting unit and its intangible assets as of September 23, 2006. Ciena compared its fair value to
its carrying value including goodwill and determined that
its carrying value, including goodwill, did not exceed fair value. Because the carrying
amount, including goodwill, was less than its fair value, no impairment loss was recorded for
fiscal 2006. During fiscal 2006, the fair value of Ciena was determined using the average market
price of Cienas common stock over a 10-day period before and after September 23,
57
2006, with a
control premium added to the valuation results.
Goodwill Assessment Fiscal 2005
During the fourth quarter of fiscal 2005, Ciena performed its annual test to determine and
measure goodwill impairment on a reporting unit basis. Management performed an assessment of the
fair value of Cienas reporting units and their 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. During the fourth quarter of fiscal 2005 and in conjunction with
Cienas annual 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 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 2004
During fiscal 2004, Ciena performed its annual test to determine and measure goodwill
impairment on a reporting unit basis. Management performed an assessment of the fair value of
Cienas reporting units and their intangible assets as of September 27, 2004. Ciena compared the
fair value of each of its reporting units at that time to each reporting units carrying value
including goodwill and determined that the carrying value, including goodwill, of the Core
Networking Group (CNG), Metro and Enterprise Solutions Group (MESG), and BBG exceeded their
respective fair values as of September 27, 2004. This decline in the fair value of CNG, MESG and
BBG was primarily due to the decline in the forecasted demand for Cienas products, along with the
reduction in valuations of comparable businesses. The fair value of CNG, MESG and BBG was
determined using the average of the outcomes from the following valuation methods: market
multiples; comparable transactions; and discounted cash flows. A control premium of 15% to 20% was
added to the valuation results for each reporting unit.
Because the carrying value, including goodwill, for CNG, MESG and BBG, exceeded the fair value
of each reporting unit as a whole, Ciena assessed the fair value of each reporting units
respective individual assets, including identified intangible assets and liabilities, in order to
derive an implied fair value for each reporting units goodwill. Ciena determined the estimated
fair value of the identifiable intangible assets of each of the reporting units using discounted
cash flows. Ciena used cash flow periods ranging from one to seven years, depending on the nature
of the asset, applying annual growth rates of 5% to 118%. Ciena used discount rates of 10% to 30%
based of the specific risks and circumstances associated with the identified intangible assets and
Cienas weighted average cost of capital. The assumptions supporting the estimated cash flows for
identified intangible assets and other non-goodwill assets and liabilities, including the discount
rate, reflects managements estimates. Because the carrying amount of the goodwill assigned to CNG,
MESG and BBG was greater than the implied fair values, an impairment loss of $93.3 million, $129.0
million and $149.4 million for CNG, MESG, and
BBG, respectively, was recognized in fiscal 2004.
Long-Lived Asset Impairment Equipment, Furniture and Fixtures
58
Ciena did not record an impairment of equipment, furniture and fixtures in fiscal 2006. During
fiscal 2005 and fiscal 2004, Ciena recorded impairment losses of $0.2 million and $15.9 million,
respectively, related to excess equipment, furniture and fixtures that were classified as held for
sale as a result of Cienas restructuring activities.
Long-Lived Asset Impairment Other Intangible Assets
During fiscal 2006, fiscal 2005, and fiscal 2004, Ciena performed an assessment of the
carrying value of Cienas other intangible assets pursuant to SFAS 144.
Ciena did not record an impairment of intangible assets in fiscal 2006 or fiscal 2004. 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 in May 2004. This charge was based on
the amount by which the carrying amount of the intangible assets exceeded their fair value. Fair
value was determined based on discounted 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.
(5) MARKETABLE DEBT AND EQUITY SECURITIES
Short-term and long-term investments are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2006 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2005 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
291,044 |
|
|
$ |
|
|
|
$ |
1,888 |
|
|
$ |
289,156 |
|
Asset backed obligations |
|
|
195,471 |
|
|
|
|
|
|
|
844 |
|
|
|
194,627 |
|
US government obligations |
|
|
253,633 |
|
|
|
|
|
|
|
1,941 |
|
|
|
251,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
740,148 |
|
|
$ |
|
|
|
$ |
4,673 |
|
|
$ |
735,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
582,947 |
|
|
|
|
|
|
|
3,416 |
|
|
|
579,531 |
|
Included in long-term investments |
|
|
157,201 |
|
|
|
|
|
|
|
1,257 |
|
|
|
155,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
740,148 |
|
|
$ |
|
|
|
$ |
4,673 |
|
|
$ |
735,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
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 on its marketable
debt investments at October 31, 2006 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. The gross unrealized losses were as follows at October 31, 2005 and October 31, 2006 (in
thousands):
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2006 |
|
|
|
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 |
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2005 |
|
|
|
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 |
|
$ |
1,335 |
|
|
$ |
197,754 |
|
|
$ |
553 |
|
|
$ |
91,402 |
|
|
$ |
1,888 |
|
|
$ |
289,156 |
|
Asset backed
obligations |
|
|
655 |
|
|
|
160,495 |
|
|
|
189 |
|
|
|
34,132 |
|
|
|
844 |
|
|
|
194,627 |
|
US government
obligations |
|
|
1,027 |
|
|
|
146,783 |
|
|
|
914 |
|
|
|
104,909 |
|
|
|
1,941 |
|
|
|
251,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,017 |
|
|
$ |
505,032 |
|
|
$ |
1,656 |
|
|
$ |
230,443 |
|
|
$ |
4,673 |
|
|
$ |
735,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes maturities of debt investments at October 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Value |
|
Less than one year |
|
$ |
629,269 |
|
|
$ |
628,393 |
|
Due in 1-2 years |
|
|
351,022 |
|
|
|
351,407 |
|
Due in 2-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
980,291 |
|
|
$ |
979,800 |
|
|
|
|
|
|
|
|
(6) ACCOUNTS RECEIVABLE
As of October 31, 2006, the trade accounts receivable, net of allowance for doubtful
accounts, included two customers that accounted for 25.4% and 21.8% of the net trade accounts
receivable, respectively. As of October 31, 2005, the trade accounts receivable, net of allowance
for doubtful accounts, included three customers that accounted for 12.1%, 13.1% and 13.8% of the
net trade accounts receivable, respectively. Cienas allowance for doubtful accounts as of October
31, 2006 and October 31, 2005 was $0.1 million and $3.3 million, respectively.
During fiscal 2006, Ciena recorded the 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 the customers 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 their financial condition.
During fiscal 2004, Ciena recovered $3.1 million from a customer, from whom payment was
previously deemed
60
doubtful due to the customers financial condition. Ciena also recorded a
provision for doubtful accounts of $0.3 million during fiscal 2004 relating to one customer.
The following table summarizes the activity in Cienas allowance for doubtful accounts (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
Provisions |
|
|
|
|
|
Balance at end |
|
|
October 31, |
|
of period |
|
(Recovery) |
|
Deductions |
|
of period |
|
|
|
2004 |
|
|
$ |
1,498 |
|
|
$ |
284 |
|
|
$ |
821 |
|
|
$ |
961 |
|
|
|
|
2005 |
|
|
$ |
961 |
|
|
$ |
2,602 |
|
|
$ |
272 |
|
|
$ |
3,291 |
|
|
|
|
2006 |
|
|
$ |
3,291 |
|
|
$ |
(3,031 |
) |
|
$ |
114 |
|
|
$ |
146 |
|
(7) INVENTORIES
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Raw materials |
|
$ |
21,177 |
|
|
$ |
29,627 |
|
Work-in-process |
|
|
3,136 |
|
|
|
9,156 |
|
Finished goods |
|
|
47,615 |
|
|
|
89,628 |
|
|
|
|
|
|
|
|
|
|
|
71,928 |
|
|
|
128,411 |
|
Provision for excess and obsolescence |
|
|
(22,595 |
) |
|
|
(22,326 |
) |
|
|
|
|
|
|
|
|
|
$ |
49,333 |
|
|
$ |
106,085 |
|
|
|
|
|
|
|
|
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 2006, fiscal 2005 and fiscal 2004, Ciena
recorded a provision for inventory reserves of $9.0 million, $5.2 million and $4.2 million,
respectively, primarily related to increases in excess inventory due to changes in forecasted
sales for certain products.
The following table summarizes the activity in Cienas reserve for excess and obsolete
inventory (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
beginning of |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
October 31, |
|
period |
|
Provisions |
|
Deductions |
|
end of period |
|
|
|
2004 |
|
|
$ |
23,093 |
|
|
$ |
4,172 |
|
|
$ |
5,332 |
|
|
$ |
21,933 |
|
|
|
|
2005 |
|
|
$ |
21,933 |
|
|
$ |
5,232 |
|
|
$ |
4,570 |
|
|
$ |
22,595 |
|
|
|
|
2006 |
|
|
$ |
22,595 |
|
|
$ |
9,012 |
|
|
$ |
9,281 |
|
|
$ |
22,326 |
|
(8) PREPAID EXPENSES AND OTHER
Prepaid expenses and other are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Interest receivable |
|
$ |
7,743 |
|
|
$ |
8,547 |
|
Prepaid VAT and other taxes |
|
|
4,848 |
|
|
|
9,467 |
|
Prepaid expenses |
|
|
9,103 |
|
|
|
8,445 |
|
Restricted cash |
|
|
10,376 |
|
|
|
6,990 |
|
Other non-trade receivables |
|
|
5,797 |
|
|
|
2,923 |
|
|
|
|
|
|
|
|
|
|
$ |
37,867 |
|
|
$ |
36,372 |
|
|
|
|
|
|
|
|
61
(9) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Equipment, furniture and fixtures |
|
$ |
249,282 |
|
|
$ |
253,953 |
|
Leasehold improvements |
|
|
33,266 |
|
|
|
36,203 |
|
|
|
|
|
|
|
|
|
|
|
282,548 |
|
|
|
290,156 |
|
Accumulated depreciation and amortization |
|
|
(254,458 |
) |
|
|
(260,729 |
) |
|
|
|
|
|
|
|
|
|
$ |
28,090 |
|
|
$ |
29,427 |
|
|
|
|
|
|
|
|
During fiscal 2005 and fiscal 2004, Ciena recorded impairment losses of $0.2 million and $15.9
million, respectively, for equipment, furniture and fixtures as a result of its restructuring
activities. During fiscal 2004, Ciena also recorded $22.5 million in accelerated amortization
expense of leasehold improvements related to the closure of its San Jose, CA facility. This expense
is included in the research and development expense for fiscal 2004.
(10) OTHER INTANGIBLE ASSETS
Other intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
Developed technology |
|
$ |
139,983 |
|
|
$ |
(70,502 |
) |
|
$ |
69,481 |
|
|
$ |
139,983 |
|
|
$ |
(87,577 |
) |
|
$ |
52,406 |
|
Patents and licenses |
|
|
47,370 |
|
|
|
(19,219 |
) |
|
|
28,151 |
|
|
|
47,370 |
|
|
|
(25,463 |
) |
|
|
21,907 |
|
Customer
relationships,
covenants not to
compete,
outstanding
purchase orders and
contracts |
|
|
45,981 |
|
|
|
(23,289 |
) |
|
|
22,692 |
|
|
|
45,981 |
|
|
|
(29,020 |
) |
|
|
16,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
233,334 |
|
|
|
|
|
|
$ |
120,324 |
|
|
$ |
233,334 |
|
|
|
|
|
|
$ |
91,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2005, Ciena recorded an impairment of $37.7 million against developed technology
and an impairment of $8.0 million against customer relationships. For additional information see
Note 4.
The aggregate amortization expense of other intangible assets was $29.1 million, $42.7 million
and $34.7 million for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. Expected future
amortization of other intangible assets is as follows (in thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2007 |
|
$ |
29,050 |
|
2008 |
|
|
27,840 |
|
2009 |
|
|
19,254 |
|
2010 |
|
|
14,500 |
|
2011 |
|
|
630 |
|
|
|
|
|
|
|
$ |
91,274 |
|
|
|
|
|
(11) OTHER BALANCE SHEET DETAILS
62
Other long-term assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Maintenance spares inventory, net |
|
$ |
12,513 |
|
|
$ |
14,724 |
|
Deferred debt issuance costs |
|
|
6,406 |
|
|
|
10,306 |
|
Investments in privately held companies |
|
|
7,223 |
|
|
|
6,489 |
|
Restricted cash |
|
|
4,393 |
|
|
|
3,227 |
|
Other |
|
|
10,792 |
|
|
|
2,658 |
|
|
|
|
|
|
|
|
|
|
$ |
41,327 |
|
|
$ |
37,404 |
|
|
|
|
|
|
|
|
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 costs, which is included in interest expense, was
$3.1 million, $3.0 million and $3.0 million for fiscal 2006, fiscal 2005 and fiscal 2004,
respectively.
Accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Warranty |
|
$ |
27,044 |
|
|
$ |
31,751 |
|
Accrued compensation, payroll related tax and benefits |
|
|
26,164 |
|
|
|
24,102 |
|
Accrued interest payable |
|
|
6,082 |
|
|
|
5,502 |
|
Other |
|
|
17,201 |
|
|
|
17,927 |
|
|
|
|
|
|
|
|
|
|
$ |
76,491 |
|
|
$ |
79,282 |
|
|
|
|
|
|
|
|
The following table summarizes the activity in Cienas accrued warranty and other contractual
obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end |
|
|
October 31, |
|
of period |
|
Provisions |
|
Acquired |
|
Settlements |
|
of period |
|
|
|
2004 |
|
|
$ |
37,380 |
|
|
$ |
8,351 |
|
|
$ |
1,000 |
|
|
$ |
(16,542 |
) |
|
$ |
30,189 |
|
|
|
|
2005 |
|
|
$ |
30,189 |
|
|
$ |
9,738 |
|
|
$ |
|
|
|
$ |
(12,883 |
) |
|
$ |
27,044 |
|
|
|
|
2006 |
|
|
$ |
27,044 |
|
|
$ |
14,522 |
|
|
$ |
|
|
|
$ |
(9,815 |
) |
|
$ |
31,751 |
|
Deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Products |
|
$ |
14,534 |
|
|
$ |
4,276 |
|
Services |
|
|
28,984 |
|
|
|
36,400 |
|
|
|
|
|
|
|
|
|
|
|
43,518 |
|
|
|
40,676 |
|
Less current portion |
|
|
(27,817 |
) |
|
|
(19,637 |
) |
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
15,701 |
|
|
$ |
21,039 |
|
|
|
|
|
|
|
|
(12) 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 1st and August 1st 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. Ciena has the option to redeem all or a
portion of the notes that have not been previously converted at the following redemption prices
(expressed as percentage of principle amount):
63
|
|
|
|
|
|
|
Redemption |
Period |
|
Price |
Beginning on February 1, 2006 and ending on January 31, 2007 |
|
|
101.071 |
% |
Beginning on February 1, 2007 and ending on January 31, 2008 |
|
|
100.536 |
% |
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.
At October 27, 2006, the fair value of the outstanding $542.3 million in aggregate principal
amount of 3.75% convertible notes was $525.3 million. At October 28, 2005, the fair value of the
outstanding $648.8 million in aggregate principal amount of 3.75% convertible notes was $587.9
million. 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. The notes bear interest at the annual
rate of 0.25% from April 10, 2006, payable semi-annually on May 1 and November 1, commencing on
November 1, 2006. 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, the 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), 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.
As of October 27, 2006, the fair value of the $300.0 million in aggregate principal amount of
0.25% convertible senior notes outstanding was $251.3 million, based on the quoted market price for
the notes.
ONI 5.0% Convertible Subordinated Notes
During fiscal 2004, Ciena purchased the remaining $48.2 million of the outstanding ONI 5.0%
convertible subordinated notes. Ciena paid $49.2 million for the notes with a cumulative accreted
book value of $41.0 million, which resulted in a loss on early extinguishment of debt of $8.2
million.
(13) 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; and (iii) shares issuable upon exercise of outstanding stock
options and warrants using the treasury stock method.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
Year Ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Net income (loss) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
Add: Interest expense
associated with convertible
notes (excluding anti-dilutive
expense per SFAS 128) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used to
calculate Diluted EPS |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
Year Ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Basic weighted average shares issued
and outstanding |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
83,840 |
|
|
|
|
|
|
|
|
|
|
|
Add: Shares issuable under stock
options, employees stock purchase
plans, warrants and restricted stock
units |
|
|
|
|
|
|
|
|
|
|
1,171 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares
issued and outstanding |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
85,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS |
|
Year Ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Basic EPS |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Explanation of Shares Excluded due to Anti-Dilutive Effect
For fiscal 2004 and fiscal 2005 respectively, approximately 7.9 million and 9.3 million
shares, representing 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 during these periods.
For fiscal 2006, approximately 4.2 million shares, representing the weighted average number of
shares underlying stock options, restricted stock units and warrants, 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, approximately 4.2 million and 0.8
million shares, representing the weighted average number of shares issuable upon conversion of
Cienas 0.25% convertible senior notes and 3.75% convertible notes, respectively, are considered
anti-dilutive pursuant to SFAS 128 because the interest expense (net of tax and nondiscretionary
adjustments) associated with each of the convertible notes above, on a per common share if
converted basis, exceeds Basic EPS for the period.
The following table (in thousands except per
share amounts) summarizes the shares excluded, due
to their anti-dilutive
effect, from the calculation of the denominator for Basic and Diluted EPS above:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from EPS |
|
|
Denominator due to anti-dilutive effect |
|
Year Ended October 31, |
|
|
2004 |
|
2005 |
|
2006 |
Shares underlying stock options,
restricted stock units and warrants |
|
|
6,975 |
|
|
|
8,374 |
|
|
|
4,178 |
|
0.25% Convertible senior notes |
|
|
|
|
|
|
|
|
|
|
4,203 |
|
3.75% Convertible notes |
|
|
944 |
|
|
|
928 |
|
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluded due to anti-dilutive
effect |
|
|
7,919 |
|
|
|
9,302 |
|
|
|
9,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
(14) STOCKHOLDERS EQUITY
Shareholder Rights Plan
In December 1997, Cienas Board of Directors adopted a shareholder rights plan. This plan is
designed to deter any potential coercive or unfair takeover tactics in the event of an unsolicited
takeover attempt. It is not intended to prevent a takeover of Ciena on terms that are favorable and
fair to all shareholders and will not interfere with a merger approved by the Board of Directors.
Each right entitles shareholders to buy a unit equal to one one-thousandth of a share of
preferred stock of Ciena. The rights will be exercisable only if a person or a group acquires or
announces a tender or exchange offer to acquire 15% or more of Cienas common stock or if Ciena
enters into certain other business combination transactions not approved by the Board of Directors.
In June 2005, Ciena amended its rights plan to raise the ownership trigger to 20% for FMR Corp.,
one of Cienas institutional investors, and certain of its affiliated entities.
In the event the rights become exercisable, the rights plan allows for Ciena shareholders to
acquire stock of the surviving corporation, whether or not Ciena is the surviving corporation,
having a value twice that of the exercise price of the rights. The rights were distributed to
shareholders of record in January 1998. Pursuant to the terms of Cienas rights plan, the number of
rights attached to each share of common stock was proportionately increased to reflect the reverse
stock split on September 22, 2006 described below. The rights will expire on December 29, 2007 and
are redeemable for $0.001 per right at the approval of Cienas Board of Directors.
Call Spread Option
Concurrent with Cienas April 10, 2006 issuance of 0.25% Convertible Senior Notes due May 1,
2013, Ciena purchased a call spread option on its common stock from an affiliate of the
underwriter. The call spread option is designed to mitigate dilution from the conversion of the
notes to the extent that the market price per share of Ciena common stock upon exercise is greater
than the conversion price, subject to a cap.
The call spread option covers approximately 7.6 million shares of Ciena common stock, which is
the number of shares issuable upon conversion of the notes in full. The call spread option
effectively has a lower strike price of $39.5255 and a higher strike price of $45.54025 and is
exercisable and expires on May 1, 2013, the maturity date of the notes. Ciena can exercise the call
spread option on a net cash basis, a net share basis or a full physical settlement. A net cash
settlement would result in Ciena receiving an amount ranging 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, if the market price per share of Ciena common stock upon exercise is at or above the
higher strike price. Settlement of the call spread option on a net share basis would result in
Ciena receiving a number of shares ranging from 0, if the market price per share of Ciena common
stock upon exercise is equal to or below the lower strike price, up to approximately 1.0 million
shares, if the market price per share of Ciena common stock upon exercise is equal to the higher
strike price. The value of the consideration of a net share settlement will be equal to the value
upon a net cash settlement. If the market price is between the lower strike price and the higher
strike price, in lieu of a net share or net cash settlement, Ciena may elect to receive the full
number of shares underlying the call spread option upon payment by Ciena of an aggregate option
exercise price of $300.0 million. Should there be an early unwind of the call spread option, the
amount of cash or net shares to be received by Ciena will be dependent 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 option and the lower price and higher strike
prices are subject to customary adjustments. The $28.5 million cost of the call spread option was
recorded as a reduction in additional paid in capital.
Reverse Stock Split
At Cienas annual meeting on March 15, 2006, shareholders approved a proposal to authorize the
Board of Directors, in its discretion, to effect a reverse stock split at one of three approved
ratios, at any time prior to the 2007 annual meeting, without further action by shareholders. On
August 30, 2006, Cienas Board approved a one-for-seven (1-for-7) reverse stock split of Cienas
common stock. The reverse stock split became effective at 5:00 p.m., Eastern Time, on September 22,
2006. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common
stock was reclassified and combined into one share of new common stock.
In connection with the reverse stock split, the number of shares of common stock authorized
under Cienas Third
66
Restated Certificate of Incorporation was reduced from 980 million to 140
million shares, without any change in par value per common share. The reverse split did not change
the number of shares of Ciena preferred stock authorized, which remains at 20 million. All
references to share and per-share data for all periods presented have been adjusted to give effect
to the one-for-seven (1-for-7) reverse stock split.
(15) INCOME TAXES
The provision for income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Provision for income
taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
|
|
|
|
|
|
|
|
23 |
|
Foreign |
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,358 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
1,121 |
|
|
$ |
1,320 |
|
|
$ |
1,381 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2004 |
|
2005 |
|
2006 |
United States |
|
$ |
(792,059 |
) |
|
$ |
(438,956 |
) |
|
$ |
(2,549 |
) |
International |
|
|
3,716 |
|
|
|
4,577 |
|
|
|
4,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(788,343 |
) |
|
$ |
(434,379 |
) |
|
$ |
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
2004 |
|
2005 |
|
2006 |
Provision at statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
State taxes |
|
|
|
|
|
|
|
|
|
|
1.14 |
% |
Foreign taxes |
|
|
0.02 |
% |
|
|
0.06 |
% |
|
|
14.04 |
% |
Non-deductible purchased research and development |
|
|
(1.34 |
%) |
|
|
|
|
|
|
|
|
Research and development credit |
|
|
0.57 |
% |
|
|
0.65 |
% |
|
|
(55.94 |
%) |
Non-deductible goodwill and other |
|
|
(16.50 |
%) |
|
|
(15.04 |
%) |
|
|
16.15 |
% |
Valuation allowance |
|
|
(17.89 |
%) |
|
|
(20.97 |
%) |
|
|
59.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.14 |
%) |
|
|
(0.30 |
%) |
|
|
69.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2005 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accrued liabilities |
|
$ |
68,041 |
|
|
$ |
50,088 |
|
Depreciation and amortization |
|
|
110,312 |
|
|
|
118,122 |
|
NOL and credit carry forward |
|
|
983,818 |
|
|
|
994,906 |
|
Other |
|
|
11,095 |
|
|
|
26,406 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
1,173,266 |
|
|
|
1,189,522 |
|
Valuation allowance |
|
|
(1,173,266 |
) |
|
|
(1,189,522 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
67
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 |
|
2004 |
|
|
$ |
894,198 |
|
|
$ |
183,708 |
|
|
$ |
|
|
|
$ |
1,077,906 |
|
|
2005 |
|
|
$ |
1,077,906 |
|
|
$ |
95,360 |
|
|
$ |
|
|
|
$ |
1,173,266 |
|
|
2006 |
|
|
$ |
1,173,266 |
|
|
$ |
16,256 |
|
|
$ |
|
|
|
$ |
1,189,522 |
|
As of October 31, 2006, Ciena had a $2.49 billion net operating loss carry forward and an
$82.4 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 may be 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 $56.3
million will be credited to additional paid-in capital when realized.
Approximately $128.0 million of the valuation allowance as of October 31, 2006 was
attributable to deferred tax assets associated with the acquisitions of ONI, WaveSmith, Akara,
Catena and IPI that, when realized, will first reduce goodwill, then other non-current intangibles
of the acquired companies, and then income tax expense. As of October
31, 2006, it is anticipated the realization of any valuation
allowance associated with acquisitions would only reduce goodwill.
(16) SHARE-BASED COMPENSATION EXPENSE
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).
Ciena Corporation 2000 Equity Incentive Plan
The 2000 Plan, which is a shareholder approved plan, 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 and 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 issued and outstanding shares of Ciena each January 1st, unless
the Compensation Committee reduces the amount of the increase in any year. By action of the
Compensation Committee, the plan increased by (i) zero shares on January 1, 2006, (ii) zero shares
on January 1, 2005, and (iii) 9.5 million shares, or 2.0% of the then issued and outstanding shares
of Ciena,
on January 1, 2004. In addition, any shares subject to outstanding options or other awards
under the ONI 1997 Stock Plan, ONI 1998 Equity Incentive Plan, or ONI 1999 Equity Incentive Plan
that are forfeited upon cancellation of the award are available for issuance under the 2000 Plan.
As of October 31, 2006, there were 5.6 million shares authorized and available for issuance under
the 2000 Plan.
Stock Options
The following table is a summary of Cienas stock option activity (shares in thousands):
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Options |
|
Average |
|
|
Outstanding |
|
Exercise Price |
Balance as of October 31, 2003 |
|
|
7,004 |
|
|
$ |
70.70 |
|
Granted and assumed |
|
|
5,317 |
|
|
|
23.17 |
|
Exercised |
|
|
(786 |
) |
|
|
11.97 |
|
Canceled |
|
|
(2,456 |
) |
|
|
69.65 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal 2006 was $18.2 million.
The following table summarizes information with respect to stock options outstanding at
October 31, 2006, based on Cienas closing stock price on October 27, 2006 of $23.59 per share
(shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2006 |
|
|
Vested Options at October 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Range of |
|
|
|
|
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
|
Exercise |
|
|
|
|
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
|
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Price |
|
|
Number |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
Number |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
16.52 |
|
|
|
947 |
|
|
|
8.20 |
|
|
$ |
14.34 |
|
|
$ |
8,756 |
|
|
|
342 |
|
|
|
7.31 |
|
|
$ |
11.61 |
|
|
$ |
4,099 |
|
|
|
$ |
16.53 |
|
|
|
|
|
|
$ |
17.43 |
|
|
|
873 |
|
|
|
8.52 |
|
|
|
17.19 |
|
|
|
5,593 |
|
|
|
282 |
|
|
|
8.23 |
|
|
|
17.08 |
|
|
|
1,838 |
|
|
|
$ |
17.44 |
|
|
|
|
|
|
$ |
22.96 |
|
|
|
1,038 |
|
|
|
7.76 |
|
|
|
21.44 |
|
|
|
2,234 |
|
|
|
864 |
|
|
|
7.67 |
|
|
|
21.74 |
|
|
|
1,600 |
|
|
|
$ |
22.97 |
|
|
|
|
|
|
$ |
31.36 |
|
|
|
637 |
|
|
|
7.63 |
|
|
|
27.55 |
|
|
|
3 |
|
|
|
516 |
|
|
|
7.16 |
|
|
|
27.48 |
|
|
|
3 |
|
|
|
$ |
31.37 |
|
|
|
|
|
|
$ |
31.71 |
|
|
|
1,041 |
|
|
|
6.16 |
|
|
|
31.70 |
|
|
|
|
|
|
|
1,014 |
|
|
|
6.07 |
|
|
|
31.71 |
|
|
|
|
|
|
|
$ |
31.72 |
|
|
|
|
|
|
$ |
46.97 |
|
|
|
725 |
|
|
|
6.45 |
|
|
|
40.83 |
|
|
|
|
|
|
|
663 |
|
|
|
6.16 |
|
|
|
41.37 |
|
|
|
|
|
|
|
$ |
46.98 |
|
|
|
|
|
|
$ |
83.13 |
|
|
|
781 |
|
|
|
5.43 |
|
|
|
60.35 |
|
|
|
|
|
|
|
781 |
|
|
|
5.43 |
|
|
|
60.35 |
|
|
|
|
|
|
|
$ |
83.14 |
|
|
|
|
|
|
$ |
1,046.50 |
|
|
|
1,068 |
|
|
|
4.24 |
|
|
|
156.16 |
|
|
|
|
|
|
|
1,069 |
|
|
|
4.24 |
|
|
|
156.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
|
|
|
|
$ |
1,046.50 |
|
|
|
7,110 |
|
|
|
6.75 |
|
|
$ |
48.52 |
|
|
$ |
16,586 |
|
|
|
5,531 |
|
|
|
6.18 |
|
|
$ |
57.01 |
|
|
$ |
7,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2006, total unrecognized compensation expense related to unvested stock
options was $11.0 million. This expense is expected to be recognized over a weighted-average period
of 1.9 years.
On October 26, 2005, Cienas Board of Directors accelerated the vesting of approximately 2.0
million unvested, out-of-the-money stock options previously awarded to employees, officers and
directors under Cienas stock option plans. Certain performance-based options held by executives
were not subject to this acceleration. For purposes of the acceleration, options with an exercise
price greater than $17.43 per share were deemed out-of-the-money. The accelerated options, which
were considered fully vested as of October 26, 2005, had exercise prices ranging from $17.50 to
$328.93 per share and a weighted average exercise price of $30.73 per share. Ciena did not
accelerate the vesting of options that had an exercise price per share of $17.43 or less. The
primary purpose of the accelerated vesting was to enable Ciena to avoid recognizing future
compensation expense associated with these out-of-the-money stock options upon adoption of SFAS
123(R) for fiscal 2006.
Restricted Stock Units
A restricted stock unit is a right to receive a share of Ciena common stock when the unit
vests. Ciena calculates the fair value of each restricted stock unit using the intrinsic value
method and recognizes the expense straight-line over the requisite period. The following table is a
summary of Cienas restricted stock unit activity, based on Cienas closing stock price as October
27, 2006 of $23.59 per share (shares and intrinsic value in thousands):
69
The following table is a summary of Cienas restricted stock unit activity (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Restricted |
|
Grant Date |
|
Aggregate |
|
|
Stock Units |
|
Fair Value |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Value |
Balance as of October 31, 2003 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Granted |
|
|
25 |
|
|
|
|
|
|
|
|
|
Converted |
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2004 |
|
|
22 |
|
|
$ |
45.85 |
|
|
$ |
373 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Converted |
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2005 |
|
|
18 |
|
|
$ |
47.32 |
|
|
$ |
301 |
|
Granted |
|
|
261 |
|
|
|
|
|
|
|
|
|
Converted |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
162 |
|
|
$ |
22.99 |
|
|
$ |
3,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of restricted stock units converted during fiscal 2006 was $2.6
million.
As of October 31, 2006, total unrecognized compensation expense related to restricted stock
units was $2.8 million. This expense is expected to be recognized over a weighted-average period of
1.5 years.
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 annually increases 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 4.0 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.
70
|
|
|
|
|
|
|
|
|
|
|
ESPP shares available for |
|
Intrinisic value at |
|
|
issuance |
|
exercise date |
Balance as of October 31, 2003 |
|
|
2,644 |
|
|
|
|
|
Issued March 15, 2004 |
|
|
(221 |
) |
|
$ |
1,653 |
|
Issued September 15, 2004 |
|
|
(171 |
) |
|
|
347 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2006, unrecognized compensation expense related to the ESPP was $0.5
million. This expense is expected to be recognized over a weighted-average period of 1.2 years.
Share-Based Compensation under SFAS 123(R) for Fiscal 2006 and APB 25 for Fiscal 2005 and Fiscal
2004
On November 1, 2005, Ciena adopted SFAS 123(R), which requires the measurement and recognition
of compensation expense, based on estimated fair values, for all share-based payments awards made
to Cienas employees and directors including stock options, restricted stock, restricted stock unit
awards and stock purchased under Cienas ESPP.
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. Share-based
compensation expense of $9.4 million and $11.9 million for fiscal 2005 and fiscal 2004 was solely
related to share-based awards assumed through acquisitions and restricted stock unit awards that
Ciena had been recognizing in its consolidated statement of operations in accordance with the
provisions set forth above. Because the exercise price of Cienas stock options granted to
employees and directors equaled the fair market value of the underlying stock at the grant date,
under the intrinsic value method, no share-based compensation expense was otherwise recognized in
Cienas consolidated statement of operations.
The following table summarizes share-based compensation expense under SFAS 123(R) for fiscal
2006; and share-based compensation expense under APB 25, as interpreted by FIN 44 for fiscal 2005
and fiscal 2004, which was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Product costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,075 |
|
Service costs |
|
|
|
|
|
|
|
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of sales |
|
|
|
|
|
|
|
|
|
|
1,885 |
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,514 |
|
|
|
4,404 |
|
|
|
5,057 |
|
Sales and marketing |
|
|
4,051 |
|
|
|
4,404 |
|
|
|
3,415 |
|
General and administrative |
|
|
1,318 |
|
|
|
633 |
|
|
|
3,385 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense |
|
|
11,883 |
|
|
|
9,441 |
|
|
|
11,857 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense capitalized in inventory, net |
|
|
|
|
|
|
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
11,883 |
|
|
$ |
9,441 |
|
|
$ |
14,041 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Share-Based Compensation under SFAS 123 for Fiscal 2005 and Fiscal 2004
Had (i) compensation expense for Cienas stock option plans and employee stock purchase plan
been determined based on the Black-Scholes option-pricing model; and (ii) the fair value at the
grant date for awards in fiscal 2004 and fiscal 2005
71
been determined consistent with the provisions
of SFAS 123, Accounting for Stock Based Compensation as amended by SFAS 148, Accounting for
Stock Based Compensation-Transition and Disclosure, Cienas net loss and net loss per share for
the fiscal 2004 and fiscal 2005 would have changed by the pro forma amounts indicated below (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2004 |
|
|
2005 |
|
Net loss applicable to common stockholders as reported |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects |
|
|
39,638 |
|
|
|
61,623 |
|
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects |
|
|
11,883 |
|
|
|
9,441 |
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders pro forma |
|
$ |
(817,219 |
) |
|
$ |
(487,881 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss per share pro forma |
|
$ |
(10.97 |
) |
|
$ |
(5.94 |
) |
|
|
|
|
|
|
|
Fair Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS 123
Assumptions for Option-Based Awards under SFAS 123(R)
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, |
|
|
2004 |
|
2005 |
|
2006 |
Expected volatility |
|
|
63%-71 |
% |
|
|
58%-67 |
% |
|
|
61.5 |
% |
Risk-free interest rate |
|
|
3.5 |
% |
|
|
3.65%-4.26 |
% |
|
|
4.3%-5.1 |
% |
Expected
life (years) |
|
|
4.5 |
|
|
|
3.9-5.5 |
|
|
|
5.5-6.1 |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
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; 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; options are non-transferable and non-hedgeable.
The dividend yield assumption is based on Cienas history and expectation of dividend payouts.
As share-based compensation expense recognized in the consolidated statement of operations for
fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures were estimated based on Cienas historical experience.
Assumptions for option-based awards under SFAS 123
Prior to the first quarter of fiscal 2006, 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
72
the term of Cienas
employee stock options. The dividend yield assumption was based on Cienas history and expectation
of dividend payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted for as
they occurred.
Assumptions for Restricted Stock Unit Awards under SFAS 123(R) and SFAS 123
The fair value of each restricted stock unit award is estimated on the date of grant using the
intrinsic value method. The weighted average fair value of each restricted stock unit granted under
Cienas stock option plans for fiscal 2006 and 2004 was $19.47 and $44.78, respectively. No
restricted stock unit awards were made during fiscal 2005.
Assumptions for Employee Stock Purchase Plan Awards under SFAS 123(R)
On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to
shorten the offer period under the ESPP from twenty four months 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. These amendments were intended to enable the ESPP to
be considered a non-compensatory plan under FAS 123(R) for future offering periods.
Employees enrolled with offer periods that commenced prior to September 15, 2006 are permitted
to complete the remaining purchase periods in their current offer period. For these continuing
offer periods, the 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.
(17) 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. The plan includes an employer matching contribution
equal to 50% of the first 3% an employee contributes 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 2006, fiscal 2005 and fiscal 2004, Ciena made
matching contributions of approximately $1.2 million, $1.3 million and $1.6 million, respectively.
(18) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Ciena has certain minimum obligations under non-cancelable operating leases expiring on
various dates through 2019 for equipment and facilities. Included in Cienas minimum obligations
under non-cancelable operating leases is $41.2 million of unfavorable lease commitments. These
unfavorable lease commitments were based on the present value of the lease obligations assumed by
Ciena through acquisition, compared to market rates at the time of acquisition. The unfavorable
lease commitments will be paid over the applicable remaining lease term. Also included in Cienas
minimum obligations under non-cancelable operating leases is $44.5 million related to restructured
facilities. For additional information see Note 3. Both the unfavorable lease commitments and
restructured facilities are recorded as liabilities on Cienas balance sheet. Future annual minimum
rental commitments under non-cancelable operating leases at October 31, 2006 are as follows (in
thousands):
73
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2007 |
|
$ |
26,141 |
|
2008 |
|
|
24,521 |
|
2009 |
|
|
22,106 |
|
2010 |
|
|
20,652 |
|
2011 |
|
|
14,492 |
|
Thereafter |
|
|
18,970 |
|
|
|
|
|
Total |
|
$ |
126,882 |
|
|
|
|
|
Rental expense for fiscal 2006, fiscal 2005, and fiscal 2004 was approximately $9.2 million,
$11.6 million and $16.3 million, respectively. In addition, Ciena paid approximately $45.3 million,
$33.0 million, and $19.3 million during fiscal 2006, fiscal 2005, and fiscal 2004, respectively,
related to rent costs for restructured facilities and unfavorable lease commitments, which were
offset against Cienas restructuring liabilities and unfavorable lease obligations.
Purchase Commitments with Contract Manufacturers and Suppliers
Ciena relies on a small number of contract manufacturers to perform the majority of the
manufacturing operations for its products. In order to reduce lead times and ensure adequate
component supply, Ciena enters into agreements with these suppliers that allow them to procure
inventory for Cienas forecasted future demands. As of October 31, 2006, Ciena has purchase
commitments of $97.3 million.
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. Thereafter, on September 19, 2006, Litton Systems filed a status
report in which it requested that the district court lift the stay of the case, which request was
denied by the district court on October 13, 2006. Ciena believes that it has valid defenses to the
lawsuit and intends to defend it vigorously in the event the stay of the case is lifted.
As a result of Cienas 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, if approved, 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 does 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 directed
the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005,
the district court issued a preliminary order approving the revised stipulated settlement agreement, and approving and setting
dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006,
at which time the court took the matter under advisement. If the court determines that the settlement is fair
to the class members, the settlement will be approved. 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. Because the settlement
agreement involves certification of a settlement class as part of the approval process, the impact of the
Second Circuits decision on the settlement remains unclear.
74
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. While the outcome of these
matters is currently not determinable, 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.
(19) ENTITY WIDE DISCLOSURES
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. Cienas geographic distribution of revenue was as
follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
United States |
|
$ |
221,456 |
|
|
|
74.1 |
|
|
$ |
340,774 |
|
|
|
79.8 |
|
|
$ |
423,687 |
|
|
|
75.1 |
|
International |
|
|
77,251 |
|
|
|
25.9 |
|
|
|
86,483 |
|
|
|
20.2 |
|
|
|
140,369 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
298,707 |
|
|
|
100.0 |
|
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
The majority of Cienas assets are located in the United States and attributable to the
United States operations. Equipment, furniture and fixtures located outside of the United States
are reflected as International in the geographic distribution of equipment, furniture and fixtures
below. Cienas geographic distribution of net equipment, furniture and fixtures was as follows (in
thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
United States |
|
$ |
23,390 |
|
|
|
83.3 |
|
|
$ |
21,934 |
|
|
|
74.5 |
|
International |
|
|
4,700 |
|
|
|
16.7 |
|
|
|
7,493 |
|
|
|
25.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,090 |
|
|
|
100.0 |
|
|
$ |
29,427 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total equipment, furniture and fixtures |
Product portfolio distribution of revenue was as follows (in thousands, except percentage
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
Optical networking products |
|
$ |
188,656 |
|
|
|
63.1 |
|
|
$ |
254,159 |
|
|
|
59.5 |
|
|
$ |
376,920 |
|
|
|
66.9 |
|
Broadband networking products |
|
|
31,294 |
|
|
|
10.5 |
|
|
|
82,726 |
|
|
|
19.4 |
|
|
|
81,823 |
|
|
|
14.5 |
|
Data networking products |
|
|
23,150 |
|
|
|
7.8 |
|
|
|
34,265 |
|
|
|
8.0 |
|
|
|
35,007 |
|
|
|
6.2 |
|
Network and services
management software, and
other |
|
|
7,111 |
|
|
|
2.4 |
|
|
|
3,125 |
|
|
|
0.7 |
|
|
|
8,677 |
|
|
|
1.5 |
|
Global network services |
|
|
48,496 |
|
|
|
16.2 |
|
|
|
52,982 |
|
|
|
12.4 |
|
|
|
61,629 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
298,707 |
|
|
|
100.0 |
|
|
$ |
427,257 |
|
|
|
100.0 |
|
|
$ |
564,056 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
- denotes % of total revenue |
During the following fiscal years customers who each accounted for at least 10% of
Cienas revenue during the respective periods are as follows (in thousands):
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2004 |
|
|
%* |
|
|
2005 |
|
|
%* |
|
|
2006 |
|
|
%* |
|
Verizon |
|
$ |
N/A |
|
|
|
|
|
|
$ |
43,673 |
|
|
|
10.2 |
|
|
$ |
70,225 |
|
|
|
12.4 |
|
Sprint |
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
89,793 |
|
|
|
15.9 |
|
BellSouth |
|
|
N/A |
|
|
|
|
|
|
|
43,946 |
|
|
|
10.3 |
|
|
|
N/A |
|
|
|
|
|
AT&T |
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
66,926 |
|
|
|
11.9 |
|
SAIC |
|
|
46,557 |
|
|
|
15.6 |
|
|
|
46,058 |
|
|
|
10.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,557 |
|
|
|
15.6 |
|
|
$ |
133,677 |
|
|
|
31.3 |
|
|
$ |
226,944 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
- denotes % of total revenue |
|
N/A |
|
denotes revenue recognized less than 10% for the period. |
76
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, 2006. 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, 2006, 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 managements assessment and the effectiveness of Ciena Corporations
internal control over financial reporting as of October 31, 2006 as stated in its report appearing
under Item 8.
|
|
|
|
|
/s/ Gary B. Smith
|
|
/s/ Joseph R. Chinnici |
|
|
|
|
Joseph R. Chinnici
|
|
|
President and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer |
|
|
January
10, 2007
|
|
January 10, 2007 |
|
|
77
Attestation Report of Independent Registered Public Accounting Firm
Pricewaterhouse Coopers LLP, the independent registered public accounting firm that audited
Cienas consolidated financial statements, has issued an attestation report on managements
assessment of Cienas internal control over financial reporting, which is contained under Item 8 of
Part II of this annual report under the heading Report of Independent Registered Public Accounting
Firm. The attestation report is incorporated herein by reference.
Item 9B. Other Information
None.
78
PART III
Item 10. Directors and Executive Officers of the Registrant
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
Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this Form 10-K with respect to our Annual Meeting of Shareholders
to be held on March 14, 2007.
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 Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be
held on March 14, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information responsive to this item is incorporated herein by reference to Cienas Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be
held on March 14, 2007.
Item 13. Certain Relationships and Related Transactions
Information responsive to this item is incorporated herein by reference to Cienas Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be
held on March 14, 2007.
Item 14. Principal Accounting Fees and Services
Information responsive to this item is incorporated herein by reference to Cienas Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be
held on March 14, 2007.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) |
1. |
|
The information required by this item is included in Item 8 of Part II of this annual
report. |
|
|
2. |
|
The information required by this item is included in Item 8 of Part II of this annual
report. |
|
|
3. |
|
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) |
|
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. |
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Linthicum, County of Anne Arundel, State of Maryland, on
the 10th day of January 2007.
|
|
|
|
|
|
Ciena Corporation
|
|
|
By: |
/s/ Gary B. Smith
|
|
|
|
Gary B. Smith |
|
|
|
President, Chief Executive Officer
and Director |
|
|
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.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ Patrick H. Nettles, Ph.D.
Patrick H. Nettles, Ph.D. |
|
Executive Chairman of the Board
of Directors |
|
January 10, 2007 |
|
|
|
|
|
/s/ Gary B. Smith
Gary B. Smith |
|
President, Chief Executive Officer and
Director |
|
January 10, 2007 |
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/ Joseph R. Chinnici
Joseph R. Chinnici |
|
Sr. Vice President, Finance and Chief
Financial Officer |
|
January 10, 2007 |
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
/s/ Andrew C. Petrik
Andrew C. Petrik |
|
Vice President, Controller and
Treasurer |
|
January 10, 2007 |
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
/s/ Stephen P. Bradley, Ph.D.
Stephen P. Bradley, Ph.D. |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Harvey B. Cash
Harvey B. Cash |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Bruce L. Claflin
Bruce L. Claflin |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Lawton W. Fitt
Lawton W. Fitt |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Judith M. OBrien
Judith M. OBrien |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Michael J. Rowny
Michael J. Rowny |
|
Director |
|
January 10, 2007 |
|
|
|
|
|
/s/ Gerald H. Taylor
Gerald H. Taylor
|
|
Director |
|
January 10, 2007 |
80
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
|
|
|
Filed |
|
|
|
|
Form and |
|
|
|
|
|
Here- |
Exhibit |
|
|
|
Registration or |
|
|
|
|
|
with |
Number |
|
Exhibit Description |
|
Commission No. |
|
Exhibit |
|
Filing Date |
|
(X) |
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Third Restated Certificate of Incorporation
|
|
S-1 (333-17729)
|
|
3.2
|
|
12/12/1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws
|
|
S-1 (333-17729)
|
|
3.3
|
|
2/5/1997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate of Amendment to Third Restated
Certificate of Incorporation dated December 9,
1996
|
|
S-1 (333-17729)
|
|
3.1
|
|
12/12/1996 |
|
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|
|
|
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|
|
|
|
|
3.4
|
|
Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock dated January 12, 1998
|
|
8-K (000-21969)
|
|
4.2
|
|
12/29/1997 |
|
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|
3.5
|
|
Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 13,
1998
|
|
10-Q (000-21969)
|
|
3.5
|
|
5/18/2000 |
|
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|
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|
|
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|
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|
3.6
|
|
Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 16,
2000
|
|
10-Q (000-21969)
|
|
3.6
|
|
5/18/2000 |
|
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3.7
|
|
Certificate of Amendment to Third Restated
Certificate of Incorporation dated March 13,
2001
|
|
10-Q (000-21969)
|
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3.7
|
|
5/17/2001 |
|
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3.8
|
|
Certificate of Ownership and Merger (amending
Third Restated Certificate of Incorporation)
dated October 29, 2004
|
|
8-K (000-21969)
|
|
3.1
|
|
10/29/2004 |
|
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|
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|
|
3.9
|
|
Certificate of Amendment to Third Restated
Certificate of Incorporation dated September
22, 2006
|
|
8-K (000-21969)
|
|
3.1
|
|
9/25/2006 |
|
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|
|
4.1
|
|
Specimen Stock Certificate
|
|
S-1 (333-17729)
|
|
4.1
|
|
1/14/1997 |
|
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4.2
|
|
Rights Agreement dated December 29, 1997
|
|
8-K (000-21969)
|
|
4.2
|
|
12/29/1997 |
|
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4.3
|
|
Amendment to Rights Agreement dated June 2, 1998
|
|
8-K (000-21969)
|
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4.3
|
|
6/3/1998 |
|
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4.4
|
|
Amendment No. 2 to Rights Agreement dated
September 13, 1998
|
|
8-K (000-21969)
|
|
99.2
|
|
9/14/1998 |
|
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4.5
|
|
Amendment No. 3 to Rights Agreement dated
October 19, 1998
|
|
8-K (000-21969)
|
|
99.1
|
|
10/19/1998 |
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4.6
|
|
Amendment No. 4 to Rights Agreement dated June
2, 2005
|
|
8-K (000-21969)
|
|
4.1
|
|
6/3/05 |
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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)
|
|
4.6
|
|
2/15/2001 |
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4.8
|
|
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)
|
|
4.8
|
|
4/10/2006 |
|
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|
|
10.1
|
|
Employment Agreement dated April 9, 1994
between Ciena and Patrick Nettles**
|
|
S-1 (333-17729)
|
|
10.12
|
|
12/12/1996 |
|
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|
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|
10.2
|
|
Lightera 1998 Stock Option Plan and Form of
Stock Option Agreement**
|
|
10-Q (000-21969)
|
|
10.19
|
|
5/21/1999 |
|
|
|
|
|
|
|
|
|
|
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|
|
10.3
|
|
Omnia Communications, Inc. 1997 Stock Plan and
Form of Agreements**
|
|
10-Q (000-21969)
|
|
10.20
|
|
8/19/1999 |
|
|
|
|
|
|
|
|
|
|
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|
|
10.4
|
|
1999 Non-Officer Stock Option Plan and Form of
Stock Option Agreement**
|
|
10-K (000-21969)
|
|
10.22
|
|
12/10/1999 |
|
|
|
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|
|
|
|
|
|
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|
|
10.5
|
|
Amendment No. 1 to 1999 Non-Officer Stock
Option Plan**
|
|
10-K (000-21969)
|
|
10.25
|
|
12/3/2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Cyras Systems, Inc. 1998 Stock Plan as amended
and Form of Stock Option Agreement**
|
|
10-Q (000-21969)
|
|
10.24
|
|
5/17/2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
ONI 1997 Stock Plan**
|
|
S-1*
|
|
10.2
|
|
3/10/2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
ONI 1998 Equity Incentive Plan**
|
|
S-1*
|
|
10.3
|
|
3/10/2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
ONI 1999 Equity Incentive Plan**
|
|
S-1*
|
|
10.4
|
|
3/10/2000 |
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
|
|
|
Filed |
|
|
|
|
Form and |
|
|
|
|
|
Here- |
Exhibit |
|
|
|
Registration or |
|
|
|
|
|
with |
Number |
|
Exhibit Description |
|
Commission No. |
|
Exhibit |
|
Filing Date |
|
(X) |
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
WaveSmith Networks, Inc. 2000 Stock Option and
Incentive Plan**
|
|
10-Q (000-21969)
|
|
10.36
|
|
8/21/2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Catena Networks, Inc. 1998 Equity Incentive
Plan, as amended**
|
|
10-Q (000-21969)
|
|
10.38
|
|
5/20/2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Internet Photonics, Inc. Amended and Restated
2000 Corporate Stock Option Plan**
|
|
10-Q (000-21969)
|
|
10.39
|
|
5/20/2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Form of Stock Option Award Agreement for
directors under Ciena Corporation 2000 Equity
Incentive Plan**
|
|
8-K (000-21969)
|
|
10.4
|
|
11/04/2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Amended and Restated 2003 Employee Stock
Purchase Plan (as amended on May 30, 2006)**
|
|
10-Q (000-21969)
|
|
10.1
|
|
8/31/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
1996 Outside Directors Stock Option Plan**
|
|
S-1 (333-17729)
|
|
10.4
|
|
12/12/1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Forms of 1996 Outside Directors Stock Option
Agreement**
|
|
S-1 (333-17729)
|
|
10.5
|
|
12/12/1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Third Amended and Restated 1994 Stock Option
Plan**
|
|
S-8 (333-72474)
|
|
99.1
|
|
10/30/2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Form of Indemnification Agreement with
Directors and Executive Officers**
|
|
10-Q (000-21969)
|
|
10.1
|
|
3/03/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Transfer of Control/Severance Agreement between Ciena Corporation and Gary B. Smith**
|
|
10-Q (000-21969) |
|
10.26 |
|
2/21/2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Form of Transfer of Control/Severance Agreement between Ciena and Executive Officers**
|
|
10-K (000-21969) |
|
10.18 |
|
12/10/1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Form of Amendment 1 to Transfer of Control/Severance Agreement for named executive officers (other than Gary B. Smith)**
|
|
10-Q (000-21969)
|
|
10.18
|
|
2/21/2002 |
|
|
|
10.27 |
|
Incentive Bonus Plan** |
|
10-Q (000-21969) |
|
10.1 |
|
4/30/2006 |
|
|
|
14.1
|
|
Ciena Corporation Code of Ethics for Senior
Financial Officers***
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of registrant
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public
Accounting Firm
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
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
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
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
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
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
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
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
|
|
|
|
|
|
|
|
X |
|
|
|
* |
|
ONI Systems Corp. Form S-1 (333-32104) |
82
|
|
|
** |
|
Represents management contract or compensatory plan or arrangement |
|
*** |
|
Cienas Code of Ethics for Senior Financial Officers is available on the corporate governance
page of our web site at http://www.ciena.com |
83